Buy-to-Let Mortgages Explained

If you’re considering becoming a residential landlord, a buy-to-let mortgage is essential. While the eligibility criteria are stricter than those for residential mortgages, it’s still possible to secure a buy-to-let mortgage, even if you’re new to property investment.

This guide explains how buy-to-let mortgages work, what to expect in terms of eligibility, and the key advantages and challenges of becoming a landlord.

For more resources, visit our dedicated buy-to-let mortgages page, which includes articles on specific circumstances and access to our buy-to-let mortgage calculator. You can also learn how a broker can help you navigate the process, compare options, and secure the best deal.

What is a buy-to-let mortgage?

A buy-to-let mortgage (BTL) is a type of home loan for buying property that you intend to rent out to residential tenants, usually for a profit or at least to break even. Unless you own a property outright, it is usually against your mortgage lender’s rules to rent it out without taking out a mortgage specifically for this purpose.

Buy-to-let mortgages are similar to residential mortgages, but there are some ways in which they’re different:

• Most buy-to-let mortgages in the UK are interest-only, with the landlord paying the monthly interest using rental income.
• Affordability is assessed on the strength of the investment, and lenders calculate this based on rental potential (rental yield). The projected rental income has to cover the mortgage payments, calculated at current and possible future interest rates, with most lenders requiring it to be between 125% and 145% of your mortgage repayments.
• Unlike their residential counterparts, the majority of buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA).
• Interest rates and fees are typically higher than for a residential mortgage.

Most landlords choose interest-only buy-to-let mortgages to keep their overheads down and for tax-efficiency purposes. Still, it’s also possible to choose a capital repayment mortgage if you want to reduce your debt each month. This means higher monthly payments, but you will build equity and own the property outright by the end of the term.

See our guide to buy to let repayment mortgages for more information about these products and how they compare to interest-only BTL mortgages.

Did you know… You only have access to one third of the Buy-To-Let mortgages available unless you use a specialist broker!

How much deposit do I need for a buy-to-let mortgage?

The typical loan-to-value (LTV) ratio for a buy-to-let mortgage is 75-80%, which means that most BTL lenders will ask you to put down a minimum of 20-25% of the property’s value as a deposit for a buy-to-let mortgage. That said, fewer providers are known to approve customers with lower deposits of just 15% under the right circumstances.

If you’re purchasing a property valued at £300,000, you’d need a deposit of at least £60,000 (20%). Generally, the larger your deposit, the more likely lenders will offer you better rates.

However, there are providers who lend to customers with no personal income and base agreements entirely on rental income.

How much could you borrow?

Typically, mortgage lenders will only approve a loan amount if the forecasted rental income exceeds the mortgage payments by a certain percentage. 125-145% is a common range.

Use the calculator below to find out how much you could borrow:

Eligibility criteria

The eligibility criteria for a buy-to-let mortgage are different from residential mortgages. While there are no set criteria, most lenders will require you to meet the following before they lend to you:

• Age: Most lenders require you to be over 21, and they may have an upper age limit of up to 75 or 80. However, some buy-to-let mortgage lenders specialise in customers over 75.
• Property type: The type of property you’d be renting out will make a difference if it’s not made from bricks and mortar. Anything else might call for a lender specialising in unique buildings or non-standard construction.
• Landlord experience: Some lenders prefer customers with landlord experience, as evidence of a strong track record with rental properties will give them confidence that your plans are achievable. However, a smaller number of lenders specialise in first-time landlords. If you’re exploring purchasing a buy-to-let property through a limited company for tax or financial planning purposes, check out our guide on buying a house through your business. This option has become increasingly popular among landlords looking for tax efficiencies or enhanced borrowing opportunities.
• Homeownership: Many lenders won’t lend to anyone who doesn’t have their own residential mortgage. Most will want you to have been a homeowner for at least six months, though some might accept less than that, and a handful offer buy-to-let mortgages for first-time buyers, usually with caveats attached.
• Proof of income: You will need to provide your buy-to-let mortgage lender with a rental income projection by arranging a report from a regulated letting agent. You can find an agent in your local area by carrying out an online search on the Propertymark. Some lenders will request three months’ bank statements as proof of your earnings. If you’re a landlord looking to expand your property portfolio, most lenders will ask to see two years of your tax returns plus a copy/copies of your lease agreements as proof of existing rental income.
• Credit history: Bad credit of any kind could limit the number of approachable lenders and the number of products you qualify for. Whether you’re eligible and which lenders will approve you will likely depend on your age, severity, and reason for your credit issues. You might also be asked for an extra deposit to offset the risk. Customers with a clean credit history usually qualify for more favourable rates.

Can I afford a buy-to-let mortgage?

Along with your monthly repayments, there are other important factors to consider before you commit to a buy-to-let mortgage that will impact the lender’s affordability calculations.

