What Is A Buy-To-Let Mortgage?
A buy-to-let mortgage is for someone that wants to purchase a property or already owns a property that they are going to rent to tenants. Buy-to-let mortgages are usually taken out on an interest only basis. This means that monthly payments made to the lender cover just the interest charged as opposed to regular repayment mortgages that including capital repayments.
A buy-to-let mortgage usually requires a larger deposit, which at the time of writing is a minimum of around 15% of the property purchase price, but more often between 25% and 40%. As well as this the interest rate is often higher than a repayment mortgage and stamp duty will be more if the property is not your home. The reason for this is due to the potential of vacant periods in the property if a tenant cannot be found and therefore a loss of rental income, leading to a higher risk of default on the loan.
Types of buy-to-let mortgage
Fixed-rate: a fixed payment amount for the agreed time period.
Discount variable: borrowing at a discount to the mortgage provider’s standard variable rate. If the lender’s standard rate changes, so will your discounted rate.
Tracker Mortgage: a variable repayment amount generally tied to a certain percentage above the Bank of England’s base rate.
Buy-to-let mortgage repayment vehicles
With buy-to-let mortgages, lenders require that a borrower demonstrates they have a repayment vehicle (repayment plan) in place to repay the total amount borrowed the end of the mortgage term. A repayment vehicle could be:
Cash (savings or ISAs)
Stocks and Shares ISAs
Regular savings plans (endowment policies)
It is not enough to rely on expected lump sums such as a potential inheritance to repay the capital amount.
How to compare buy-to-let mortgages
There are a variety of ways to arrange a buy-to-let mortgage including going directly to your banking provider. However, a mortgage broker is typically used to help you compare multiple lenders, if not the whole market. By comparing thousands of products offering different lending criteria, interest rates, mortgage types and deposit requirements, you will improve your chances of finding the right buy-to-let mortgage.
Mortgage broker fees can vary significantly with a typical fee being around £500. There is a fee-free option though and that is to use an online mortgage broker, providing whole of market comparison with no fee to the borrower.
Can I switch my current mortgage to buy-to-let?
Yes, providing that you meet eligibility criteria. You may for example decide to rent out your first home, turning it into more of an investment. It is important however to into account when you current deal ends and thereby avoiding early repayment charges plus any other fees involved.
How is an interest only mortgage repaid?
As no capital repayments are made throughout the mortgage term, the capital needs to be repaid at the end of the mortgage. This can be through the sale of the property but lenders will require a suitable savings plan (repayment vehicle) to be in place prior to signing off on an interest-only deal.
What is the maximum age for a buy-to-let mortgage?
You will generally have to be less than 70 years old at the time that your mortgage agreement comes to an end to be accepted. However, in recent years lenders are starting to offer buy-to-let mortgages who will be older than 70 at the end of the mortgage term.
Will I be eligible for a buy-to-let mortgage?
To find out whether you are eligible, you can use this eligibility calculator, provided by our partners at Mojo Mortgages.