Understanding the Buy to Let Mortgage Process
Before we start discussing buy to let mortgage rates and costs, let's run through a summary of what this borrowing product is for.
You can apply for a buy to let mortgage against any property that you're letting out to tenants for a profit.
Most buy-to-let loans are interest-only, so you use the rental income each month to pay the interest and either sell the property or remortgage at the end of the term.
There are thousands of buy to let properties, from city centre apartments to family homes, rural buildings to listed properties, so it can be difficult to know which lender to apply to.
Borrowing Limits on Buy to Let Loans
Buy to let mortgages are relatively flexible, so provided you can prove that the rental income will more than cover the interest cost, there isn't any generic cap on the maximum mortgage you can apply for.
Of course, lenders will look at many other circumstances before offering to lend, but rental income is the primary factor, provided you meet all the requirements.
Most buy to let lenders will need to see that the projected rental earnings are at least 25% or 30% higher than the monthly interest, as a bare minimum.
Advantages to Taking Out a Buy to Let Mortgage
So, if you're thinking about taking on a buy to let mortgage, let's look at some of the pros and cons you should be aware of.
Rental property investment does have advantages and drawbacks, so we've summarised them here.
- Long-term returns - if you have a great buy to let property that commands good returns, you can earn a stable, ongoing profit each month. Properties also tend to appreciate so that you can sell your asset in the future.
- Strong earning potential - demand in the rental market is solid, and therefore investing in quality property can be a low-risk opportunity.
- Tax incentives - while there have been several changes in the last few years that limit your allowable expenses, there are also lots of running costs you can deduct from your declared rental income.
Potential Pitfalls to Be Aware
Tenant-related risks are the most significant possible downside. That could include vacant periods between tenants, late rent payments or even arrears.
You'll also pay higher Stamp Duty if you're buying a rental property as a second home (there is a 3% additional levy) and the potential that your investment property will drop in value, as with any home purchase.
However, working with a broker is a great way to sidestep potential issues.
For example, Revolution can suggest insurance policies to protect you from tenant-related issues and negotiate lower interest costs to maximise profit.
Eligibility Criteria for the Best Buy to Let Mortgages
Just like a residential mortgage, your buy to let mortgage application will be subject to lender assessments, and every provider has varying rules and eligibility requirements.
Minimum Deposits on Buy to Let Mortgages
Deposits tend to be 20-25% of the property value, with standard buy to let mortgages offered at 75% to 80% Loan to Value (LTV). You usually need a larger deposit for a buy to let investment than if you're purchasing a home to live in.
There are options if you have a lower deposit, with a select number of providers accepting deposits as low as 15% if the circumstances are right.
Income Eligibility for a Buy to Let Loan
Lenders will primarily consider the rental income, but they'll also want to know if you have a separate salary or employment.
Particularly for new landlords, a mortgage provider might require an annual income of £25,000 from other earning streams.
However, Revolution works with buy to let mortgage lenders who don't have a personal income requirement and base their lending decisions solely on the rental earnings.
Other Buy to Let Mortgage Criteria
Depending on your lender, they might also look at other factors, such as:
- Age: some lenders will lend from age 21 to 75, but others have no limits or specialise in later life mortgages.
- Property type: any non-standard property, such as a high rise flat, listed building, or unusual construction, will typically need a niche lender.
- Experience: lenders can require a minimum number of years of landlord experience to grant a buy to let mortgage, but this isn't a universal criterion.
Another common requirement is that you already have a residential mortgage. Lenders like to see buy to let applicants with a mortgage of at least six months.
Typical Buy to Let Mortgage Rates and Costs
Buy to let mortgage rates vary since it's an unregulated market (visit our FAQs below to learn more about this!).
Therefore, it's all but impossible to give standard interest rates since that depends heavily on the property, your income, anticipated rental earnings, credit scoring, age, and various other circumstances.
However, we can illustrate the likely additional costs that go hand in hand with a mortgage.
It's crucial to have complete oversight of all the fees, as these are often forgotten until the mortgage comes to complete and can add a substantial amount to your budget.