Buy to Let mortgages explained

Taking the first steps towards becoming a landlord can feel pretty exciting. But there’s a lot to get your head around – including the ins and outs of Buy to Let mortgages. Here’s all you need to know.

What is a Buy to Let mortgage?

A Buy to Let (BTL) mortgage is a specific type of mortgage for people who want to buy a property to rent out. You’ll need one if you want to borrow money to become a landlord, because you can’t use a normal residential mortgage to fund a Buy to Let property.

Most highstreet banks offer Buy to Let mortgages, and there are specialist providers too. 

Let’s take a closer look.

Residential vs Buy to Let mortgages

Buy to Let (BTL) mortgages work similarly to normal residential mortgages. But there are a few key differences to be aware of:

• The interest rates are usually higher for BTL mortgages.
• You’ll usually need at least a 25% deposit for a BTL mortgage – and the best deals are often offered to those who can put down a deposit of 40% or higher.
• The fees are usually higher for a BTL mortgage.

Like with residential mortgages, you can get different types of Buy to Let mortgages, for example:

• Fixed rate: where your mortgage interest rate stays the same for a fixed term.

• Variable rate: where your mortgage interest rates go up and down over time in line with whatever the lender decides.
• Tracker: a type of variable rate mortgage where a “base rate” is tracked (rather than your lender deciding how much your interest will go up and down) – this is normally the Bank of England’s base rate.

• Discount: a type of variable rate mortgage where a discount is offered on interest for a set period of time.

• Offset: where the amount you owe on your mortgage is “offset” by money you have in a savings account. The lender deducts the value of your savings from your mortgage and you only pay interest on what’s left (but you also can’t earn interest on savings you’re offsetting with).
• Interest only: where you only pay off your mortgage interest each month rather than paying anything off the actual capital of the property. Then, you pay the rest of the mortgage in one lump sum at the end of a fixed term.

How do Buy to Let mortgages work?

The vast majority of Buy to Let mortgages work on an interest-only basis. 

Interest-only mortgages are appealing to landlords because only paying off interest makes the monthly payments lower. 

But of course, that also means you need to have a plan to pay off the rest of the mortgage at the end of your fixed term. You might choose to pay into a dedicated savings pot for this. Or you could potentially sell the property (hopefully at a profit) and pay off the rest of your mortgage this way.

How much can you get for a Buy to Let mortgage?

The amount you can get for a Buy to Let mortgage is based on the expected rent a property will get from tenants. Mortgage lenders usually want to see that a property will make at least 25-30% more in rental income than the monthly mortgage repayments. 

Tip: Read our guide to property rental yields to find out more about calculating a property’s profitability from a rental income point of view. 

It’s worth noting that in certain circumstances, lenders might want to look at any other income you have, too (find out more about eligibility below).

How to get a Buy to Let mortgage

The process of getting a Buy to Let mortgage is similar to getting a residential mortgage. You can shop around on comparison sites, speak to lenders, or work with a specialist mortgage advisor. 

However, the eligibility criteria for getting a Buy to Let mortgage tends to be stricter than with residential mortgages. This is because lenders see BTL mortgages as higher risk.

The rules around who’s eligible for a Buy to Let mortgage differ from lender to lender. But in general, you may need to:

• Already own a property – this isn’t a steadfast rule, but some lenders do require you to own at least one property (with or without a mortgage) to get a BTL mortgage.

• Have a good credit record.

• Are under a certain age – this is usually around 75 but for some lenders it may be younger.

• Have other income over around £25,000 (outside of the rental income you expect to make) – this may vary from lender to lender.

• Have enough saved for at least a 25% deposit.

How many Buy to Let mortgages can you have?

There’s no limit to how many Buy to Let mortgages you can have. 

Some landlords have portfolios of hundreds of properties (with hundreds of Buy to Let mortgages) – which gives you an idea of the possibilities. 

It’s worth noting, though, that individual lenders will usually limit either the amount of mortgages you can have with them or the total amount of money you can borrow from them.

And some (but by no means all) lenders won’t lend to you if you have over a certain amount of mortgages with other lenders. 

It’s worth noting that, when applying for additional Buy to Let mortgages, lenders will look at the loan to value (LTV) ratio of your portfolio as a whole. The LTV of a property is a ratio of its mortgage expressed as a percentage of the total value of the property. So, if you pay a 25% deposit on a property, its LTV is 75%. The more money you pay off the mortgage (not including interest payments), the less the LTV becomes.

When it comes to multiple BTL mortgages, lenders will look at the combined money you owe across all mortgages vs the combined value of all your properties.

How to get a Buy to Let mortgage if you run a limited company

Many landlords choose to run their letting business through a limited company for tax efficiency purposes among other reasons. But what does this mean for getting a Buy to Let mortgage?

To get a Buy to Let mortgage through a limited company, your best bet is to work with a broker who specialises in this area. 
It’s worth noting BTL mortgages for limited companies are less common than residential BTL mortgages – although they are becoming increasingly popular. This is because there’s been an insurgence of landlords moving over to a limited company structure following recent changes to the rules around landlord tax relief.

Buy to Let HMO mortgages

A House in Multiple Occupancy (HMO) is a rental property that’s let to three or more unrelated tenants. For example, a student house where each student has their own tenancy agreement. If you’re looking to invest in an HMO, you’ll need an HMO mortgage.

How to get a Buy to Let mortgage as an HMO landlord

To get a Buy to Let mortgage as an HMO landlord it’s likely you’ll need to meet stricter criteria than with a standard Buy to Let mortgage. Many HMO mortgage lenders will require you to already be an experienced landlord, for example. 

It’s also worth noting that you can probably expect to pay slightly higher fees, and will need a bigger deposit (at least 35-40%) than with a standard BTL mortgage. 

Thankfully, there are many lenders (as well as brokers) out there who specialise in this area, and who can help you navigate things.

Changing your residential mortgage to Buy to Let

If you already own a property with a residential mortgage and decide to rent it out, you need to get permission from your mortgage lender. Transferring a residential mortgage over to a Buy to Let mortgage is really common – with two main options:

• Your mortgage lender might be happy to transfer your residential mortgage to a Buy to Let mortgage.

• If they’re not willing to do this, you can look to remortgage with a new lender – but be aware you might face early repayment charges with your current lender if you do this before the end of your mortgage term.

Make better property investment choices with Hammock

Getting your head around property finances can be tough when you’re starting out as a landlord. We understand this more than most – as we’re landlords ourselves. That’s why we built Hammock, a platform for landlords that helps you manage all your property finances in one place, in real time. See all your rental income and expenses in our app or website portal. Plus, get full transparency on your Buy to Let investment returns with live metrics, and file your taxes in a fraction of the usual time.

Sound good?