• Rental income: The amount you can borrow will depend on your forecasted rental income. It’s important to get an idea of this before you go to a lender so you have an idea of the potential rent you can charge. Looking at listings in your area and letting agents will give you a rough idea.
• Unlet periods: There’s likely to be times when your property isn’t rented. You’ll need to ensure you have savings or another source of income to avoid defaulting on your monthly repayments.
• Unexpected maintenance costs: If something in the property breaks that’s not covered by buy-to-let landlord insurance, you might face a hefty bill. It’s a good idea to stress test your finances before getting a mortgage to ensure you can meet these costs should they arise.
• Surveys and legal fees: Before you purchase the property, you’ll need to hire a surveyor to undertake a homebuyer report. This will check for any potential structural issues that could result in costly repairs. A solicitor will also perform the conveyancing on your mortgage.

Although there are lenders with no strict cap on the maximum amount you could borrow, affordability assessments are still stringent, and you’re unlikely to pass one without a rental income forecast from an ARLA-regulated letting agent.

Moreover, some lenders have minimum personal income requirements and won’t approve you for a buy-to-let mortgage unless you’re earning over a certain amount from other sources, regardless of whether your investment property is likely to be self-funding. Proven earnings of £25,000 is quite a common figure.

How to apply for a buy-to-let mortgage

By making an enquiry with us, our broker-matching service can connect you with the right advisor who specialises in buy-to-let. 

Your buy-to-let broker will then be able to help with the following: 

• Obtaining a rental income projection for the property: This is usually done by instructing a report from an ARLA-registered letting agent – your broker will be able to guide you through this process. If you have personal income, it can also help your cause if you provide evidence of this.
• Download and optimise your credit reports: Once you’ve downloaded your credit reports, your broker will help to identify any inaccurate or outdated information that could hinder your buy-to-let mortgage application.  
• Finding the right mortgage lenders: Your mortgage broker will be able to quickly identify those lenders who specialise in arranging buy-to-let mortgages and currently offer the best rates. Saving you time and, potentially, some money. They’ll also facilitate a formal application in principle (AIP) to a lender should you take their quote and lender recommendation forward.
• Preparing your application: Your broker will already know the documentary evidence required (see the next section below) and can help you gather all of this information together to ensure your application has the best chance of approval.

What documents will you need?

You’ll need the following documents to be approved:

• Proof of income (usually the most recent three months’ payslips)
• Mortgage statement for your existing property or properties
• Proof of rental income (usually a report from an ARLA-regulated agent)
• Proof of deposit (if you have a donor, you also need to get this in writing from them)
• Proof of any bonuses or commission (if applicable)
• Proof of ID (passport/driving license)
• Proof of address
• Current or most recent P60
• Your SA302 tax return forms (if you’re self-employed)

How long will your application take?

The average time to receive a buy-to-let mortgage offer is between four and six weeks. If there are no setbacks or complications, completion would normally follow within another four weeks.

More complex applications, such as portfolio mortgage agreements or scenarios where the borrower has bad credit, can take longer. Still, you can shave time off the application process by applying through a buy-to-let mortgage broker.

They can help you get it done quicker by finding the right lender immediately, assisting you with the paperwork, and avoiding unnecessary delays.

What additional fees do I need to pay on a buy-to-let property?

In addition to your standard mortgage and legal fees, you will also need to consider ongoing costs, including landlord insurance, letting agent fees, and income tax on your rental earnings.

• Broker fees: The amount you will pay depends on the complexity of the buy-to-let mortgage and the type of product you are taking out. Some brokers take their fees from a lender, and others charge up to 1.5% of the loan amount to arrange the mortgage for you.
• Lender application/ booking fees: Every lender deals with different fees. Some are fee-free, and others charge non-refundable upfront fees, such as £500. This allows them to only take on applications from borrowers who are more committed to proceeding. Generally speaking, fees for a buy-to-let mortgage are higher than they are for residential mortgages.
• Valuation fees: This is entirely dependent on the buy-to-let property’s value, type, location, and the BTL product you are taking, some mortgage products offer a free basic valuation report. You will usually pay more for homebuyer or full structural surveys.
• Mortgage product fees: These depend on the product type and property value. Some lenders charge nothing, others a fixed fee of around £500, and others a percentage of the loan amount. For larger buy-to-let mortgages, it might be most cost-effective to choose a product with no fee or a fixed fee.
• Mortgage exit fees: If you’re tied into a buy-to-let mortgage and want to leave early, there may be additional costs associated with this, known as Early Repayment Charges (ERCs). These will depend upon the lender.
• Solicitor fees & disbursements: Solicitor costs vary depending on their charging structure. Some charge fixed fees, others per hour, and some a percentage of the property (rarer nowadays). Occasionally, lenders will offer free legal advice as an incentive for borrowers to take their particular BTL mortgage deal.
• Stamp duty: The Stamp Duty rate can vary between 3% and 15% as buy-to-let landlords are liable to pay the surcharge.
• Property Maintenance Can cost nothing to a large amount of money, depending on the state of your property and any ongoing repairs.
• Letting agent fees: These are based on either a fixed fee or a percentage of your rental income. Common charges are 10% of the monthly rent (e.g. £35pm charge on a £350pm rental).
• Income tax: This will be from £0-50% (Depending on your current income and rate of tax paid). For more info, visit HMRC for help with buy-to-let tax.
• Landlord insurance: The cost of landlord insurance can vary dramatically depending on the location of your property, its size, the type of tenants you’re letting and the type of policy you take out.

