Pros and cons of a buy-to-let mortgage. Are BTL mortgages a good idea?

Monday 18th December 2023 | 7 minute read

Pros and cons of a buy-to-let mortgage

If you’re looking to become a landlord for the first time or want to add a new rental property to your property portfolio, you’re probably looking for the best deal on a buy-to-let mortgage.

And you’re probably wondering what the benefits and disadvantages of a buy-to-let mortgage currently are. That’s what we’re going to answer for you in this article.

First, let’s make sure we’re all on the same page and answer the question “What is a Buy-to-let mortgage?”

A buy-to-let mortgage is a mortgage for people buying a property with the intention of renting it out. Standard residential mortgages cannot be used for properties that are rented.

Learn more about the specifics of a buy-to-mortgage in our What is a buy-to-let mortgage? Find out if they’re a good fit for you

After reading this article you’ll know:

  • The Pros of a buy-to-let mortgage
  • The cons of a buy-to-let mortgage
  • What you should be comparing when looking at your offers
  • The risks involved in getting a buy-to-let mortgage
  • How to find the best buy-to-let mortgage interest rates for your requirements

What are the pros of a buy-to-let mortgage?

There are many benefits to getting a buy-to-let mortgage to purchase a buy-to-let property. That’s why more people are becoming landlords and creating additional revenue streams for themselves. Check out the pros of a buy-to-let mortgage below:

Generate rental income

The largest advantage of a buy-to-let mortgage is the ability to create rental income that covers the cost of your mortgage repayments. So the rental income allows you to pay for the property in the long run. And you generate extra income too.

To ensure you make money on your buy-to-let property investment you should plan for the rental income to be higher than the monthly repayments and then some. 

New buy-to-let investors often forget to factor in ongoing maintenance and repair costs for their property. And this means they could be hit with costs that wipe out their profits from their rental income.

So you should position your monthly rental value at a point where you can put money aside each month for potential repairs and maintenance to maximise your profitability.

Capital uplift

Enables an investor to purchase a residential property that they otherwise wouldn’t be able to afford. That property over the long term is likely to see an uplift in capital appreciation - it’s going to be worth more, possibly a lot more. In the last 10 years, the average property price has increased by a whopping 68.96%.

Increased rental demand

More people are choosing to rent over buying. This means the demand for rental properties across the UK has increased in the past years. 

In 2022 demand for rental homes increased by a massive 23%. This increase means finding tenants will be much easier now than it was a few years ago. And this is great news for landlords as the biggest issue used to be occupancy. When your property sits vacant, you have to cover the monthly mortgage repayments. 

With demand so high, the amount of time your property is likely to have no tenants is much smaller. So your risks are reduced too.

What are the best buy-to-let areas in the UK?

Knowing where the highest demand for rental property is can help you secure the best rental income opportunities. So here are the top 10 places to invest in buy-to-let property right now:

  1. Manchester
  2. London
  3. Bristol
  4. Cambridge
  5. Peterborough
  6. Milton Keynes
  7. Luton
  8. Reading
  9. Southend
  10. Coventry

And most new landlords are investing in buy-to-let properties in London, Manchester and Birmingham. These are 3 major cities in the UK and are more likely to have a high demand. Another reduction to your risk when investing in buy-to-let property.

A wise investment

Some people like to invest in stocks and bonds. But property is a more reliable investment opportunity right now. With the demand for rental property still increasing, property investment is a sound option. 

All investments come with a risk. But buy-to-let property investment is currently a lower risk than it has been in previous years.

Property value is on the up over the long term

Property values in the UK are also on the rise (and whilst they've had a few bumps in 2023, over the long term they don’t look to be nose-diving any time soon). So investing in property is a typically considered a good decision. As you may be able to make a quick profit selling further down the line. 

And as property values increase, rental prices will naturally increase along with them. This means your profits will increase over time too.

What are the cons of a buy-to-let mortgage?

Where there’s an up, there’s always a down. Buy-to-let mortgages come with their disadvantages too. So let’s summarise the not-so-good parts of buy-to-let mortgages.

Empty property

As we mentioned in the pros of buy-to-let mortgages above, all investments come with a risk. And the biggest risk for buy-to-let property investment is having an empty property (no rental income). Your buy-to-let mortgage repayments will need to be paid even if your property has no tenants. So you’ll need to plan for this eventuality to avoid missing mortgage payments and potentially losing your property.

