Buy-to-let mortgages

How do buy-to-let mortgages work?

With a buy-to-let mortgage, just like a residential mortgage, you provide a deposit and borrow the remaining money from a mortgage lender. You also still repay the mortgage over a defined term.

But in some ways, it works differently from a mortgage you'd use to buy your own home. For example:

• Deposit size - You need a much bigger deposit for buy-to-let. This varies by lender but is usually 20-40% of the property value
• Repayment type - Most buy-to-lets are interest-only mortgages, but it’s possible to get a repayment version from some lenders
• Repayment vehicle - If you opt for interest-only, the lender will expect you to have a repayment plan - also known as a repayment vehicle. This could be selling the property at the end of the mortgage, or some form of investment, to pay back the final balance. Different lenders accept different repayment plans
• Not covered by the FCA - The Financial Conduct Authority (FCA) doesn't regulate most buy-to-let mortgages. Except if you’re buying property purely to rent to your family - this is known as a regulated buy-to-let mortgage
• Borrowing based on rental income - Lenders calculate how much you can borrow based on how much you could make by renting the property out. When buying your own home, borrowing is usually just based on your income
• Stricter lending criteria - Because buy-to-let properties are an investment, they’re seen as commercial transactions. This means lenders are more cautious and often have stricter criteria to meet

How to get the best buy-to-let mortgage deal

It’s a good idea to compare buy-to-let mortgages before choosing a lender. Criteria and terms for each mortgage product vary, so you may be able to borrow more or pay less interest, with one lender than another.

An independent mortgage broker can help you speed up the search as they have access to most lenders on the market.

Most landlords use an interest-only mortgage, but you’ll need to have a definitive final repayment plan in place to do so. You’ll also need to decide whether a fixed-rate or variable-rate mortgage is more suited to your needs.

If you own multiple buy-to-let properties, you could consider a portfolio mortgage, which lets you keep all of the mortgages in one account.

What other costs are involved in buy-to-let mortgages?

The interest rates and application fees are typically higher for a buy-to-let mortgage than standard residential mortgages. To keep business costs lower, landlords often use an interest-only mortgage to reduce their monthly repayments,

You also need to pay valuation and legal fees, like any other mortgage. You typically pay more stamp duty on additional property purchases if you already own one - including your main home. The extra amount varies depending on which part of the UK you live in.

It’s also important to consider other costs involved with being a landlord:

• Tax - whether you’re an individual or a limited company, you pay tax on rental income. If you sell the property you also pay capital gains tax on profits
• Insurance - tenants usually pay contents insurance, but buildings insurance is the landlord's responsibility. It’s also a good idea to have landlord’s insurance, which covers mortgage payments when you have no tenants or tenants refusing to pay
• Management fees - if you use a rental management or letting service, their fee is usually around 20-30% of your rental income
• Maintenance - you're responsible for keeping the property in good repair and replacing broken fixtures and fittings
• Safety compliance - you're responsible for ensuring safety regulations are met, like gas safety certificates and smoke alarms. Make sure to research landlord regulatory responsibilities