Typical policies landlords might need include contents cover, rental protection insurance, public liability insurance, legal expense cover, malicious damage by tenants and portfolio insurance.

Types of buy-to-let mortgage

There are two main types of buy-to-let mortgages: interest-only and repayment.

We look at the two in more detail below:

Interest-only

With an interest-only mortgage, you pay the interest each month. This means your monthly repayments will be lower, but you’ll have to pay off the remainder of your mortgage in a lump sum at the end of your term.

It’s common to do this by selling the property for a profit when your term ends. But if house prices fall, the house could be worth less than you paid. If this happens, you must have a backup plan to pay off the remainder of your mortgage.

Repayment mortgage

With a repayment mortgage, you pay off the interest and capital each month. This will mean higher monthly repayments, so you must ensure you can charge a high rent to cover this.

The upside is that you’ll own the property once your mortgage term ends. This means you can continue renting or selling it and potentially recoup your initial outlay.

Is a fixed or variable mortgage better?

Once you’ve decided whether to get an interest-only or repayment mortgage, you’ll have to decide whether to get a fixed-rate or variable mortgage.

Fixed-rate mortgage

With a fixed-rate mortgage, your interest rate remains unchanged throughout your term. This will make budgeting easier, as you know what your repayments will be each month. However, if interest rates fall, you’re stuck with your rate until your term ends.

Variable rate mortgage

With a variable-rate mortgage, your repayments could go up or down depending on fluctuations in interest rates.

Some of the most common types are listed below:

• Tracker mortgage: A tracker mortgage follows the Bank of England’s base rate as it goes up or down. If the interest rates are high, so will your repayments. Depending on whether they go up or down, your repayments will follow suit.
• Standard variable mortgage: A standard variable rate (SVR) is the lender’s default rate and is often higher than their other rates.
• Discount mortgage: A discount mortgage gives you a discount on a lender’s SVR for a set period. For example, if the lender’s SVR is 5%, you might be offered a discounted rate of 3.5%

What interest rates to expect

The rate you pay will vary on several factors, but to give some examples, we’ve illustrated some below:

The rates quoted above were correct at the time of writing and are subject to change at any time at the lender’s discretion. Speaking to a mortgage broker is the best way to keep track of the rates available at any given time.

What are the advantages and disadvantages of a buy-to-let mortgage?

Advantages

• Long-term investment gains: The right buy-to-let property can bring short-term gains in the form of rental income, but the rental property also has the potential to be a sound investment in the long term. This is because property often increases in value, so you might be able to make money through a sale or remortgage.
• The rental market is strong: Although the UK Government has vowed to ‘turn Generation Rent into Generation Buy’, the demand for high-quality rental accommodation remains high. Many landlords are capitalising on this, especially in certain UK hotspots.
• Tax benefits: Some of the running costs associated with buy-to-let properties can be reclaimed when you submit your Self-Assessment Tax Return to HMRC each year. These include interest on your mortgage repayments, letting agent fees, repair costs, council tax payments and other bills (if you’re footing them yourself).

Disadvantages

• Tenant-related risks: There will always be risks regarding tenants, with the possibility of rental void periods, renters falling into arrears, or damage to the property among the main concerns. Many landlords opt for comprehensive insurance policies to safeguard themselves against these things.
• Higher stamp duty: On the purchase of the property, stamp duty is charged at a higher rate for buy-to-let properties, with buyers having to fork out an extra 3% compared to residential purchases. This is something to factor into the overall cost if you’re considering other investments.
• Long-term market uncertainty: Although there has traditionally been strong demand for rental properties, the current market turbulence associated with rising interest rates is slowing the market.

What are rental returns and yields?

A rental return is the difference between the rental income your property generates and the amount of interest due on your mortgage each month, expressed as a percentage. For example, if your mortgage interest payments are £1,000 per month and your rental income is £1,100, the rental return on your buy-to-let property would be 110%.

Rental yields, meanwhile, are the amount of cash your property generates, calculated as a percentage of its value and broken down into net and gross values.

To calculate your rental yield, simply use our calculator below:

Restrictions and rules landlords need to know about

Landlords cannot live in their buy-to-let properties without permission from their lender, and even if they grant it, this would likely mean switching to a different product type. Moreover, 2021 was the first full year where landlords could not deduct mortgage expenses from their rental income. Instead, they’re entitled to a 20% tax credit on interest payments.

Recent buy-to-let regulation changes you should know about include…

• New electrical safety standards were brought in for landlords in the summer of 2020. You can read them in full on the UK Government’s website.
• A new code of practice to help landlords with rent issues was introduced in 2020. It is available online in PDF format.
• Leaseholders can now extend their lease by 990 years thanks to new reforms.

Speak to a specialist buy-to-let mortgage broker

Speaking to a buy-to-let mortgage specialist before you apply will boost your chances of finding the right lender the first time, which could mean saving time and money. Call 0330 818 7026 or make an enquiry, and we’ll set up a no-obligation chat with a broker today.