Buy to Let Mortgages
Buy-to-let (BTL) mortgages are specifically for those looking to invest in property to rent out to tenants. They are fundamentally different from residential mortgages and are assessed on different criteria.
This guide will help you understand how lenders assess your application and what you need to know to secure the right finance for your investment property.
How buy-to-let mortgages differ from residential mortgages
While both are used to buy property, buy-to-let (BTL) mortgages are a distinct product with different lending rules. They are designed for business purposes, not for living in, which changes the criteria a lender uses to assess your application.
This difference in lending criteria is a key point for any landlord. A BTL application is assessed on its own merits as a business venture, not just your personal finances. It’s a commercial decision for both you and the lender.
Criteria | Buy-to-Let Mortgage | Residential Mortgage |
|---|---|---|
Criteria Purpose | Buy-to-Let Mortgage To purchase an investment property to be rented out. | Residential Mortgage To purchase a home to live in. |
Criteria Lending criteria | Buy-to-Let Mortgage Primarily based on the expected rental income of the property. | Residential Mortgage Primarily based on your personal income and affordability. |
Criteria Minimum deposit | Buy-to-Let Mortgage Usually 25% of the property's value. | Residential Mortgage |
Criteria Interest rates | Buy-to-Let Mortgage Typically higher than residential mortgages. | Residential Mortgage Generally lower as they are considered less risky. |
Criteria Regulation | Buy-to-Let Mortgage Often unregulated by the FCA unless you rent to a close family member (a 'consumer buy-to-let'). | Residential Mortgage Regulated by the FCA, offering a higher level of consumer protection. |
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How much can you borrow for a buy-to-let mortgage?
Unlike a residential mortgage, how much you can borrow is primarily based on the property’s rental potential, not just your personal income. Here are the main criteria lenders use to assess your application:
Deposit
You will need a minimum deposit of 25% of the property's value. However, a larger deposit will reduce your loan-to-value (LTV) ratio, which can help you access lower interest rates and more competitive products.
Personal income and affordability
While the property’s rental income is the main factor, most lenders will still check your personal income.
They want to see that you have a minimum income, typically £25,000 a year, and that you can cover the mortgage payments during any void periods when the property is not rented out.
Credit score and age
Lenders will check your credit file to ensure you have a history of managing debt responsibly.
They will also have an age limit, with most expecting the mortgage to be fully paid off before you turn 75.
A broker can help you find lenders who offer more flexible terms if this is a concern.
The buy-to-let mortgage application process
The buy-to-let mortgage application process can run in parallel with the conveyancing process. While it is similar to applying for a residential mortgage, there is a greater focus on the property’s value and rental potential. Here is a guide to the key stages:
- 1
Get a Decision in Principle (DIP)
A DIP is a document from a lender that gives you a formal indication of how much you are likely to be able to borrow. It is a tool for showing sellers that you are a serious buyer.
- 2
Find a property and instruct a solicitor
Once you have a DIP, you can confidently find a property. When your offer is accepted, you should immediately instruct a solicitor to begin the legal and conveyancing work on the purchase.
- 3
Submit your application
Your broker will then submit your full mortgage application to the lender. This will include all of your financial documents and a formal rental valuation from a local letting agent.
- 4
Valuation and assessment
The lender will carry out a valuation of the property and a full assessment of your application. This includes a review of your finances and an affordability check based on the rental income stress test.
- 5
Receive your mortgage offer
If your application is successful, the lender will send a formal mortgage offer. Your solicitor will need this document to proceed with and complete the purchase on your behalf.
Discover the areas with the best rental yields in our dedicated article, Buy to Let Hotspots.
The risks of a buy-to-let mortgage
While a buy-to-let property can be a profitable investment, it is important to be aware of the risks. A BTL mortgage is a business tool, and a rise in interest rates, for example, can have a direct impact on your profit margin.
- Rising Interest Rates: Most buy-to-let mortgages are on an interest-only basis and are not fixed for the entire term. If the interest rate rises, your monthly payments will go up, which can significantly reduce your rental yield and bottom line.
- Void Periods: You are responsible for the mortgage repayments, bills, and council tax even when the property is vacant and not bringing in any rent. You should always have a financial buffer to cover these times.
- Falling Property Values: The property's value can go down as well as up. If you need to remortgage or sell during a downturn, you may find yourself in negative equity.
- Lack of Protection: Unlike a residential mortgage, most BTL mortgages are not regulated by the Financial Conduct Authority (FCA). This means you have less consumer protection if things go wrong.
Buying as a limited company
For many landlords, buying a property through a limited company has become a popular option due to its potential tax benefits. Lenders have adapted to this trend, but the process is slightly different from buying as an individual.
Key differences
- Tax Efficiency: The main reason for using a limited company is tax efficiency. As a company, you can often deduct all mortgage interest from your rental income as a business expense, before calculating Corporation Tax, which can result in a higher profit margin.
- Lending Criteria: While the minimum deposit is typically still 25%, some lenders may require a higher deposit for limited company applications. The process is also often more complex, with lenders scrutinising the company’s financial health and requiring a personal guarantee from the directors.
- Regulations: Mortgages for limited companies are considered 'business buy-to-let' and are generally unregulated by the FCA.
This is a specialist area, and it is highly recommended to seek professional advice from a financial adviser and an accountant to determine if a limited company structure is right for you.
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Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
