Are you thinking about becoming a landlord? If so, you will need a buy-to-let mortgage for your rental property. At YesCanDo, we are here to help. Our expert team can unlock the doors to the very best mortgage rates, so get in touch with us today for advice and support you can rely on.
In this guide, we will give you more information on buy-to-let mortgages, alongside some general advice worth noting before you become a landlord.
Do I Need A Buy-To-Let Mortgage?
If you’re buying a property with the intention of renting it out to others, then yes, you will need a buy-to-let mortgage. This is assuming that you don’t have the finances available to buy a property outright. The rent you receive should cover all or most of your mortgage costs, although it’s still wise to choose a mortgage product with the lowest interest rates to ensure you make a profit.
How Do Buy-To-Let Mortgages Work?
Buy-to-let mortgages are very similar to residential mortgages, with a choice of fixed, variable, discount, tracker, or capped interest rate mortgages available. We can discuss each of these with you when you’re looking for the most suitable mortgage deal and can go through the pros and cons of each with you.
However, despite the similarities to a residential mortgage, there are some differences worth knowing about.
One difference is the criteria that mortgage lenders will use when assessing who to lend to. Some lenders will only lend to experienced landlords, for example, so first-time landlords may be ruled out. Some lenders may also require the applicant to be a homeowner, while others won’t. Age can also be a factor, as some lenders require the applicant to be over the age of 21 while others are happy to lend to those who are 18 or over.
If you’re a first-time buyer of a buy-to-let, we can certainly help you. We have access to the best mortgage deals from specialist lenders who may better fit your circumstances.
Another key difference is the actual mortgage itself. Most buy-to-let mortgages are interest-only, meaning you only pay the interest each month. These mortgage interest payments are generally lower than those on repayment mortgages which require you to pay off the capital and interest together.
The lower monthly payments make interest-only mortgages attractive to landlords, although you will need to make sure you have funds in place to pay off the capital when your mortgage term ends. You can still opt for a repayment mortgage if you prefer, as you will then own your property outright at the end of your mortgage term, without any further payments to make.
If you are unsure about which type of mortgage to go for, talk to our team. We will detail the pros and cons of each before you approach a mortgage lender. We will also talk to you about the benefits of a part to part mortgage, which is a combination of interest-only and repayment elements.
How much deposit do I need for a buy-to-let mortgage?
In the majority of cases, you will need a 25% deposit for a buy-to-let mortgage. Some lenders will accept a lower deposit, but a minimum deposit of 25% will allow you access to better rates and deals. If you were to put down a larger deposit, such as 40%, you would gain access to some of the best deals available, so it’s worth saving up if you can before you apply for a mortgage.
Who is eligible for a buy-to-let mortgage?
Lenders have different requirements so it might be that you will get turned down by one lender and accepted by another. As we mentioned, age can be a factor, as can the experience you have as a landlord.
The main factor for eligibility though is whether or not you can afford the expected monthly payment on your mortgage. As with a residential mortgage, your financial circumstances will be taken into account, such as an assessment of your current income and outgoings. Your credit record will also be considered, so it’s worth finding ways to improve your credit score before applying for a buy-to-let mortgage.
However, when it comes to affordability, there is one major difference when comparing buy-to-let mortgages with residential mortgages. Alongside your regular income, the lender will also consider your expected monthly rental income. They will compare this to the monthly repayments you would make on your mortgage and will use it to calculate your eligibility. Generally speaking, your rental income would need to be at least 125% of your monthly mortgage repayment, i.e. be worth the full payment and 25% over.
When applying for a mortgage, the lender will ask you to confirm how much you expect to make from your annual rental income. They will then compare your figure with the rental figures charged for similar properties in the area you intend to buy. Provided it tallies up, you are more likely to get your mortgage application accepted.
Does the property type matter for a buy-to-let mortgage?
Yes. You stand a better chance of having your mortgage application accepted if you are buying a traditional brick-built property, such as a detached, semi-detached, or terraced house. The lender will instruct a surveyor to carry out a mortgage survey to ensure the property meets all of their requirements before lending. If the property needs to be refurbished, this will usually become a condition of the mortgage.
If the property is in need of extensive refurbishment, you may be turned down for a buy-to-let mortgage. If the property is made from material other than brick, your application might also be rejected.
There can also be restrictions and special criteria if you are intending to buy one of the following property types.
- New build flats
- Ex-local authority properties
- High-rise flats
- Flats above shops
- Holiday homes
We can talk to you about your available options if considering such rental properties as you may have a better chance of acceptance through the specialist lenders we can give you access to.
Buy-To-Let: Important Things To Know Before Becoming A Landlord
In theory, you can make a sizeable profit from your property investment, especially if you have a steady flow of rental income. However, owning a buy-to-let property is not without its risks, as care needs to be taken when choosing both a property and the tenants that will live within it.
