A Buy to Let mortgage is a specific type of mortgage for when you buy property as an investment – somewhere you’re going to rent out to a tenant or tenants, instead of somewhere to live for yourself. If you plan to rent out a property, most mortgage lenders won’t give you a residential mortgage. You’ll need a specialist Buy to Let mortgage.
There are a few differences between Buy to Let mortgages and other mortgages:
Buy to Let mortgages tend to have higher fees than other mortgages, they also tend to have higher interest rates.
Most Buy to Let mortgages are interest-only. This means you have to pay the interest every month but not the actual loan amount. So, at the end of your mortgage term, you end up repaying the original loan in full. However, some can be on a repayment basis.
The minimum deposit for a Buy to Let mortgage is often higher than a residential mortgage. The minimum deposit for Buy to Let mortgages tends to be 25% of the property’s value and can vary from 20-40%.
Most Buy to Let mortgage lending isn’t regulated by the Financial Conduct Authority. There are exceptions, though. If you’re renting the property to a close family member then this is often referred to as consumer Buy to Let mortgages and are assessed the same way as a residential mortgage. This means having to meet the same strict affordability rules as residential mortgage lending. Buy to Let consumer mortgages are regulated by the Financial Conduct Authority.
With all mortgage applications, you’ll need to show you can afford to make the payments. Lenders work out whether you can afford a Buy to Let mortgage based on what rent you’ll receive along with your financial circumstances. Read more about this in our Guide: What Mortgage Lenders look for in Mortgage Applicants.
The general rule with most lenders is that the rental income will have to cover at least 125% of the mortgage if the mortgage is charged at 5.5%. If you’re a higher rate taxpayer, the rental income will have to cover 145% or 160%.
Generally, 18 is the minimum age for getting a Buy to Let mortgage. However, many lenders think that Buy to Let investors who are at retirement age (66) and over might be more responsible to lend to. But every mortgage lender is different and has different criteria that they use to judge if they’re willing to give you a mortgage or not.
Right to Buy is a government scheme that helps council tenants in England to buy their council home at a discount. Most mortgage lenders use this discount in place of a deposit, meaning you don’t have to put down a big cash sum up front.
You won’t be able to rent out your Right to Buy home until five years after you’ve bought it. It’s a condition of using this scheme. If you sell your home or rent it out before this time, you’ll have to pay back the discount you received in full.
You’ll generally need a bigger deposit for a Buy to Let mortgage than you would with a standard residential mortgage. About 20-25% of the property’s value is normal.
As you would with a residential mortgage, the bigger your deposit, the better your interest rate will be. Along with this, mortgage lenders will assess your application by checking if you have any other rental properties, and how good you’ve been with your repayments.
There are three categories of Buy to Let mortgages:
Also known as Investment Property Loans, this is the most popular type of Buy to Let mortgage. They’re made for properties bought specifically for renting out. They’re called Unregulated because they’re not regulated by the Financial Conduct Authority.
Also known as Family Buy To Let, this mortgage type is specifically for properties that are rented to a family member, or where up to 40% of the property is occupied by the owner and rents out the remaining share.
Also known as an Accidental Landlord Buy To Let, this type of mortgage is made for people that inherit a property, or who buy a new home while keeping the old house to rent out.
Yes, you can definitely remortgage a Buy to Let property. It’s really common, and generally happens when someone moves out of their home but wants to keep it to rent it out.
Remortgaging is when you replace your existing mortgage with a new one. If you’re planning to rent out your old home, you’ll have to remortgage to Buy to Let. You usually can’t rent out a property if it’s on a standard residential mortgage.
It’s really important to tell your mortgage lender if you’re planning to rent out your home. Buy to Let mortgages are a bigger risk for lenders, so you risk invalidating your mortgage if you don’t let them know. Some lenders might give you what’s called a ‘consent to let’ on your current mortgage deal, meaning you won’t have to remortgage. Others might insist that you take out a new mortgage.
Applying for a mortgage or understanding your options shouldn't be confusing, yet there are just so many myths doing the rounds and it's not easy to know where to turn to get the right advice.
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