The buy-to-let mortgage market in the UK has grown in the last decade, with the Council of Mortgage Lenders revealing that the number has increased from 840,000 in 2006, to now over 1.8 million buy-to-let mortgages taken out in the UK by the end of 2015. This means that the overall balance of buy-to-let mortgages outstanding is now well over £214 billion.
However, although most are aware of buy-to-let properties and mortgages to some extent, many simply do not fully understand what a buy-to-let mortgage is and how it works in practice. There are a variety of ways in which buy-to-let mortgages are used and they enable investors to make a variety of purchases and investments.
There are various routes to consider when looking to acquire these specialist mortgages with lenders and brokers being able to advise and assist prior to any lending decision. It may well be the case if you are using an estate agent that they have preferred lenders and brokers to point you in the direction of should you require.
What is a Buy-to-Let Mortgage?
This category of mortgage product enables people to borrow money in order to purchase a property to be utilised as an investment and rented out to tenants. It is possible to get access to a buy-to-let mortgages through various means, including banks and building societies. These mortgages are typically more expensive than others available on the market, due to the level of risk involved.
Generally speaking, buy-to-let mortgages are considered higher risk as they are not a standard residential mortgage, and it is more common for borrowers to default with payments down the line, meaning that lenders lose out on their money.
However, if you are considering a buy-to-let mortgage but are put off by the additional charges and fees, it is important to not be tempted to take out a residential mortgage instead, to be used to the same effect. Buy-to-let mortgages are a specific form of property finance and are fit for their purpose. Should a borrower do this and the mortgage providers finds out at a later date that a typical residential mortgage product is being used for buy-to-let purposes, it is likely to invalidate the loan with extra fees incurred.
A Bigger Deposit Will be Required
Buy-to-Let mortgages will almost always require a higher deposit than for a standard residential mortgage. Generally, this equates to having an average deposit (based upon figures for the 2016/2017 financial year) of around £62,309.
In terms of percentages, this means that someone applying for a buy-to-let mortgage will need at the very minimum 25% of the property’s purchase value as a deposit in order to access one. However, it is commonplace for this percentage to be far higher with some leading mortgage lenders, sometimes requiring at least a 40% for buy-to-lets.
This all means that the amount that can be borrowed for buy-to-let mortgages is lower than for residential mortgages. In a report carried out by Money Supermarket, it was revealed that the average amount borrowed for buy-to-let purchases for 2016/2017 was around 69% and buy-to-let remortgages at 58.5%.
This is compared to nearly 84% for first-time buyers with standard mortgage products.
Buy-to-Let Mortgage Rates
Generally speaking, the rates for buy-to-let mortgages are higher than for residential mortgages, in much the same way as the deposit amounts that are required, due to the level of risk involved for a lender. Nevertheless, as with standard mortgages, the exact rate a person ends up paying can vary, with this being dependent on a number of factors such as:
- The credit score of the applicant
- The size of the deposit put down
- The level of risk involved in providing a loan
- The precise type of buy-to-let mortgage product utilised
The Importance of Rental Income
There are stricter conditions in place, reflecting the higher risk involved for lenders providing buy-to-let mortgages. Lenders place high importance on the affordability of an applicant and the affordability calculations made when making their lending decision for each lender and mortgage product.
This means that they take into consideration an applicant’s personal income, the expected rental yield and then look at this in relation to the overall value of the property to be purchased. There is usually a minimum rental income requirement in order to acquire a buy-to-let mortgages, typically equating to the equivalent of 125% of yearly mortgage repayments.
For example, if a person was making repayments of £15,000 annually, a lender would typically need the rental income to be at the very least £18,750 to accept such an application.
Criteria for Getting a Buy-to-Let Mortgage
When it comes to banks and building societies in the UK, there are different criteria that a person needs to meet to be considered for buy-to-let mortgages. Whilst the precise criteria will vary from lender to lender, here are some of the most commonly cited by mortgage lenders:
- Minimum age of at least 25 years old
- A minimum income: usually at least £25,000 annually
- A cap on the amount it is possible to borrow
- A cap on number of buy-to-let loans a borrower can take out (usually up to three)
Buy-to-Let Loans as Interest Only Mortgages
It is worth remembering that the majority of buy-to-let mortgages are interest only. This means that each month the borrower will only pay the interest and will then clear the capital debt at a later date once the property has been sold.
Interest-only mortgages have a number of advantages for people looking to purchase buy-to-let properties:
- It is possible to offset a proportion of the mortgage interest against tax bills
- They can end up being cheaper (on average, usually £360 per month, compared to an estimated £770 each month for a residential mortgage) than other mortgages available
Nevertheless, if a person is considering acquiring a buy-to-let mortgage they should be confident that they will able to keep up repayments even in the worst-case scenario, such as if tenants are unreliable and fail to pay on time if at all, or if the property ends up vacant for a period of time. Not properly preparing for all eventualities may end up with the borrower’s property repossessed if mortgage repayments aren’t repaid.