Before you choose a buy-a-let mortgage, you need to research both property types and the local areas that you might buy into. This is important as you want to make sure the property and area you choose is attractive to tenants. If aiming to offer housing for young families, for example, you would need to consider properties that were a) big and safe enough, and b) in an area near local schools and other helpful amenities.
There are a few other things you need to consider before you start comparing mortgages.
In theory, you should be able to make a profit from your buy-to-let property, but this is assuming you a) choose a mortgage with the lowest interest rates, and b) have a steady flow of money coming in. We can help you with the former, but when it comes to the latter, you need to remember how your cash flow can be affected. If it takes you a long time to find a tenant, or if there are any payment gaps between tenants, you may struggle to pay off your outstanding mortgage.
You might also experience problems if you have a tenant that refuses to pay you.
To avoid such problems, you should:
- Save money so you have something in reserve if there is a rental shortfall
- Run background checks on applicants before accepting them as tenants
- Find out where you might stand legally if a tenant refuses to pay
- Sign up with a letting agent who has a good track record of finding tenants
- Arm yourself with landlord insurance
Expected landlord costs
When it comes to your buy-to-let expenses, you have more to consider than the purchase price of a property and the mortgage payment you need to make to your lender.
As with a standard residential mortgage, you will need to cover lender fees. These fees tend to be higher than those associated with a residential mortgage, so you will need to budget for these when you start to compare mortgage deals.
You will also need to pay letting agency fees unless you are planning on advertising your property yourself.
There is also maintenance to consider, as there may be times when your property falls into disrepair, especially if you have negligent tenants. You will need to cover such repair costs, as well as the costs related to gas and electricity checks, which are part of your legal responsibility.
As the owner of a buy-to-let property, you also need to be aware of tax implications. You will need to pay income tax on the profits you make, so you need to account for this when working out your budget. If you decide to sell your property, you will also have to pay capital gains tax. We understand how annoying taxes can be, although where your income tax is concerned, there are ways to get tax relief. Talk to a tax advisor to learn more.
As suggested earlier, it’s a good idea to consider landlords insurance, so this is something else you need to account for in your monthly budget. We also recommend buildings insurance, as this will protect you financially if there is damage to your property.
Of course, you can offset many of your costs through a regular rental income. With the right tenants on board, you are less likely to suffer many losses.
If you struggle to make the minimum income to pay your mortgage, you could always sell your property. However, the proceeds you make may not cover your outstanding debt if house prices fall, so it’s worth checking on the state of the property market before coming to this decision.
To improve your chances of making a profit, you should:
- Research interest rates before taking out a mortgage loan
- Use a mortgage calculator to work out which mortgage rate you can and can’t afford
- Utilise the services of a FEE-FREE mortgage specialist to ensure you get access to mortgages that are based on your personal circumstances (get in touch with our team)
- Find ways to improve your rental yield, such as by buying a property in a sought-after area
- Use the financial services of an accountant to offset the costs you are liable for when you pay tax
FEE-FREE EXPERT BUY TO LET MORTGAGE ADVISORS
For free buy to let mortgage advice, speak to YesCanDo. We take time to understand your individual buy to let situation. We will search the whole mortgage market to find you the best rates and deals for your rental property goals.
Buy to Let mortgage FAQs
Do I need a mortgage broker?
For access to better deals and reduced mortgage interest, it is in your best interests to use a mortgage broker. You should also consider a broker if you have bad credit or if you are self-employed, as you will have access to specialist lenders that are more suited for your particular circumstances. Be advised that some brokers charge a fee. However, at YesCanDo, all of our services are FEE-FREE, so you can make significant savings if you choose us for your mortgage needs.
Should I apply for an interest-only mortgage?
Your monthly mortgage payments will be less if you choose an interest-only mortgage. You will then have more money to offset the fees charged by your mortgage provider, and you will have the means to cover your various property costs. You might also choose to invest in further properties if you are able to save enough money to do so.
However, you will need to save enough money to pay off the capital debt at the end of your mortgage. If you are worried about this, a repayment mortgage may be better for you, despite the higher monthly mortgage rates. We can talk through your options with you so give us a call today.
What if my application is denied?
Mortgage applications can be denied for any number of reasons, as you will understand if you have ever been turned down for a mortgage on a residential property. You may be turned down because of bad credit, low income, or because you are looking for houses at too high a property value for your financial circumstances. Alternatively, it might be because the lender you have chosen isn’t right for your situation.
As lenders have different criteria, your buy-to-let application may still be accepted by somebody else, even if you have been turned down elsewhere. We can point you to lenders that are more likely to say “yes” to you and give you advice and support to improve your application chances.