Buy-to-let mortgages explained by an expert - and your chances of being accepted for one
by Derin Clark
With savings rates at historic lows and unlikely to improve much over the coming months, along with a volatile stock market, many who are lucky enough to have a significant lump sum to invest are increasingly considering investing in a buy-to-let (BTL) property.
Right now, the BTL market looks strong, as the Government’s temporary increase to the stamp duty threshold has reduced the rate of tax paid when buying BTL properties. In addition to this, in its July 2020 UK Residential Market Survey, the Royal Institution of Charter Surveyors (RICS) predicted that over the next 12 months rents are expected to rise by just over 1% at the national level.
Saying this, it is important to think carefully before investing in a BTL property. Although it can offer a good return on investment, a BTL property is a long-term commitment that involves additional costs to other types of investments – for example paying letting management fees and mortgage repayments during times when the property is unoccupied.
On the upside, a BTL property can be a good way to supplement your existing income and, depending on what happens to property prices, can sometimes be sold at a profit.
Before considering investing in a BTL property, it is important to understand BTL mortgages and whether you will be accepted for one. Here's everything you need to know about getting a BTL mortgage.
Why get a BTL mortgage?
You will have a residential mortgage on the home you live in, but if you are planning to invest in a BTL property, you will need a specific BTL mortgage.
These mortgages as designed by mortgage lenders to suit the needs of property investors and, fortunately for landlords, competition within the BTL market remains as strong as the residential mortgage market.
Just as with a residential mortgage, you can choose between a fixed rate BTL mortgage or a variable rate deal. In addition to this, there are BTL deals available for first-time landlords. A full list of the current BTL deals available can be found on the BTL charts at Moneyfacts.co.uk.
What LTV mortgage should you choose?
Unlike residential mortgages that can go up to a 95% or at times even a 100% loan-to-value (LTV), with BTL deals, the current maximum LTV is 80% (which would require a 20% deposit for the property).
Normally, landlords will go for an LTV between 60% and 75%, and often the lower the LTV, the lower the rate offered.
Should you get an interest-only mortgage?
As the BTL property is only being purchased for investment purposes, it is common for landlords to choose an interest-only mortgage. This is because landlords usually are not interested in owning the property outright at the end of the mortgage term and interest-only mortgages have significantly lower monthly repayments than capital repayment mortgages.
For example, a £200,000 mortgage to be repaid over 25 years at 1.35% (the current lowest rate on a first-time landlord deal), would result in capital and interest monthly repayments of £785.85, whereas if just making interest repayments, the monthly repayments would be £225.00 – a reduction of £560.85 per month.
Will you be accepted for a BTL mortgage?
Lenders have a number of criteria when considering whether to accept a BTL mortgage application. One main area they will look at is the rental yield, which is the rental income compared to the mortgage payment - most lenders will require this to be at least 125% of your mortgage payment.
You can calculate the rental yield using the Moneyfacts.co.uk BTL calculator. In addition to this, some lenders will require borrowers to have a minimum income - for example, you need to earn at least £25,000 per year. Other requirements can include a minimum age and already having a residential mortgage.
How to choose the best BTL mortgage
As with a residential mortgage, the right BTL mortgage will depend on your individual circumstances. You will need to consider whether a two or five-year fixed rate deal is the best option, or alternatively, a variable rate mortgage. In addition to this, you will also need to factor in the rental yield, taxes, additional costs and your personal financial situation.
For those new to BTL investments, speaking to a mortgage broker might be beneficial in helping you to decide which is the best option for your needs.
For more information about BTL mortgages, visit the BTL mortgage chart at Moneyfacts.co.uk