Buy To Let Mortgages

If you already own a second property that you want to rent out, or you’re considering becoming a landlord to bring in some extra cash each month, you’ll probably need a buy-to-let (BTL) mortgage.

Your mortgage repayments will be the biggest ongoing cost of your BTL, so whether you’re investing in your first property or adding to an existing portfolio, securing the right deal is essential to maximise your potential profit.

Whilst there are similarities between BTL and standard residential mortgages, there are some key differences to be aware of. This guide explains what a BTL mortgage is, when you’ll require one, typical eligibility requirements, and how to get the most out of your investment.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a loan specifically designed for properties that are purchased with the intention of renting them out to tenants. Without a BTL mortgage, you won’t usually be permitted to let out a property for profit unless you own it outright.

Depending on your preferences, BTL mortgages, sometimes referred to as ‘landlord mortgages’ can be used to buy residential rental property, student accommodation, holiday homes, or anything in between.

What’s the difference between residential and buy-to-let mortgages?

Unlike residential mortgages, whereby the mortgage holder will likely be a permanent resident of the property, the owner is not usually permitted to live in a BTL; these types of mortgages are specifically designed for third party letting.

The majority of residential mortgages are repayment plans, which means you repay a portion of the loan and interest every month. Most UK BTL mortgages on the other hand are interest-only, so you’ll only be required to repay the mortgage interest each month. It also means you’ll need a plan for how you’ll settle the outstanding debt when the term ends.

Eligibility requirements are slightly different for BTL mortgages, with the most significant relating to the way affordability is calculated. For residential mortgages, this is based on personal income and expenses.

For BTLs, although lenders may factor personal circumstances into their calculations, the determining factor is based on the strength of the investment and projected rental income. As such, the majority of BTLs are not regulated by the Financial Conduct Authority (FCA).

How much can you borrow for a buy-to-let mortgage?

How much you can borrow for a BTL mortgage usually boils down to the amount of rental income that you’re expecting to receive from the tenants of the property. Usually, the income needs to be at least 25-30% higher than what you’re paying for the mortgage.

Although there are lenders offering BTL mortgages with no borrowing limit, eligibility assessments are still stringent, and applicants are advised to acquire a rental income forecast from an ARLA-regulated letting agent.

Rental returns and yield requirements for BTL properties

Most mortgage providers have minimum projected rental return requirements. Your ‘rental ROI’ is calculated by subtracting the mortgage and running costs from the amount of projected rent, divided by the total amount of cash you invested to purchase the property.

Most lenders like to see a rental return of 125% or more, and they will stress-test this using your projected rental income and qualifying mortgage rate.

Rental yield refers to the amount of money you make on a BTL property by measuring the difference between your overall costs and the income you receive from letting it out. This is calculated by dividing the purchase price by the amount of yearly rent generated. A rental yield of 8% or more is generally viewed as a ‘healthy investment’.

As an example, if the purchase price of your property was £200,000 and your tenants pay £350 a week rent, the annual rent £18,200, making your property yield just under 11%