Find out everything you need to know about buy-to-let mortgages, from interest rates to requirements for how much you can afford the loan.

When you purchase a home with the intention of turning it into an investment, you won’t be able to use a conventional mortgage to finance the transaction. Instead, you will require a mortgage that is specifically designed for buy-to-let investments.

The good news is that there are deals available for first-time landlords, so-called “accidental” landlords, seasoned investors with vast portfolios, and other types of landlords.

The regulations around mortgages for buy-to-let properties, on the other hand, may be a bit of a maze. This is the bad news.

You may discover the fundamentals of how buy-to-let mortgages operate and get a handle on how lenders will determine whether or not you can afford a property by reading this tutorial.

How do mortgages for buy-to-let properties work?

The great majority of buy-to-let mortgages are issued on an interest-only basis. This is the case for most buy-to-let mortgages. This indicates that during the period of the mortgage, you will be responsible for paying only the interest on the loan and none of the principal amount.

This can be good news in the short term as you will be able to minimise your monthly outgoings; however, it is vital that you have a strategy in place to either pay off the complete loan or refinance at the conclusion of the mortgage term. If you do not have a plan in place, this can be bad news.

How much of a down payment do I need for a mortgage on a buy-to-let property?

A down payment equal to at least 20 to 25 percent of the value of the investment property is typically required in order to qualify for a mortgage on the property.

There were some buy-to-let mortgages available for landlords who put down 15% of the purchase price prior to the COVID-19 epidemic; however, these options are no longer available because of the pandemic.

As is the case with regular home mortgages, the larger the initial payment that you make, the better interest rate you’ll be able to negotiate for your loan.

The most advantageous buy-to-let transactions are typically made accessible to investors who can make deposits of at least 40 percent.

Lenders will take into consideration your present portfolio (more on this later) and any previous experience of acquiring and paying off buy-to-let finance when determining whether or not you are able to afford their loans.

Purchase-to-let mortgage interest rates

The cost of mortgage rates for buy-to-let properties has been gradually decreasing over the past five years.

As indicated in the graph below, the average interest rate on a fixed-rate buy-to-let mortgage dropped to 3.1 percent in November 2020 from 3.99 percent five years earlier. This marked a significant decrease from the rate of 3.99 percent.

A like tendency was observed with variable-rate deals up until the COVID-19 epidemic brought about a considerable increase in prices. This increase is a direct result of the great majority of variable arrangements being cancelled in response to the Bank of England base rate being reduced twice in the month of March.

Mortgages for businesses that invest in buy-to-let properties

As a result of reductions in the amount of tax relief available for mortgage interest and the amount of allowance available for wear and tear, several landlords have begun organising their buy-to-let portfolios as companies.

Although they account for a very insignificant share of the market overall, the number of company buy-to-let mortgages has been growing steadily over the past few years.

However, converting to a business structure is not the best choice for everyone, as the interest rates on these packages tend to be a great deal higher than those that are available to individual borrowers.

How to compare mortgages for buy-to-let investments

When shopping for mortgages, it is essential to take into account the whole cost of the loan. This is because a low interest rate at the beginning of the loan may be more than offset by the hefty expenses associated with the mortgage.

The initial costs associated with buy-to-let mortgages are typically much greater than the costs associated with regular residential mortgage packages.

In November 2020, there were 1,557 mortgages with fixed rates on the market, and 1,333 of those mortgages featured upfront fees. These fees might be paid as a single sum or as a percentage of the amount borrowed.

The most affordable options had either a one-time flat price ranging from 1,495 to 1,999 or a percentage fee of 2 percent.

Norms governing the cost of rent for landlords

There is no shortage of alluring mortgage offers available to landlords today; nevertheless, you should be aware that you will be subjected to stringent affordability assessments.

In recent years, the Bank of England has attempted to reduce what it saw as an overheated buy-to-let market by implementing stricter lending restrictions. This move was made in an effort to chill the market.

Mortgages for investment properties have interest coverage ratios.

Lenders factor in interest cover ratios (also known as ICRs) when determining whether or not a borrower can afford a loan by determining how much profit a landlord is expected to make.

The interest coverage ratio (ICR) of a lender is the ratio that determines whether or not a property’s rental income is sufficient to cover the mortgage payments of the landlord when a representative interest rate is used (most banks currently use 5.5 percent ).

It is necessary of lenders to test at 125 percent, which means that the anticipated rental revenue must be at least 125 percent of the landlord’s monthly mortgage payment. However, several enforce far higher thresholds, sometimes in the neighbourhood of 145 percent.

Mortgages for portfolio landlords

The term “portfolio landlord” is commonly used to refer to professional landlords that manage four or more rental properties.

This is a very essential difference to make because the restrictions that were implemented by the Bank of England in October 2017 made it more difficult for these investors to gain access to additional financing.

Putting the portfolio of landlords through its paces

When asking to borrow extra money or remortgage a property in their portfolio, portfolio landlords were able to disclose their overall profit and loss data in the past; however, this requirement has since been modified.

When applying for financing, you will now be expected to provide information regarding your mortgage, cash flow projections, and business models for each of the properties that you own.

These regulations may make it more difficult for you to access more cash if you have a portfolio that is substantially mortgaged. This may be the case for you if you:

Increases are made to both the maximum portfolio size and the ICR.

Additionally, portfolio landlords are subject to a variety of additional restrictions, which change depending on the lender.

For instance, some lenders will cap the total number of properties you are permitted to have in your portfolio at a certain number (up to 10 is the most common limit), while others will adjust your ICR and representative interest rate based on the number of properties you own.

