The Complete Guide To Buy To Let Mortgages

What Is a Buy to Let Mortgage?

Typically used by landlords looking to buy a property to rent out, Buy to Let mortgages make it possible for people to get a mortgage on a property which they do not intend to live in. Usually the rates on this sort of mortgage can be less favourable than a residential mortgage, so we’ve listed the most important features of BTL mortgages:

• Fees tend to be higher than residential mortgages
• Interest rates tend to be higher than with residential mortgages
• Usually, but not always, BTL mortgages are taken on an interest-only basis
• This means that you’ll pay off interest but not the capital amount each month. At the end of your borrowing term, you’ll pay that back
  • BTL loans can also be arranged on a capital and interest repayment basis
  • You may need to own your home, outright or under a mortgage, to qualify for a Buy to Let mortgage
• Loan-to-value ratio limit is typically up to 75%, meaning that you’ll have to have a 25% deposit upfront, although a couple of lenders do have 80% LTV products
  BTL mortgages are not regulated by the FCA unless you intend on renting the property to a close family member, in which case that would qualify as a regulated buy-to-let mortgage

In this guide, we’re going to explore every element of Buy to Let mortgages, so that you can make more informed decisions on whether this type of mortgage suits your needs.

What are the different types of buy-to-let mortgages?

In this section we will explore the various types of specialist Buy to Let mortgages, including an explanation of each and how they compare to a traditional BTL mortgage.

London Buy to Let

Whilst there are no specific extra requirements when securing a Buy to Let mortgage in London, you will need to consider the additional factors affecting your profit margins and eligibility. With property prices in London being some of the highest in the country, accounting for the possibility of lower yields, it may be a better option to look elsewhere if you are in need of a Buy to Let mortgage.

Limited Co (SPV)

This type of Buy to Let mortgage uses an SPV, or Special Purpose Vehicle, to purchase and hold property. This should be a Limited Company set up solely for property purchase. It is a good option for those looking to invest in properties as a primary or secondary form of income and additionally can reduce personal risk, or give a more forgiving corporate tax rate when compared to personal tax rates.

HMO Mortgages

HMO (House of Multiple Occupation) Mortgages are a specialist type of mortgage offered by select and specialist lenders. HMO properties are defined as those where three or more people live in a property together, from different households, and share communal areas. You might also call this a house share. As there will be three or more tenants with three or more lease contracts, a standard Buy to Let mortgage is not sufficient. This means that a ‘rental void’, or a period where the property is empty, is less likely.

If you are considering this type of property, you must secure the relevant mortgage, otherwise you may be at risk of breaching the terms of your contract. HMO’s typically require licences from councils so be sure to check which rules apply to the area in which your HMO is situated.

Multi-Unit Freehold Blocks

A Multi-Unit Freehold Block (MUFB) refers to a group of properties collected under one freehold title, where each unit is leased separately with different contracts. Similarly to HMO mortgages, this is a specialist Mortgage for this property type. The advantage of this mortgage is the ability to manage several properties under one mortgage.

If you are considering this type of property, you must secure the relevant mortgage, otherwise you may be at risk of breaching the terms of your contract.

Portfolio Landlord Mortgages

A portfolio landlord is someone who owns (solely or jointly) four or more mortgaged Buy To Let properties. This also includes properties secured through HMO, multi-unit and SPV mortgages. You may be asked to provide a business plan, portfolio information and a property schedule alongside the usual documentation to secure this sort of mortgage. If you fulfil these requirements, you could benefit from better rates and lending terms.

First-Time Buyer Buy to Let Mortgages

A First Time Buyer Buy To Let mortgage might be used when someone intends to rent their first property, instead of living in it and applying for a residential mortgage. However, it is difficult for first-time buyers to secure a BTL mortgage, as you may be subject to higher interest rates; required to have a higher projected income and provide a larger deposit. As lenders will want to make sure you have a plan if the rent doesn’t come in, it might be a good idea to form a business plan detailing cost and revenue.

Regulated Buy to Let Mortgages

Previously, we mentioned that if you intend to rent to a family member, then a standard Buy to Let mortgage is insufficient, and you’ll need a regulated Buy to Let mortgage. Many lenders are wary of these arrangements, as ‘family rates’ and other factors can reduce the potential profit made on a property, and therefore your ability to pay your mortgage. As this is another type of specialist mortgage, we would advise you to discuss your options with an experienced mortgage broker.

Buy to Let Remortgage

If you’re looking to switch your mortgage provider or broker a new deal, you might look to remortgage an existing BTL property. To avoid paying at a lender’s standard variable rate (SVR), you’ll need to remortgage. Be aware that remortgaging for a better deal is an increasingly unlikely possibility in the current market given tax changes and interest rate rises, however, there are options available that our specialist advisers will unearth for you, whether this is with your existing lender or a new one.

