What is a Buy-to-let mortgage?
Find out if they're a good fit for you
A buy-to-let mortgage is a specific mortgage for those who intend to purchase a property with the purpose of renting it out to tenants.
If you want to become a landlord, you’ll need to buy a property suitable for renting out. This type of purchase is known as a buy-to-let (BTL). You cannot use a standard mortgage for a property you intend to rent to tenants.
There are some things you should know before applying for a buy-to-let mortgage. We’ll cover these essential points here.
Here’s what you’ll learn in this article:
- Are buy-to-let mortgages regulated?
- How a buy-to-let mortgage works
- Buy-to-let vs Standard mortgage
- Buy-to-let vs Consent-to-let
- The different types of buy-to-let mortgage products
- Where you can find a buy-to-let mortgage
Are buy-to-let mortgages regulated?
As buy-to-let purchases are commercial/business transactions they are not regulated by the FCA (Financial Conduct Authority). The FCA regulates consumer financial products. Landlords are not consumers, they are business people.
There are some circumstances where the FCA will regulate a buy-to-let mortgage. Example: If you rent out your property to immediate family (siblings, parents, children, or grandchildren).
If you rent to people outside your immediate family (uncles, aunts, cousins, or other relatives) an unregulated buy-to-let mortgage will be enough.
Regulated buy-to-let mortgages are more difficult to find. This is because lenders tend to steer clear of lending to landlords renting to family members as risks are higher. Family members are more likely to miss payments. And this can make repayment of the mortgage difficult.
Regulated buy-to-let mortgages follow stricter deadlines set by the FCA so the application process is completely different. And the rates also tend to be higher so the cost is increased.
How do buy-to-let mortgages work?
To apply for a buy-to-let mortgage, lenders will assess certain criteria. These can vary by lender but tend to include:
- You are a homeowner (some require you to own your home outright)
- You make more than £25,000pa
- You have a good credit history
- Your age - lenders usually insist that a buy-to-let mortgage term ends before the landlord turns 70
- Rental income is set to be higher than the monthly repayments
These criteria are a general guide. Different lenders have different rules for buy-to-let mortgage acceptance. If you're new to buy-to-let you can learn more about buy-to-let mortgages in our practical tips for new buy-to-let landlords.
Is a buy-to-let mortgage different from a standard mortgage?
The main difference between a buy-to-let mortgage and a standard mortgage is how the lenders perceive them. Most lenders consider buy-to-let mortgages to be higher risk. So the rates are generally higher for buy-to-let mortgages than a standard mortgage.
Recently, due to rising interest rates, many BTL lenders have also switched from fixed arrangement fees to a percentage-based model. This enables them to offer lower headline rates while making the same lucrative profit margins by shifting the profit into the front-loaded fee. What does this mean for landlords? It means set-up costs are higher.
Deposit requirements for a buy-to-let mortgage are generally higher than a standard mortgage too. In many cases, the loan-to-value must be under 75%. So for the average UK property which was £289,818 in March 2022, that’ll mean stumping up £72,454 for your deposit.
Another cost aspect to consider is that you’ll also be required to pay more stamp duty on a property that is not your main home. You’ll usually have to pay 3% on top of SDLT (stamp duty land tax) rates if buying a new residential property means you’ll own more than one. For a purchase of a BTL property for £289,818 (the average price paid in March 2022), the total SDLT due would be £10,685.
Here’s a detailed breakdown of how the total amount of SDLT was calculated
| Purchase price bands (£) | Percentage rate (%) | SDLT due (£) |
| Up to 250,000 | 3 | 7,500 |
| Above 250,000 and up to 925,000 | 8 | 3,185 |
| Above 925,000 and up to 1,500,000 | 13 | 0 |
| Above 1,500,000+ | 15 | 0 |
| Total SDLT due | 10,685 |
The other difference is the usage of the purchased property. Buy-to-let mortgages can only be used for the purpose of renting the property you buy. You are not allowed to live in the home you purchase through a buy-to-let mortgage. And doing so would breach the terms of your buy-to-let mortgage agreement.
Buy-to-let mortgages Vs Consent-to-Let
A consent-to-let is best described as a short-term amendment to your existing residential mortgage. It extends a traditional mortgage to allow you to rent your property out for an agreed period. Consent-to-let agreements tend to have higher fees and higher interest rates.
