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As a landlord, if you require a mortgage for a property you’re letting, it should be a buy to let mortgage. This type of borrowing accounts for the fact that there is more risk associated with having tenants living in the property, and that it is essentially a business asset, rather than your own home.
Before 1996, the only legal way for landlords to finance a property portfolio was through commercial mortgages. Because these had high interest rates, low loan-to-value ratios and often a maximum 10-year term, they certainly weren’t attractive to investors.
With demand for private rented accommodation growing quickly and very little supply, it became clear something needed to be done to encourage new and existing landlords to invest in the sector. So, Paragon Banking Group worked with members of the Association of Residential Letting Agents (ARLA) and other specialists, to design a mortgage product that catered specifically to the needs of landlords.
The resulting product enabled borrowers to:
Recognising that demand would be too great for any single company to handle, Paragon opened up the concept to other lenders. Buy to let specialist mortgages were introduced in 1996 (the same year that Total Landlord began!), and presented to the ARLA conference in 1997.
Since then, the market has developed considerably and there are now a huge variety of buy to let products, with loans to value of 80% and even 85% currently available.
In this guide, we answer a range of questions about all aspects of buy to let mortgages, including:
We begin with a key investment question: why can it be better for landlords to own property with a mortgage, rather than outright?
Property is unique among financial investments, in that you can borrow money to fund your purchase. This benefits you in two ways:
And because 75% mortgages are widely available, you could even stretch that to four properties and make a significantly higher return on your investment:
Here’s a simplified example:
You’re buying a property for £250,000 with 100% cash:
You use the same amount of capital to buy four properties worth £250,000 each with a 75% mortgage and £62,500 deposit:
Of course, when you have a mortgage there are fees, mortgage interest and monthly payments that will have an impact, mainly on your rental profits. But provided you’re investing over the long term and capital values continue to rise, you could still see a significantly better return over time if you buy with a mortgage rather than all cash.
Top tip/warning: To secure a mortgage on a buy to let property the rent typically needs to be 125% to 145% higher than the actual mortgage cost. This is calculated at the mortgage pay rate if the mortgage is a five year fixed rate or at a higher rate if less than five years or a variable tracker rate, so it is not always possible to secure high loan to values.
The Government’s 2021 English Private Landlord Survey revealed that 57% of landlords had a buy to let mortgage and around two-thirds of tenancies were in properties funded by a mortgage.
The terms and conditions of a standard residential mortgage will specify that it must be your own primary residence and cannot be let without specific lender consent. If you do rent out the property without informing your lender, you will be in breach of the mortgage conditions. That could lead to your lender:
If you’re planning to let the property long-term/permanently, you will need to apply for a buy to let mortgage. However, if you want or need to let the property right away – for instance, if you have bought a new home for yourself and been unable to sell your old home, or you’ve been temporarily relocated for work – you can ask your lender for ‘consent to let’ on the existing mortgage.
Before moving ahead with letting a property that has a standard residential mortgage, you must speak to your lender.
They may grant you consent to let on the existing mortgage, but this is usually for a limited period of time, and they may raise the interest rate to account for the increased risks associated with letting.
Read more in our separate guide, ‘Accidental landlords - Do you have consent to let your property?’.
While most lenders will usually offer this short-term arrangement, there’s no guarantee, and some may require you to apply for a buy to let mortgage right away.
Although buy to let mortgage loans are mainly based on the rental income potential of the property, most lenders require landlords to have a personal income of at least £25,000. And the higher your earnings, the more likely you are to have a greater choice of lenders and buy to let products.
A rental property is considered a business, so affordability checks are based mainly on the income it can generate, rather than your own personal income.
So, the amount a lender will offer via a buy to let mortgage depends primarily on the rent the property is likely to achieve, which must exceed the mortgage payment by a certain percentage. This is known as an ‘interest cover ratio’ (ICR) and lenders are required to test at 125%, although some will ask for as much as 145%.
The ICR will vary dependent on the borrowers’ tax bracket and whether or not the property is being purchased in personal name or a Limited Company. Typically, a higher rate tax payer buying in personal names will have a higher ICR than a lower rate tax payer or a purchase in a corporate structure.
For example, if you could get £1,000 a month in rent for the property, the maximum monthly mortgage repayment the lender would consider affordable would be between £690 and £800 a month.
Assuming the lender is testing at an interest-only mortgage rate of five per cent, that’s an approximate loan offer of between £165,600 and £192,000, depending on their ICR.
The lender will require the rental potential of the property you’re considering buying to be confirmed by a professional – usually a Propertymark registered letting agent and/or a RICS qualified surveyor.
