August 9, 2022

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What is a Buy-to-Let Mortgage (and Can I Switch to One)?

6 min read

Like all conventional mortgages, every buy-to-let mortgage issued is unique. Policies vary significantly from one lender to the next, emphasising the importance of shopping around for a great deal. But as many buy to let specialists offer their services exclusively via broker referrals, seeking skilled broker support at an early stage is essential.

What is a Buy-to-Let Mortgage?

A buy-to-let mortgage is a specialist type of mortgage for BTL property investments. Conventional mortgages cannot be used to purchase properties to be let out to tenants. In the same way, a buy-to-let mortgage cannot be used to buy a property to live in.

If you plan on letting out a property, you buy to tenants on any basis, and you must ensure you take out an appropriate buy-to-let mortgage.

Who Can Get a Buy-to-Let Mortgage?

Eligibility for buy-to-let mortgages is assessed on the basis of numerous factors. Examples of which include the provision of an adequate deposit, estimated rental income that comfortably exceeds the monthly loan repayments, evidence of a stable financial position and a good credit score.

However, you do not necessarily need to be an experienced landlord or investor in order to qualify for a buy-to-let mortgage.

What Are the Age Limits on Buy-to-Let Mortgages?

You must be aged at least 18 or over to apply for a buy-to-let mortgage, but some lenders restrict their services to applicants aged at least 21 or 25.

Upper age limits also apply with all lenders, which can be anything from 60 to 75 – depending on the length of the mortgage term.

How Much Do I Need to Earn?

Your monthly or annual salary will be of less importance than the potential for your buy-to-let property to generate strong and consistent rent yields. Some lenders impose a minimum annual income of £25,000 on BTL mortgage applicants, but others have no minimum income thresholds at all.

Instead, you will need to provide evidence that your buy-to-let home will generate a rental income of at least 120% to 150% of your monthly mortgage payments.

How Do Lenders Assess Rental Income?

On average, a lender will expect to see evidence of an estimated rental income of at least 125% of the monthly mortgage payment. On an annual basis, this would mean that if your combined mortgage payments were £10,000, your BTL property would need to generate £12,500 in rental payments.

In addition, lenders may also factor other potential issues into their affordability checks, such as repair and maintenance costs, letting agent fees, and vacant periods between tenancies.

What Kind of Deposit is Needed for Buy to Let?

This is where many prospective landlords hit something of a roadblock, as the standard deposit requirement for a BTL mortgage is 25%. This means that if you plan to purchase a £300,000 home to let out to tenants, you will need to come up with at least £75,000 – plus all additional legal and administrative costs.

However, paying a larger deposit always opens the door to preferential interest rates and reduced overall borrowing costs. For example, if you are able to offer a 40% deposit rather than the 25% minimum, you could qualify for a significantly more competitive deal.

Do I Need a Good Credit Score?

A good credit score will always make it much easier to qualify for a competitive BTL mortgage. The stronger your credit history, the more lenders will be willing to consider your application. In addition, the best deals on most types of mortgages are often reserved for those with flawless credit.

But this does not necessarily mean that poor credit will count you out of the running for a BTL mortgage. Some specialist lenders are surprisingly flexible, while others pay little to no attention to credit scores at all.

If you have any questions or concerns regarding your credit profile, discuss them with an independent broker before applying for a BTL mortgage.

Which is Better – Interest-Only or Repayment Mortgages?

Technically speaking, an interest-only mortgage can be the more cost-effective of the two options. With interest-only mortgages, your monthly repayments only cover the interest payable on your mortgage. When you have fully repaid the interest on your loan, the remaining balance becomes payable.

Interest-mortgages tend to be shorter-term in nature and can minimise borrowing costs by paying off the bulk of the loan in a single lump-sum payment. However, this is only a viable option where the borrower has the means to repay their mortgage in full by an agreed date; for example, if they sell their property to raise the funds or by paying off the remaining balance with a longer-term loan.

Interest-only mortgages can be more affordable but are not without their risks, all of which will be detailed and discussed during your initial consultation with a specialist BTL mortgage broker.

Can I Get a Buy-to-Let Mortgage on Any Type of Property?

No – the conventional BTL mortgages are issued exclusively for the purchase of certain types of properties. Lenders’ restrictions with regard to ‘uninhabitable’ or ‘unmortgageable’ properties also apply to most BTL products.

For example, if a property is in a particularly poor state of repair or doesn’t feature a working kitchen and bathroom, it is unlikely to qualify for a mortgage.

Alternative options like bridging loans can be used to purchase non-standard homes to be renovated and let out for the best possible ROI.

Is There a Maximum of Buy to Let Mortgages I Can Have?

It depends entirely on your financial track record and your experience as a landlord. Some BTL business owners have dozens of properties in their portfolios and any number of active BTL mortgages at any one time.

Some lenders impose restrictions on the number of BTL mortgages they will issue to a borrower, while others base their decisions on individual merit. A specialist BTL mortgage provider is more likely to demonstrate flexibility than a conventional High Street bank, for example.

Can I Let Out My Current Home to Tenants?

If you are still repaying your standard mortgage, then no – you cannot let out your home to tenants under any circumstances. The terms and conditions of almost every conventional mortgage rule out the use of the purchased property for lettings purposes.

However, there may be the option of switching from your standard residential mortgage to a buy-to-let mortgage.

How Does Switching to a Buy-to-Let Mortgage Work?

With the help and support of an experienced broker, the whole thing can be surprisingly simple. In addition, the initial product search and eligibility checks pose no risk to your credit score.

If you would like to switch to a buy-to-let product, you will need your current lender’s permission first. Should they decline your request (or if they do not offer BTL products), you will still be able to remortgage with a new provider and seek a BTL mortgage elsewhere.

Whether or not it is cost-effective or even possible to switch to a BTL mortgage will depend on the following:

  • The type of mortgage you are currently repaying
  • Your lender’s terms and conditions
  • How you intend to accommodate yourself
  • Your other combined debts and outgoings
  • Early exit fees and penalties for remortgaging
  • Your intentions for your property long-term

Extensive calculations will need to be performed to determine whether switching to a BTL mortgage is an affordable option. All of which will be handled on your behalf by your broker, who will also compare the market in its entirety to find you an unbeatable deal.

What is Let to Buy?

Let to buy is another popular entry point to BTL property ownership. This is where a homeowner with an existing residential mortgage purchase a new home to move into and lets out their previous property to tenants.

With let to buy, the tenants who rent out your previous home cover your outstanding mortgage payments, leaving you free to seek a new mortgage on your next home. Long-term, you benefit from ownership of two properties while having only repaid one mortgage in full.

This can be a particularly useful option if you have struggled to sell your current home for its full market value or if you reside in an area where rent yields are particularly high. Let-to-buy property investments also call for a specific type of mortgage, which is not always available from mainstream lenders.

For more information on any of the above or to discuss buy-to-let investment opportunities in more detail, contact a member of the team at UK Property Finance today.

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