How Do Buy to Let Mortgages Work?

In the last 12 months alone landlords have taken out over 200,000 buy to let mortgages. With this borrowing being valued at over £36 billion in value, we ask what is a buy to let mortgage and how do they work.  

What Is a Buy to Let Mortgage?   

A buy to let mortgage is a form of specialist loan that is exclusively provided to landlords. This is because home owners are prohibited from letting out part, or all of their property whilst they have a residential mortgage. This loan allows aspiring landlords to be able to establish or expand their property investment portfolio without having to save the full value of the property.    

What Are the Requirements for a Buy to Let Mortgage?   

Similarly to the affordability checks seen across the tenant referencing process, buy to let mortgage providers will also demand that the rental income generated by the property is sufficient, commonly requesting the rent is around 130% of the expected interest payments.  Whilst this has only come into practice in recent years, providers will now also take a landlord’s personal income into consideration when determining the value of the mortgage, whereas in the past the rental income of the property was an exclusive influence on the loan’s value. 

How Much Is a Buy to Let Mortgage Deposit? 

In order for a landlord to take out a buy to let mortgage they will need to provide the lender with a sufficient deposit, often far higher than the amounts required for a standard residential mortgage. Typically, this will see those that wish to let a rental property through a buy to let mortgage offer up as much as 30% of the property’s market value to the lender as a deposit.

Can You Get a Normal Mortgage for Buy-To-Let? 

Perhaps more commonly asked by those new to the private rental sector, or aspiring landlords thinking of letting their home, it is essential that property owners do not let out their property whilst on a standard residential mortgage.  

Residential mortgages are intended for owners that wish to use the property as their main residence, and not as a rental opportunity for tenants. It is also worth noting that in the eyes of the bank, a buy to let mortgage and residential mortgage are two very different loans, with only the latter being regulated. Because of this, lenders will often see a buy to let mortgage as a significant risk when compared to a residential loan, partly informing why they demand a far higher deposit.  

With this being said it is possible in certain circumstances for some owners to let whilst on a residential mortgage. This is because if an owner only wishes to let out their property for a short period of time they may be able to gain consent to let from their mortgage provider. Whilst this will not be a permanent solution to housing tenants, this will save some owners from mortgaging just to let out their home for a few months.  

What Is the Maximum Buy-To-Let Mortgage I Can Get? 

The amount an aspiring landlord will be able to borrow through a buy to let mortgage will largely be dictated by the annual rental income the property will generate once occupied. Typically buy to let mortgage providers will demand that the rental income of the property is at least 25% higher than the expected mortgage interest payments. For this reason, it is essential that new and accidental landlords are aware of how to calculate their rental yields. This is simply done by dividing the annual rental income by the amount paid for the property, then multiplying this figure by 100 for the yield percentage.   

Are Buy to Let Mortgages Interest Only? 

A further distinction to be made between residential and buy to let mortgages is the way in which they are repaid. Whilst a homeowner will expect to pay the mortgage provider back each month slowly decreasing the amount they owe against the property; with a buy to let mortgage this is not the case. Although recipients will still be expected to make a payment towards their mortgage provider each month, this amount will exclusively pay the interest on the loan and not the capital.  

Can You Get Buy to Let Mortgages as a First Time Buyer? 

Despite common misconceptions it is possible for a first-time buyer to obtain a buy to let mortgage. However, it is worth noting that those that are yet to take their first steps onto the property ladder will find it more difficult to get a buy to let mortgage.  This is because, as mentioned, lenders will often see a buy to let mortgage as a riskier loan to offer, with this risk being exemplified through the owner’s inexperience in the market, leading to fewer mortgage providers offering such loans to first time buyers. Further to this lenders will also likely demand that first time buyers offer a significantly higher deposit than would typically be seen with a buy to let mortgage.  

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