Other buy to let mortgage requirements
Exact requirements will vary from one lender to another, but most will include the following application criteria:
If the property or type of let falls under mandatory or selective licensing requirements (England), or you as a landlord are required to be licensed (Wales and Scotland), the lender will usually require proof this has been secured, as a condition of the mortgage.
In terms of the property you want to buy to rent out, some lenders won’t accept non-standard construction – i.e. not bricks and mortar. That could be anything from a thatched cottage to a steel-framed modern home.
And if you want to rent to students or let the property as holiday accommodation, be aware that not all lenders will accept this type of tenancy, as it is considered higher-risk.
If you want to let the property as an HMO, lenders will also usually look for proof of some previous landlord experience.
Because of the specialist nature of buy to let mortgages, and the fact that around three-quarters of products are only available through brokers, you should always consult a mortgage broker that is experienced in working with buy to let investors.
See the section below on ‘How do I get the best buy to let mortgage?’ for more information.
When assessing affordability, some lenders will take your personal income into consideration, alongside the rental income of the property. This can allow you to increase your borrowing. However, it is a niche concept and usually only applies to landlords that have a substantial income.
Because of the higher risk associated with letting a property to tenants, the maximum loan to value for a buy to let mortgage is lower than for a mortgage on your own home, so you will need a bigger deposit.
The vast majority of lenders will offer a maximum loan to value of 75%, so you will need at least a 25% deposit.
Although it is possible to find products at 80% and even 85% loan to value, these are rare and interest rates will be higher, so it’s difficult to find a property with a high enough ‘interest cover ratio’ (ICR)
As part of ‘stress testing’ your prospective property investment, you need to consider what would happen if there was a recession or market fluctuation that resulted in prices falling.
You should always be in a position to remortgage, so that you don’t find yourself with no option but to move to a much higher standard variable interest rate - or, worse, have to sell, possibly in a negative equity situation.
Kate Faulkner, one of the UK’s leading property experts and founder of Propertychecklists, advises:
“As such, it’s ideal to go into any property investment with an ‘equity cushion’ of around 20%, which is the amount by which prices have fallen in previous serious recessions. That means putting down at least a 40% deposit – or buying a property that you can immediately improve to give you at least that much equity once the work has been done. Then, if prices were to fall by 15% or more, you would still have 20% to 25% equity in the property and a loan to value that would allow you to access new mortgage products.”
Around 70% of buy to let mortgages are only available through brokers, with that percentage even higher for more specialist buy to let products. That means the vast majority are simply not available to you as an individual landlord going direct to lenders.
So, to make sure you get the best and most appropriate financing for your rental property, it’s essential to consult a broker who specialises in buy to let mortgages.
There are two types of broker:
A good broker will discuss your personal circumstances and also your financial goals for your property investment, to help you decide on the most suitable product. Most will then keep in touch with you throughout the term of the mortgage, usually every six to 12 months, to advise you of new products and when it may be worth considering switching.
Long term, buy to let interest rates are typically between five and six per cent, and this is the level you should use when making business plans and medium to long-term forecasts.
A mortgage broker will have not only the most up-to-date information on rates, but they will also be able to take your own property, type of let and specific circumstances into account to narrow down the most appropriate good deals.
However, you can still get a good idea of the best current rates online, via mortgage comparison sites such as Moneyfactscompare.co.uk – this is one of the best sites that lists current best rates, then you can refine your search according to property price and deposit
Buy to let mortgage calculators
Even before you speak to a broker, it’s useful to have an idea of the approximate amount you can borrow and what the monthly repayment would be.
There are various handy online calculators available online, although some do require you to enter a lot of information.
Only a suitably qualified and regulated broker or lender can give specific advice on the right mortgage for you, but the reality is that most landlords have a fixed-rate product.
Fixing your mortgage rate – whether that’s for two, three, five or ten years – has two big benefits:
For most tenancies in England, you can usually only increase the rent once a year, while in Scotland they have different rules on rent levels and although not currently in existence, they have introduced ‘Rent Pressure Zones’ and rent controls, which are now being considered as a long term measure. Having a fixed mortgage means your profit margin can be protected against continuous increases in what’s likely to be your biggest monthly cost.
At the same time, it’s important to be aware of the potential downsides of fixed-rate mortgages, which include:
This is why it’s particularly important to take professional advice from a mortgage broker or financial adviser before committing to a fixed rate.
The type of mortgage you need will depend on exactly how you are planning to let the property.
If you’re buying a property to rent out via Airbnb, you will need a buy to let mortgage – just as if you were letting it yourself or through an agent.