Mortgages for Airbnb Properties

If you plan to use a property as an Airbnb, the sort of mortgage you need will depend on the sort of property you buy. You might need a BTL, residential, holiday let or commercial mortgage depending on the property. Seek advice from an experienced mortgage broker.

Holiday Lets

Holiday lets require a different mortgage than BTL properties, as there is no long-term rental agreement. This is because a holiday let is considered a business. In order to qualify for a holiday let mortgage, your property must be furnished for the purpose and be available for rent at least 210 days in the year. Alternatively, a holiday home mortgage is for properties which will not be rented out.

What kinds of mortgage products are there for landlords?

Landlords may be looking for different types of mortgage properties so that they can leverage their portfolios more effectively. We’ve explored the best options available to landlords in this section.

Tracker mortgages

This type of buy-to-let mortgage uses a variable rate, linked to the base rate offered by the lender. This is usually the same as the Bank of England’s base rate. Your interest payment will fluctuate in line with this base rate, either on a fixed-term or lifetime basis. These sort of mortgages are best used where you foresee a drop in interest rates, as you will be able to capitalize. They are risky for the same reasons though, so you should consult with an experienced mortgage broker.

Green Mortgages for Buy to Let

This sort of BTL mortgage favours green, energy-efficient properties. By complying with current, and future government guidelines on energy-efficient properties, your property may become more attractive to tenants. They are basically the same sort of mortgage as a standard BTL, except that the property which you intend to buy must have an energy efficiency rating of A-C. This may enable you to obtain a slightly cheaper interest rate or lower fees.

Offset mortgages

An offset Buy to Let mortgage allows you to reduce the amount you are paying interest on through a savings account attached to your mortgage. When you deposit money in that account, the amount of monthly interest you pay, or your mortgage term, will reduce in line with this. You can increase your net profit and cashflow in this way, an attractive option for landlords with other revenue streams. Learn more about offset mortages in our offset mortgage guide.

Fixed rate mortgages

Usually fixed for two, three, five or ten years, this sort of Buy to Let mortgage locks you into a specific interest rate. Depending on what advice you get on the future of interest rates, you may decide on a fixed rate or a variable rate.

Sitting tenant mortgages

A sitting tenant is a tenant who has the legal right to rent a property for life, and perhaps pass on that right to a family member upon their death. Furthermore, a sitting tenant has a right to fair rent, which is usually below the market rate and prevents the landlord from making many changes to the rent. These properties are considered high-risk by lenders because of rent restrictions and the difficulty of eviction. You will find lenders willing to help, but you’ll need to provide additional information about the tenant’s ability to pay, as well as your own.

Buy to Let Mortgage Criteria and Considerations

If a Buy to Let mortgage is right for your needs, then you’ll need to read this section to fully understand the requirements lenders will look for:

Rental Income

This is one of the most important factors determining whether a lender will grant you a BTL mortgage. Across lenders, you’ll need to make the amount of your monthly payment back, and between 25-45% on top of that. You’ll also need to prove some sort of income, whether this is from a salaried job, pension schemes, other rental properties or something else.

Deposit

The highest LTV (Loan to Value) ratio that lenders are likely to offer is 75%, (only a couple will go to 80% LTV), meaning that your deposit must amount to at least 25% of the property value. If you are looking for many types of specialist BTL mortgages, lenders may require a larger percentage deposit than this.

Age

You must be 18 to qualify for a BTL mortgage, however many lenders impose higher age limits of 21 or even 25, and upper age limits of 75-85. There are, however, a couple of lenders who have no upper age limit.

Whether you are already a homeowner

We discussed in First Time Buyer Buy to Let that many lenders can be hesitant to offer mortgages to applicants who are not already homeowners. Many will want you to be a property owner of some description whether or not you live in that property. Being a homeowner helps you to prove your assets, and possibly that you are likely to pay back your mortgage on time. If you are looking at BTL for your first property, it may be advantageous to group up with others looking to buy, or have a family member assist.

What will the property be used for? What type of property is it?

It is important to know what you intend to use your property for. Buy to Let specifically refers to long-term tenancies, and renting. Take a closer look at the previous section, What are the different types of BTL mortgages, if you are unsure. If you have a unique property, consider discussing your options with a trusted mortgage broker.

Borrower Status

Essentially, borrower status refers to whether you have taken out a mortgage before. This can be a first-time buyer, experienced or professional landlord etc. Having a stronger borrower status might help you secure better rates with lenders, especially for a BTL mortgage.