But, the good news here is that rental demand is higher than ever, so there are fewer vacant properties too.

Rent arrears

You have some control over getting tenants into your property. But tenants that stop paying their rent is a different story. You can't control a tenant's financial situation. And if your tenants fall into rent arrears, this could negatively affect your ability to pay your mortgage repayments.

Higher fees

Buy-to-let mortgages have higher fees, stamp duty and interest rates than standard residential mortgages. This means your upfront costs will be higher and therefore it can take no longer for you to turn a profit.

But after this initial period, you’ll be making regular income from your rental income that covers your monthly repayments.

Legalities and tax

There are lots of legal requirements for landlords. You should make sure you are fully aware of all these legal requirements to avoid receiving a big fine. You are responsible for knowing and abiding by these legal requirements. 

We recommend you consult a legal professional to make sure your buy-to-let property is adequate and up to legal standards for tenant occupancy before bringing tenants into the property.

There are also possible implications for your income tax payments. A higher income may mean you fall into a higher tax bracket so your tax payments may increase.

What should I compare with buy-to-let mortgages?

When you’re looking for a buy-to-let mortgage there are lots of things to consider. But to find the best deal you should compare the main features of a buy-to-let mortgage. We recommend you compare the following areas:

The mortgage type

There are different types of buy-to-let mortgages. When you receive offers from potential lenders, you should take a look at the type of buy-to-let mortgage they’re offering you. Most new landlords prefer the interest-only mortgage because they offer the lowest monthly repayments.

But you should get to know the buy-to-let mortgage types available to choose the one that will work best for your requirements and financial situation.

The interest rate

Buy-to-let interest rates are higher than standard residential mortgages. Currently, lenders are offering interest rates between 3-6% for buy-to-let mortgages. The average buy-to-let mortgage interest rate as of April 2023 is 5.81%.

Your best deals will be offers that have a lower interest rate as the interest rate and stamp duty are the most expensive elements for a buy-to-let mortgage.

If you find a buy-to-let mortgage with a particularly low interest rate, you may wish to check the upfront fees the lender is requesting to calculate the total cost of your buy-to-let mortgage offer.

The arrangement fees

Lenders will always add an arrangement fee to the total cost of your buy-to-let mortgage. Some lenders will display this as a percentage amount and others will charge a flat fee. The average arrangement fee for buy-to-let mortgages is around £1,500.

You should compare the arrangement fees on your buy-to-let mortgage offers with the same interest rate as this could be a place you could save money. 

The rental income requirement

Most lenders will require your rental income value to be at least 125% of your monthly buy-to-let mortgage repayments. Some lenders go up to 145%+. You should check your lender’s rental income requirements in the offer to ensure you can realistically charge the rental amount required by the mortgage agreement.

What risks are involved with getting a buy-to-let mortgage?

The main risks involved with getting a buy-to-let mortgage are:

1. Property value depreciation

If the property value decreases you are likely to lose money if you sell the property. This is a risk you and your financial advisor should consider before taking the plunge to purchase any property.

2. Rental voids

Any time your property is left empty you won’t be receiving rent. But you’ll still need to cover the monthly buy-to-let mortgage repayments. This can be difficult if you rely solely on the rental income for this.

3. Tenants in rent arrears

Tenants falling into rental arrears is something that is out of your control. The best way to avoid this is to complete credit checks before accepting them.

The biggest risk with buy-to-let mortgages is not being able to pay your monthly repayments as this could result in your losing your property. So you should plan effectively to ensure that any rental voids or rent arrears don’t prevent you from paying your monthly repayments.

How to find the best buy-to-let mortgage interest rates

To find the best buy-to-let mortgage interest rates you should shop around as many buy-to-let mortgage lenders as possible. High street banks and building societies are a good place to start. But they may not be offering the best interest rates for you.

Online comparison sites will help you compare beyond the high street banks and building societies, but they may not be the best at finding the best interest rates.

A buy-to-let mortgage broker has the know-how and expertise to find you the best buy-to-let mortgage interest rates available to you. And they’ll help you compare the offers so that you know you’re getting the best deal.

They can also help cut down the time it takes to get a buy-to-let mortgage. So give our experts a call today to discuss your buy-to-let mortgage requirements. Call us on 01202 612934.

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