If you already have a standard residential mortgage on the property you want to offer on Airbnb – whether it’s the whole property or just part of it - you must inform your lender, otherwise you’ll be in breach of your mortgage conditions.
They may require you to apply for a buy to let mortgage, particularly if you want to let the property on an ongoing basis. However, if it’s just a room or a small part of the home, or you’re only offering it as a holiday let once or twice a year when you’re away yourself, a lender might grant you ‘consent to let’.
This means you’ll keep your standard mortgage, but the lender may charge you a fee and increase the mortgage interest rate.
If you are considering Airbnb, it’s worth reading our ultimate guide to short term lets and our guide to short term tenancy agreements.
Standard buy to let mortgages are designed for renting to single households. So, if you are planning to let the property as an HMO, you will require a specialist mortgage, and only a limited number of lenders offer these.
HMO mortgages generally have higher interest rates and higher fees associated with them, but most lenders will offer a similar loan to value as is available for standard buy to let mortgages - up to 75%, with some products available at 80%, and occasionally 85%.
Most HMO lenders consider any property with up to five lettable bedrooms a ‘standard’ HMO. If the HMO is larger than this, you may require a commercial mortgage, which further limits the pool of lenders.
The type of tenant is also a consideration – for instance, not all lenders will accept student tenants or tenants on housing benefit.
Because of the niche nature of HMO mortgages, it is essential to work with a specialist broker who can access the best products and guide you through the application process.
To find out more about being an HMO landlord, head to our ultimate guide to letting an HMO property.
Any investor that has four or more rented properties is termed a ‘portfolio landlord’.
The first thing to be aware of is that the total level of borrowing across the entire portfolio cannot be more than 75%.
Secondly, portfolio landlords have to satisfy tighter lending criteria if they want to remortgage a property or increase their borrowing. In addition to providing details of all existing mortgages, lenders may require a business plan and cash flow projections for every property.
See our separate guide, ‘How to make a landlord business plan’.
In addition:
The criteria will vary between lenders, so it’s well worth consulting an experienced buy to let mortgage broker, ideally one that specialises in arranging loans for portfolio landlords. They can make sure you understand exactly what measures will apply to you and help secure the most appropriate product.
For more information, read our separate ultimate guide to being a multi-property portfolio landlord.
If you are investing in property via a limited company, this is a highly specialised area of buy to let, and you should take advice from a suitably experienced financial adviser and an independent tax specialist. This is particularly important if you are deciding whether to let personally or via a company as the decision will depend on your own financial circumstances and investment objectives.
When a limited company owns a property, it is generally considered a commercial asset, in which case a commercial or semi-commercial mortgage is required. These are offered by a limited number of lenders that are able to underwrite mortgages for businesses, and you should work with a specialist broker to make sure you get the right product for your circumstances.
It is possible to get a UK buy to let mortgage as an expat landlord. However, lenders have strict criteria for overseas buyers, and you will need to satisfy the following:
Individual lenders will have different specific requirements and there will be a relatively limited number of products available to expat buyers. It’s also important to know that interest rates and arrangement fees are usually higher for overseas borrowers.
As with any specialist mortgage, it is advisable to use a broker that is experienced in arranging this type of loan. You should also ideally work with a financial adviser who can look at your UK and overseas assets and earnings as a whole to ensure your tax liability is managed appropriately.
As with any property that is mortgaged, your buy to let lender will require you to have suitable building insurance that covers the full rebuild value.
“If you have a buy to let mortgage, then make sure you have the correct insurance to match. Since a home insurance policy will not be good enough, this must be specialist landlord insurance, which is specifically designed for buy to let properties. If you only have standard homeowner’s insurance for a property that is rented out, any claim made in the future is likely to be refused.”
- Steve Barnes, Head of Broking at Total Landlord
A landlord insurance policy will also generally extend to offer cover for:
To help protect your buy to let investment it’s important to make sure you have the right cover for your particular type of property and tenancy.
At Total Landlord Insurance, we offer specialist cover for:
To discuss appropriate cover for your own buy to let property or portfolio, get in touch with the team at Total Landlord by calling 0808 506 7816 or get a quote online.
And for an overview of the different features of landlord insurance, read out guide to choosing the best landlord insurance cover for you.
Bear in mind that this is a very broad overview of buy to let mortgages, and you should consult a buy to let mortgage specialist for personalised advice. Thanks to Andrew Montlake, Managing Director at Coreco Mortgage Brokers and Chairman of the Association of Mortgage Intermediaries (AMI) for fact checking this article. We would always recommend that you consult a mortgage expert for personal advice tailored to your needs.