Location of Borrower’s Residence

The location of your residence generally has no bearing on the sort of BTL loan you can secure, or the location of the property you intend to buy. There are some exceptions, for example, if the property is in an area of high council ownership, is above a commercial property or any other location that a lender may deem to be undesirable.

Credit History

Your credit history is used by lenders to determine how reliable of a borrower you are. If you have a poor credit history, it is unlikely that you will be able to secure a BTL mortgage, especially at favourable rates. There are grades of poor credit, though, and these will be accepted by some lenders to varying degrees.

Tax

Since 2020, the rules on tax for BTL properties have changed.

Previously, basic rate taxpayers could earn a 20% relief on their taxes and higher rate taxpayers could earn 40% tax relief. This is no longer the case. Recent changes mean that you can now claim 20% of your mortgage interest payments as a tax credit instead.

You should also be aware that since the Budget in October 2024, those with more than one property will have to by an additional Stamp Duty levy of 5% on top of the standard Stamp Duty rates.

Buy To Let LTV Ratio

Our top tip when it comes to LTV ratios is to aim for the lowest possible ratio. As with most mortgages, more upfront cash as a deposit may mean you’ll have access to a better interest rate, and therefore the potential for higher profit margins. A high LTV ratio means that lenders are at risk, if they need to repossess the property and prices have dropped, they may not be able to recuperate the full cost. Therefore, a larger deposit will lead to better deals, as you’ll be considered a lower-risk client.

Buy to Let Documents

Here’s a checklist of the documents you’ll need:

• Personal ID; a valid passport or driving license
• Address ID; a driving license (unless you used it for the above), a current council tax bill, bank statement or credit card statement, utility bill.
• Income proof:
  • Employed: latest P60 and last three payslips
  • Self-Employed
    • Sole trader/ Partnership / LLP: two years of tax calculations and tax year overviews
    • Limited company: two years of tax calculations and tax year overviews, 2 years of company accounts
  • Retired: state pension entitlement or private pension statement
• Bank statements
  • No owned properties: 3 months of personal bank statements
  • 1-3 properties: 3 months of personal bank statements, 3 months of business bank statements (if applicable) in addition to the above
  • 4+ properties: 3 months of personal bank statements, 3 months of business bank statements (if applicable)
• Deposit
  • Purchase: proof of source including bank statements from the last three months, donor statements
  • Remortgage: No proof required

You may be asked to provide additional documentation, however, the majority of lenders will need at least the above.

I want to become a landlord. What are my first steps?

If you’re a first time landlord looking for a BTL mortgage, here’s a list of things to consider:

• Make sure you are choosing the right property, in a growth area, in order to make the most of your BTL mortgage
• Are you able to borrow enough? Be realistic about the sort of property you are looking for, and keep in mind that lower LTV ratios will lead to better rates with the lender
• Get your documents ready to present to the lender, and for certain BTL mortgages, prepare a business plan to convey your readiness and forward-thinking business attitude
• Speak to a BTL mortgage broker, to make sure you’re trying to get the right mortgage for your property

Buy to Let Stamp Duty

If you’re purchasing a Buy to Let property or a holiday/second home, you’ll be required to pay an additional 5% in stamp duty. However, a key exception applies to first-time buyers venturing into Buy To Let investments, who have never owned a property before; they will be subject to standard home mover rates.
It’s important to note that stamp duty rates for second homes and Buy to Let properties follow a tiered structure, similar to residential stamp duty rates and income tax.

Buy to Let Mortgage Process

In this section, we’ve detailed the BTL mortgage process, from meeting with an adviser to exchange and completion, so you can be prepared for every stage of the process.

Meeting with Adviser and Mortgage Research

In this stage, you’ll be discussing the options available to you for BTL mortgages. You’ll be considering the property type and purpose for the property. Your adviser will be able to help you with finding the right lender.

Decision in Principle

This means that your lender has given you a figure (that could change) for a potential BTL agreement. It is not an offer but it does give you a good idea to inform your decision on a lender, and helps you to start shopping for properties.

Pre-Application and Submission

This is where you’ll apply for the mortgage based on a property you’ve found. You’ll need your collected documents for this stage.

Lender Underwriting and Valuation

In this phase, the lender will perform due diligence checks, inspect the property during valuation, and finally review your documentation in underwriting. The case progresses to an offer if all of these elements are in order.

Mortgage Offer

This is the formal offer from the lender. It confirms that your application has been received, read, checked and approved. It will only be valid for a limited period of time, usually between three and six months, so be sure to check with your lender.

Conveyancing

This is the legal process of transferring the BTL property into your name. For this, it is strongly recommended that you find a conveyancing solicitor. Don’t worry, we can recommend some good ones! Be prepared for legal fees during this process.

