A buy-to-let mortgage is a loan for purchasing a property that will be rented out to tenants rather than lived in by the owner. Buy-to-let mortgages usually have higher interest rates and higher fees than standard residential mortgages, and the lending criteria are different.
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What is a buy-to-let mortgage?
Buying a rental property is seen as a business transaction, so there are some important differences between a buy-to-let and a residential mortgage:
- While residential mortgages are usually calculated based on your income, the amount you can borrow for buy-to-let depends mainly on the projected rental yield. The expected monthly rental income usually needs to be at least 30 per cent higher than your monthly mortgage payment.
- To get a buy-to-let mortgage, you’ll usually need a deposit of at least 25 per cent of the property purchase price.
- Buy-to-let mortgages usually have substantially higher arrangement fees than residential mortgages. Fees tend to be around £1,000 to £5,000.
- Buy-to-let mortgages tend to have higher interest rates than residential mortgages.
- Most buy-to-let mortgages are interest-only, which means you only pay the interest each month rather than paying down the debt, and when you sell the property you repay the capital in full.
- While homeowner mortgages are regulated by the Financial Conduct Authority (FCA), most buy-to-let mortgages are not. This is because they’re seen as business transactions. This means that you can’t claim compensation if you believe the mortgage has been mis-sold.
- You may need to own a home already and have been paying your mortgage problem-free for at least 12 months to be approved for a buy-to-let mortgage.
Do I need a buy-to-let mortgage?
Buying to let
If you’re buying a property to rent, you will need to take out a buy-to-let mortgage rather than a standard residential mortgage. Residential mortgages are only intended for owner-occupiers. If you buy a property with a residential mortgage but you rent it out, you’re likely to be breaching the terms of your contract, and you may be hit with charges or even asked to repay your loan early.
However, there are some exceptions. If you buy a property to live in but later your situation changes and you decide to rent the property out (for example you move out to live with a partner), you may not need to remortgage. You must tell your mortgage lender as soon as the situation arises, and they may agree to leave your existing mortgage in place but give you consent to let the property. They will want to make sure that you have a genuine reason for making the request, and that you didn’t intend to rent the property when you first bought it. They may ask you to pay an administration fee and/or increase your interest rate.
Renting to friends and family
It’s important to note that even if you plan to rent the property to friends or family, you still need a buy-to-let mortgage rather than a standard residential mortgage. However, many mortgage providers are not keen on family rentals, and different loan conditions may apply. If this is what you plan to do, it’s a good idea to seek professional advice.
Have you hit any stumbling blocks with taking out a buy-to-let mortgage? Tell us in the comments.