The main considerations of a buy-to-let mortgage
Posted 26 February 2016 by Keith Osborne
If you are looking to buy or refinance a residential property that you plan to let out to tenants, you might need a buy-to-let mortgage.
Buy-to-let mortgages are designed to help landlords to purchase and remortgage property that will be rented out. While many aspects of buy-to-let mortgages are similar to a standard residential home loan, there are differences.
You will need a bigger deposit
If you are looking for a mortgage for a property to live in you can generally find a range of deals with just a 5 or 10% deposit.
For a buy-to-let mortgage, you will generally need a much bigger deposit. Some lenders will accept 15% but you will get a much wider choice of products - and better interest rates - if you can put down 25% or more.
The mortgage is generally based on the rent, not your income
Unlike a residential mortgage, most buy-to-let mortgages are not based on your income. Instead, the maximum amount that you can borrow is typically based on the amount of rental income you can expect to receive.
Lenders will generally require the rental income from the property to be around 25 to 30% higher than your interest-only mortgage payment. Speak to a local letting agent or look at other similar properties to find out what the estimated rental income will be.
Other criteria you will need to meet to get a buy-to-let mortgage
While a buy-to-let mortgage will generally be based on the rental income of the property, there are some other criteria you will generally need to fulfil:
- You will generally need to own your own home, either outright or with a residential mortgage
- You will need a good credit history
- Many lenders have a minimum level of personal income that you will have to evidence. This is typically around £20,000 to £25,000
Interest rates and fees tend to be higher
Buy-to-let mortgages represent a higher risk to lenders than residential mortgages and so the interest rates and fees charged are generally higher than standard home loans.
While a choice of fixed- and variable-rate products are widely available you will generally find the rates are more expensive than residential loans. Fees are often charged on a percentage basis meaning you can end up paying several thousand pounds in arrangement fees for the very best deals.
Using a mortgage broker can be worthwhile
Buy-to-let mortgages can be difficult to understand and many products are only available if you go through a mortgage broker. While many of the big banks offer some buy-to-let deals there are lots of lenders with niche products that require specialist advice.
A mortgage broker can help you work out how to maximise your borrowing based on the rental income, find the most appropriate deal and find a lender who will offer on an unusual property.