Exchange and Completion

This works the same as on any property. Congratulations, you’ve successfully bought a BTL property!

Rental returns and yield requirements for BTL properties

As well as a 125-145% requirement for your incoming rent over the interest rate, you also need to consider rental returns and yield requirements. Rental yield is the percentage return that you’ll make on a property. Depending on costs, a 5% yield would create profit, however, you should aim for between 6-8%.

Some properties in more expensive areas like London only provide a 3% or 4% yield. You need to think carefully about this and whether you are buying more for overall capital growth in the long term. You may only be able to get a low LTV on these types of properties. Calculate your expected yield below.

Rental Yield Calculator

When venturing into the buy-to-let market, one crucial figure you’ll need to get your head around is the rental yield. This is a percentage that measures the annual return you can expect from your investment, relative to its market value or purchase price.

To calculate this, first, add up the total annual rent you anticipate receiving. Then, divide this figure by the property’s market value or purchase price, and multiply by 100 to get your yield percentage.

For instance, if your property is worth £200,000 and you’re charging £1,000 per month in rent, your annual rent would be £12,000. Dividing £12,000 by £200,000 and multiplying by 100 gives you a rental yield of 6%.

It’s a straightforward yet powerful tool that helps you assess the viability of your property investment. Remember, a higher yield typically signals a more profitable investment, but it’s also important to consider other factors such as property location, potential for capital growth, and ongoing maintenance costs.

Compare Buy to Let Mortgage Rates

If you want to go into a mortgage adviser meeting with an idea of some lenders and types of mortgages that you are interested in, review our picks and ‘best buys’.

Buy to Let Mortgage Lenders

We’ve listed the types of lenders that you will be able to consider when looking for a BTL mortgage, so that you can find the arrangement that works best for your needs.

• Banks:
  • Traditional lenders that offer a variety of mortgage options.
• Online Lenders:
  • Lenders that operate exclusively online, offering convenience but often no advice
• Non-Bank Lenders:
  • Financial institutions that aren’t traditional banks but provide mortgage services
• Building Societies:
  • Institutions that traditionally focus on savings and mortgage lending, often with a cooperative or mutual structure
• Specialist Lenders:
  • These lenders specialise in particular types of mortgages, such as those for people with unique financial situations (e.g., self-employed individuals) or specific property types (e.g., buy-to-let or commercial properties). They tailor their services to meet specialised needs that may not be addressed by mainstream lenders.

Why You Should Use A Specialist Buy To Let Mortgage Broker

Using a specialist Buy to Let mortgage broker offers distinct advantages. These professionals bring expertise in Buy to Let financing, navigating the unique challenges of investment properties. With in-depth knowledge of available mortgage products, they can help tailor a solution to your investment goals and may access exclusive deals and lenders. Their experience in handling complex financial situations and understanding the property market can streamline the mortgage process, increasing the likelihood of securing favourable terms aligned with your investment strategy.

Talk To A Mortgage Adviser

The team at Coreco are experts on every part of the mortgage process, with knowledge spanning a range of specific and specialist property needs. We love a challenge, so if you haven’t found the advice you’re looking for, our team are here to discuss your unique needs. If you’re looking for advice on BTL mortgages, which option is right for you, or something else, contact us today.

Advantages of Buy To Let mortgages

Choosing a Buy To Let mortgage and becoming a landlord has several advantages. Here are some notable benefits:

Rental Income: One significant advantage is the potential for rental income. The property can generate a steady stream of money through tenant payments, providing a consistent source of revenue.

Property Appreciation: Over time, the value of the property may increase, offering the opportunity for capital appreciation. This means the property could be worth more than what you initially paid for it.

Diversification of Investments: Investing in real estate diversifies your investment portfolio. It provides an alternative asset class that may not be directly linked to traditional financial markets, potentially spreading risk.

Tax Benefits: There are certain tax advantages associated with Buy to Let mortgages, including deducting mortgage interest and certain expenses from rental income when calculating taxable profits.

Long-Term Investment Potential: Buy to Let properties can serve as a long-term investment, potentially building wealth over time. The property’s value may increase, and you can benefit from ongoing rental income.

Costs of being a Buy to Let Property owner

Investing in a Buy to Let property and being a landlord can come with some risks and drawbacks, as well as costs. Here are a few examples:

Letting agent fees: Letting agents may charge fees for finding tenants and managing your property. These costs can reduce your overall rental income.

Landlord insurance: Landlord insurance is necessary but adds an extra cost. It covers risks like property damage or non-payment of rent, but it’s an additional expense to consider.

Property maintenance fees: As a landlord, you’re responsible for property upkeep. Maintenance fees can impact your profits, and unexpected repairs may arise, adding to your financial responsibilities.