Consent to let is a formal, written agreement between you and your existing lender. It gives you permission to rent out your home for a defined period of time, usually no more than 12 months. After the agreed period you'll need to request an extension on your consent-to-let. You can't assume that because they've granted one before they'll do so again.
Consent-to-let acceptance criteria vary from lender to lender. So it's worth speaking with your existing mortgage lender to understand their specific criteria.
Consent-to-let can save you a lot of money, time and hassle
Compared to a buy-to-let remortgage, a consent-to-let can save you money in two ways:
- Consent-to-let agreements will likely have better interest rates than a BTL mortgage
- You can likely avoid any significant additional fees to get a consent-to-let compared to a buy-to-let
Consent-to-lets can also save you time and hassle. Arranging a consent-to-let takes approximately 2 weeks. Whereas, a buy-to-let mortgage application can take much longer. Consent-to-lets don't require a lengthy application process like a BTL mortgage does.
If you intend to rent your property or main home out for a short or fixed amount of time, your lender would likely agree to a consent-to-let. So you wouldn't need to apply for a buy-to-let mortgage. But if you intend to rent long-term, you'll need to switch to a buy-to-let mortgage.
What buy-to-let products are available?
There are lots of buy-to-let products available on the market. And most are like the standard residential mortgages available.
Here are the ones that you’re most likely to find lenders offering. We’ll start with the most common type of buy-to-let mortgage - the interest-only mortgage:
Interest-only buy-to-let-mortgages
An interest-only buy-to-let mortgage is the most common type of buy-to-let mortgage offer. With an interest-only buy-to-let mortgage, you only pay the interest amount per month. The borrowed amount isn’t owed until the end of the term. Making this the most affordable monthly repayment mortgage for buy-to-let. But you must pay the total amount borrowed at the end of the term or re-mortgage.
If this doesn’t work for you, there are other types of buy-to-let mortgages available:
Fixed-rate buy-to-let mortgages
A fixed-rate buy-to-let mortgage is the easiest one to understand. You’re given a fixed interest rate at the beginning of your lending agreement. This interest rate will not change throughout the duration of your fixed term. So even with inflation, your interest rate stays the same.
Variable rate buy-to-let mortgages
A variable rate buy-to-let mortgage is the opposite of the fixed rate option. With this one, your interest rate can go up and down throughout the term of your agreement. So your monthly repayments could change as you repay your loan.
Tracker buy-to-let mortgages
The tracker buy-to-let mortgages are like the variable rate with one small difference. The interest rate “tracks” in line with the Bank of England base rate.
Discounted buy-to-let mortgages
To understand this one, you need to know that every lender has their own Standard Variable Rate (SVR) for interest. This is usually based on the Bank of England’s base rate and their own costs and margins.
A discount buy-to-let mortgage will have an interest rate that is lower than the lender's SVR. But the same rules from the variable rate option exist here too. As the SVR increases and decreases, so will the interest rate for the discounted buy-to-let mortgage. So your monthly repayments can go up and down throughout your repayment term.
Capped rate buy-to-let mortgages
As we’ve gone through these options, you’ve seen how interest rates can fluctuate. A capped-rate buy-to-let mortgage has a maximum limit for interest rate agreed within the mortgage terms. This means that even if the lender’s SVR rises above the agreed limit, you’ll only ever pay the maximum agreed in your buy-to-let mortgage agreement. It’s the safest way to protect against inflation.
Where to get a buy-to-let mortgage
Some high street banks and building societies offer buy-to-let mortgages. But you’re more likely to find competitive rates when you use a broker to search across many banks, lenders, and buy-to-let financial specialists. A mortgage broker will find the relevant lenders based on your specific circumstances and requirements.
You can use our buy-to-let mortgage calculator to get an idea of the rates, costs, and amount you could borrow.
There are many benefits to using a broker to get you the best deal on your buy-to-let mortgage. You can read all about that in our article: Buy-to-let mortgage: is it better to use a broker or do it yourself?
In summary, buy-to-let mortgages tend to have good rates but set-up fees and costs are higher than standard mortgages. You must abide by the rules of a buy-to-let mortgage and never use it as your main home. If you need to change to a buy-to-let from a standard mortgage or vice versa you'll need to consult your lender or shop around.
Speak to a Buy-to-let expert today
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Our specialists can talk you through the best buy-to-let mortgage options for you, just give us a call on 01202 612934.
