Buy-To-Let v Residential Mortgage

buy-to-let-mortgage-v-residential-mortgage

If you’re looking for a way to boost your income, purchasing a property with the intention of letting it out could be for you. Provided the house you buy and the surrounding location are acceptable to renters, you could make a small fortune from your investment. You will still need to pay income tax, stamp duty, and other types of expenses, but assuming there is no shortfall in your income, you should still make a profit.

Unless you have the funds to buy a property outright, you will, of course, need a mortgage. In the case of a rented property, you will need to consider buy to let mortgages rather than residential mortgages, and while there are similarities between them, there are differences too.

In this guide, we will explain the differences between buy-to-let mortgages and residential mortgages alongside other advice that may be useful to you.

What is a Buy-to-Let Mortgage?

Buy-to-let mortgages (BTL mortgages) are specifically for landlords who want to let out a property. They are a lot like ordinary mortgages although fees are typically higher and so are the rates of interest. As such, you can expect to pay more on your monthly mortgage repayments.

The maximum amount you can borrow from a lender will be linked to your expected rental income. To find out what your income might be, check rental listing sites or speak to a letting agent to discover how much similar properties are being rented for. Your lender will do the same as they will want to see how much rental income you’ll likely be getting when deciding on your monthly mortgage payment.

Lenders don’t only base their decision to lend to you on how much rent you are likely to earn. You will need to be earning around £25,000 a year for your application to be considered, and as with a residential mortgage, you will be subject to the lender’s credit checks. The lender will also have lower and upper age limits in place, so if you’re under 21 or over 75, you may not be eligible for a buy to let mortgages.

Check out our buy-to-let mortgage page to learn more.

What is a Residential Mortgage?

If you are looking to own a property that you will be living in, you will need a residential mortgage. This applies if you are a first-time buyer or somebody looking to move house.

There are different types of residential mortgages. Fixed-rate mortgages are generally the preferred choice as your interest rates won’t change over the duration of your mortgage. However, you also have the option of tracker mortgages or variable rate mortgages. These might be cheaper than a fixed-rate mortgage initially but as interest rates can fluctuate, your monthly interest payments may increase over time.

You won’t be able to rent out your residential property unless you have prior consent from your lender. In such a case, you will need to have something called ‘consent to let,’ a written agreement between you and your lender that gives you permission to rent your property for a temporary period.

Without getting the consent to let, you could be in breach of your residential mortgage contract and you could face financial penalties.

Check out our first-time buyer and moving home pages to learn more about residential mortgages.

Main Differences Between Buy-to-Let and Residential Mortgages

There are a number of key differences which you need to be aware of when comparing buy-to-let and residential mortgages.

Difference 1 – The mortgage deposit is usually higher

Mortgage providers consider buy to let mortgages riskier than residential mortgages. This is because landlords can make a loss if their tenants don’t pay on time or if they don’t pay at all. There is also the possibility that a rental property can be left empty for a long time.

Because of the higher risk to the mortgage lender, you will usually need to pay a larger deposit for a buy to let mortgage. The minimum deposit you will be expected to pay is usually 25% of the total value of the property. To qualify for the best mortgage deals, however, you should try to pay a bigger deposit, perhaps with a payment of 40% of the property’s value.

On a residential mortgage, the minimum you will be expected to pay is usually 10% of the property’s value. But it’s worth paying more if you can, as a higher deposit means less mortgage interest on your total monthly payment.

If you want to know how much deposit you should put down, use a mortgage calculator to work out what you can and can’t afford, or book an appointment with our team for the advice you need.

If you can’t afford to pay for the deposit with your own money, you might want to ask for a financial gift from a family member or friend. Unfortunately, you won’t be able to get a loan from the Help To Buy scheme for a rental property but you may be eligible if you’re looking for a residential mortgage.

Difference 2 – Most landlords opt for interest-only mortgages

As with standard residential mortgages, you have a choice between interest-only or repayment deals when comparing mortgages for a buy to let property.

If you choose a repayment mortgage, you will pay off the loan and the interest each month, and when you come to the end of the mortgage term, you will have cleared your debt. This is usually the preferred choice for residential property owners but most landlords opt for interest-only mortgages.

With an interest-only mortgage, you only pay off the interest each month, so your monthly payments will be smaller. This can be helpful, especially when there is a gap in your rental income, as you will experience less financial stress each month. However, you will need to repay the remainder of the loan at the end of the mortgage.

Some landlords will pay off their mortgage by selling the property and assuming the value of the property has gone up, they can then pocket the profit (after paying the capital gains tax). This is something you might consider doing.

However,you could struggle to pay off your mortgage if house prices fall so it’s still wise to put money into a savings account as you might need that extra money to make your final payment.