Other rules that are imposed by individual lenders include limits on maximum loan-to-value (LTV) ratios across a portfolio (for example, your overall portfolio must be at 65 percent LTV or lower), or the stipulation that the ICR from every property in your portfolio must be above 100 percent. Both of these rules are designed to protect the interests of the lender.

The term “top slicing”

Some financial institutions practise what’s known as “top slicing,” which is an approach to lending that takes a more comprehensive perspective.

When determining whether or not a property is affordable, top slicing factors in a landlord’s other sources of income, such as a salary or pension, in addition to the revenue from their rental property portfolio.

This indicates that if you have considerable earnings from other sources, you might, in theory, utilise your own income to bridge any shortfall when you are evaluated by lenders. This is the case if you have significant revenues outside of property.

As this method is only used by a small number of companies at the moment, it is recommended that you see a mortgage broker if you believe that top-slicing could be beneficial to you.

Remortgaging for landlords

As a result of a slew of taxation changes, such as reductions in tax relief for mortgage interest and an increase in the stamp duty surcharge for buy-to-let properties from 3% to 5%, many landlords have chosen to refinance their property portfolios rather than add to their existing holdings.

Historically, lenders have tried to recruit landlords by reducing their upfront costs or offering cashback, but these types of incentives have largely dried up since the COVID-19 epidemic. Lenders have also tried to attract landlords by offering lower interest rates.

Mortgages for buy-to-let investments available to first-time buyers

If you are having trouble climbing the local real estate ladder, you may want to think about purchasing an investment property in another location and renting it out as a way to supplement your income.

The good news is that it is feasible to obtain a mortgage for buy-to-let property if it is your first time purchasing a home; however, this does not mean that it will be a simple process.

For instance, because there will be a much lower number of mortgages accessible to you, you could need a larger deposit than other investors in order to secure a good bargain. This is due to the fact that there will be fewer mortgages available to you.

You will not be eligible for some of the perks that are made available to first-time buyers, particularly those that pertain to the stamp duty. This is due to the fact that you will not be eligible for first-time buyer assistance if the first home you purchase is not one that you intend to use as your primary residence.

However, you will not pay as much as a non-first-time buyer who is purchasing a buy-to-let property. Instead, you will be charged the ‘home mover rate,’ which is the same amount that a non-first-time buyer who is purchasing a home to live in would pay. This means that you will save money.

If at some point in the future you decide to buy a home for yourself while continuing to hold onto your investment property as a buy-to-let, you will be required to pay the full buy-to-let or second home surcharge.

Lenders will evaluate any debt you have outstanding on your buy-to-let mortgage when deciding whether or not to give you a mortgage when it comes time to buy your first house for yourself to live in. This could make it more challenging for you to obtain a mortgage.

Buy-to-let stamp duty calculator

Using the calculator provided below, you can determine how much you will need to pay in stamp duty when you buy an investment property anywhere in the United Kingdom.

Buy-to-let stamp duty calculator

Using the calculator provided below, you can determine how much you will need to pay in stamp duty when you buy an investment property anywhere in the United Kingdom.

Unintentional landlords should consider converting to a buy-to-let mortgage.

People who end up in the role of landlord did not always set out to be in that role. You might have, for instance, been the beneficiary of a property inheritance, or perhaps a shift in your circumstances prompted you to move back into the leased market, whereupon you made the decision to rent out your own home.

It doesn’t matter how you came to be a landlord; if you plan to rent out a house that you currently occupy and for which you have an ongoing owner-occupier mortgage, you absolutely must inform the mortgage lender.

If you don’t disclose your bank about your investment in buy-to-let homes, you run the danger of having your mortgage rendered null and void. Lenders face higher risks associated with these types of properties.

Some lenders will provide you with a “permission to let” on your existing deal, while others may require you to transfer to a buy-to-let mortgage in order to proceed with the transaction.

Buy-to-let stamp duty calculator

Using the calculator provided below, you can determine how much you will need to pay in stamp duty when you buy an investment property anywhere in the United Kingdom.

Unintentional landlords should consider converting to a buy-to-let mortgage.

People who end up in the role of landlord did not always set out to be in that role. You might have, for instance, been the beneficiary of a property inheritance, or perhaps a shift in your circumstances prompted you to move back into the leased market, whereupon you made the decision to rent out your own home.

It doesn’t matter how you came to be a landlord; if you plan to rent out a house that you currently occupy and for which you have an ongoing owner-occupier mortgage, you absolutely must inform the mortgage lender.

If you don’t disclose your bank about your investment in buy-to-let homes, you run the danger of having your mortgage rendered null and void. Lenders face higher risks associated with these types of properties.

Some lenders will provide you with a “permission to let” on your existing deal, while others may require you to transfer to a buy-to-let mortgage in order to proceed with the transaction.

Unintentional landlords should consider converting to a buy-to-let mortgage.

People who end up in the role of landlord did not always set out to be in that role. You might have, for instance, been the beneficiary of a property inheritance, or perhaps a shift in your circumstances prompted you to move back into the leased market, whereupon you made the decision to rent out your own home.

It doesn’t matter how you came to be a landlord; if you plan to rent out a house that you currently occupy and for which you have an ongoing owner-occupier mortgage, you absolutely must inform the mortgage lender.

If you don’t disclose your bank about your investment in buy-to-let homes, you run the danger of having your mortgage rendered null and void. Lenders face higher risks associated with these types of properties.

Some lenders will provide you with a “permission to let” on your existing deal, while others may require you to transfer to a buy-to-let mortgage in order to proceed with the transaction.