What is a buy to let mortgage?

You may be looking to purchase a property in order to rent it out to tenants. This can help you make some extra money at relatively little cost.

However, you may not be able to purchase the property you want to rent out outright, this is where a buy-to-let mortgage comes in.

A buy-to-let mortgage is specifically for properties where the owner wants to let out the property after purchasing it. These mortgages, much like first or second charge mortgages, should always be authorised by the Financial Conduct Authority.

This guide takes you through what exactly a buy-to-let mortgage is, how they work, who can get one and how much you can borrow with a buy-to-let mortgage.

What is a buy-to-let mortgage?

A buy-to-let mortgage is designed to help you borrow money in order to acquire the finances you need to purchase a property if you want to buy somewhere to rent out to tenants. 

If you do not have the funds to buy outright, then you will be looking for a way to fund your purchase and a buy-to-let mortgage is the way to do this. 

Being a landlord can be rewarding financially but it is important to be aware of buy-to-let mortgages and how they work before you decide to go ahead with your purchase.

How do buy-to-let mortgages work?

A buy-to-let mortgage is similar to a mortgage that you can get for a residential property. Having a larger deposit or equity will give you a better chance of securing a good mortgage deal. 

Lenders will often expect you to use some of the income that you get from rent on the monthly mortgage payments. 

The biggest difference between buy-to-let mortgages and other mortgages is that buy-to-let ones are usually interest only mortgages. 

This means that your repayments contribute to covering the interest on your mortgage and not the original loan amount. 

However, you will have to pay back the full amount of the value of the mortgage when your mortgage term ends. 

You may look to take out a new mortgage or sell the property in order to have the funds to settle your mortgage. 

Who can get a buy-to-let mortgage?

Buy-to-let mortgages are usually available to both new and existing landlords, but the exact criteria will usually vary between lenders.

It is important to make sure that you would be eligible for a buy-to-let mortgage before applying as a rejected application can harm your credit score and your ability to borrow in the future.

General criteria that you will probably need to follow include: 

  • Earn at least £25,000 a year.
  • Have a deposit of somewhere between 25% and 40% (some deals might go as low as 20%).
  • Already be a homeowner outright or part way to paying off your mortgage.
  • Be over 21 when you apply (some may be as low as 18)
  • Be under a certain age when you apply so that you’re no older than an upper age limit (often 70 or 75) when your mortgage is due to end.
  • Have a good credit score.
  • Have your existing debt under control.
  • Be in a comfortable enough financial position to allow you to take the risk to invest in property.

Hugo Anglesford of Doddler explains: “For a buy to let mortgage, there will be a few more hoops to jump through to get your mortgage over the line and get the finance you need. Part of this should include stress testing your own finances to ensure that you can afford both extra charges as well as potential fluctuations in the market, affecting your repayments. Even if down the line you need a short-term loan for example, to borrow £500 or £1,000 which may not seem like a lot, it can squeeze you and your finances.”

How much can I borrow with a buy-to-let mortgage?

Lenders will vary on how much they are willing to lend when it comes to buy-to-let mortgages. 

As a minimum, your rental income must cover your monthly repayments completely and by at least 25% more than the repayments. 

Some lenders may want the additional income to be up to 45% to make sure you are able to afford a buy-to-let property. 

You can use buy-to-let calculators to see how much your buy-to-let mortgage could be worth.