Difference 3 – Buy-to-let mortgages are more expensive with bigger mortgage payments

Buy-to-let mortgages are usually more expensive than residential mortgages. The monthly interest rate is typically higher and product fees tend to be more costly too.

So, as well as paying a larger deposit on your buy to let property, you will need to budget for the higher monthly interest payments, the mortgage arrangement fees (which are sometimes 3.5% of the property’s value), and any other fees required of you by the mortgage lender.

As a landlord, you will face other costs too.

You will need to cover the stamp duty, which will typically be higher than that on your main home. You will have to pay income tax on your rental income usually via your self assessment tax return. And there will be letting agent fees to consider, as well as council tax, maintenance costs, and other expenses.

So, not only will your buy to let mortgage be more expensive than a residential mortgage, you will have further costs to consider. Of course, you should be able to cover all of these costs if you have a steady stream of income coming in from your tenants.

How to Decide Which Type of Mortgage I Need?

Do you need a buy to let mortgage or a residential mortgage? Choosing the right type of mortgage shouldn’t be difficult but let’s look at the steps you need to take.

Step 1 – Requirements

If you aren’t planning to rent out a property, you won’t need a buy to let mortgage. You will need a residential mortgage and provided you have a steady stream of income coming in and a good credit record, you should have little trouble finding a mortgage provider willing to lend to you.

Not all residential mortgages are equal, however, so to make sure you gain access to the best mortgage deal, get in touch with our friendly team.

If you are planning to rent out a property, you will need a buy-to-let mortgage. This will be on top of the residential mortgage that you are already liable for if you currently own your own home.

Talk to us about the best BTL mortgage deals available, including those that can be accessed via specialist lenders, as we are here to help you save money on your mortgage.

Step 2 – Situation

While choosing the right mortgage can seem straightforward, there are times when you might be confused.

For example, you might want to let out your residential property for a short time, perhaps because you’re going away on an extended vacation or moving in with a family member who needs care.

Do you need a buy-to-let mortgage in these situations?

Not usually, no, although as we said earlier, you will need to ask your mortgage provider for consent to let, as you may face financial penalties otherwise.

You might also want to rent out your property if you decide not to put it on the market after moving out of it permanently.

Would you require a buy to let mortgage in this situation?

If you don’t own the house outright, then yes! If you are moving out of your house permanently, you will need to switch your residential mortgage to a buy to let mortgage. You will be in breach of your contract otherwise.

It might also be that you inherit a house and rent it out so you have the extra cash to pay off the mortgage. Many people become accidental landlords this way.

Would you need to arrange a buy-to-let mortgage for this situation?

If you don’t intend to move into the house, then yes, you will need to switch to a buy-to-let mortgage.

For these or any other situations you may be unsure about, speak to your lender or contact a mortgage broker such as ourselves for advice on which type of mortgage you should be considering. You should also contact the HMRC to learn more about your tax implications when renting out a property.

Is it illegal to rent a house without a buy to let mortgage?

If you have bought a house with the express purpose of renting it out, then yes, it is illegal.

Some landlords get a residential mortgage for a rental property as it is usually cheaper than a buy to let mortgage. While it makes financial sense, they are actually breaking the law and committing mortgage fraud.

If you were to rent out a house without a buy-to-let mortgage, the lender might…

  • Ask you to pay off your loan early
  • Raise your mortgage rates in line with their buy-to-let products
  • Subject you to financial penalties

The exception is if you decide to rent out the home you were already living in. You are still breaking the law if you decide to rent the property after moving out permanently. But if you are renting it for the short-term, you won’t get into any trouble, provided you have informed the mortgage provider first.

How a Mortgage Broker Can Help

Do you have a mortgaged property that you are thinking about renting?

Do you want to know which type of BTL mortgage is right for you?

Are you currently searching for the market for buy to let properties?

If the answer to any of these questions is yes, get in touch with us today. We have worked with many prospective landlords over the years so are here to help you get the best deal on a mortgage if you are thinking about renting. After getting to know you, we will search the market for the best buy to let deal for your circumstances and will support you with every aspect of the mortgage application.

We are also here for you if you still have outstanding mortgage payments to make on your residential mortgage. If you’re looking to make a switch to a better deal, perhaps because you’re stuck on your lender’s SVR (standard variable rate), we can reduce your monthly costs by helping you get a great new mortgage.

Get in touch with our mortgage experts who will be happy to help and benefit from the services we can offer you.

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Steve Roberts
Steve Roberts

Stephen Roberts MAQ is the founder of YesCanDo Money, Hampshire's largest no-fee mortgage brokers. With over 30 years of mortgage experience, he has advised and helped thousands of First-time buyers buy their first home and home movers buy their dream home. Speak to a mortgage expert today by completing our contact form:

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