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buy-to-let mortgage adviser Zarah Gulfraz

Zarah Gulfraz

20-minute read

Last updated: 26th May 2020

Thinking about buy-to-let or adding to your portfolio? Let's find out what buy-to-let mortgages are available and how to get the best deal. If you know what you want, get in touch and we'll get your online application started today.

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Contents

Buy-to-let mortgages and their investment potentialHow to choose a buy-to-let mortgageWho can get a buy-to-let mortgage?How to apply for a buy-to-let mortgageBuy-to-let remortgagingBuy-to-let mortgage FAQs

Buy-to-let's investment potential: a little background

Here, I'll explain the history of buy-to-let and the basics of it as a mortgageable asset.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a loan you take out to buy a property that you'll rent out.

Like all mortgage loans, the lender charges interest, and the mortgage is secured against the value of the property. This means your property could be repossessed if you don’t keep up the mortgage  payments. There are a few differences between standard residential mortgages and buy-to-let mortgages.

Is buy-to-let a good investment?

Many people have used buy-to-let investments to boost their income over the past 25 years or so – and the introduction of buy-to-let mortgages was a big part of the success.

They were launched in 1996 and made it possible for anyone, not just the super rich, to invest in property. Even now, it doesn't matter if people can afford a buy-to-let property outright, they still prefer to use a mortgage.

Following their introduction they went from strength to strength. Stats from the Council of Mortgage Lenders and UK Finance, show 1.7 million buy-to-let mortgages were loaned between 1999 and 2015, as the private rented doubled in size. They became so popular that outstanding buy-to-let mortgage balances now stand at over £230 billion – which is enough to get you to the moon and back… almost 500,000 times.

Latest buy-to-let stats from the ONS:
The number of households in the private rented sector in the UK increased from 2.8 million in 2007 to 4.5 million in 2017, an increase of 1.7 million (63%) households.

Younger households are more likely to rent privately than older households; in 2017 those in the 25 to 34 years age group represented the largest group (35%).

Households in the private rented sector are getting older; between 2007 and 2017, the proportion of household reference persons aged 45 to 54 increased from 11% to 16% while those aged 16 to 24 dropped from 17% to 12%.

How much money can be made?

A landmark report by Wigglesworth Consultancy released 20 years after buy-to-let mortgages were introduced suggested quite a lot… in fact, they were shown to be more lucrative than any other form of investment over the preceding two decades. 

Buy-to-let returns compared against other investments

It found that, on average, every £1,000 invested in a buy-to-let asset in the final quarter of 1996 was worth £14,987 by the end of 2014, a compound annual return of 16.2%. The returns comprised around 70% capital gains and 30% yields – you can get a further explanation of what a buy-to-let yield is here

Note: see how the use of a mortgages substantially boosted investment returns from £5,071 to £14,987? That's due to gearing.

So, is buy-to-let a good investment in 2020?

That report's now over 7 years old and a lot's changed. For instance, property prices have increased drastically, the average UK home cost just £55,000 back then, investors and buy-to-let landlords now need to pay an extra 3% Stamp Duty over and above the normal rate, and rates of mortgage tax relief have been slashed. 

However, if you can find the right property in the right location, and the right  mortgage deal to buy it with, annual yields of almost 10% are still achievable – and many people do. 

You can check this list of high-yielding locations, and this one for capital gains, but you're here to learn about mortgages and how they can make or break your buy-to-let investment.

So, let's do that.

How to choose a buy-to-let mortgage

Let's see how to do a mortgage comparison that's going to make sure you get the right deal for your circumstances and portfolio.

What's the difference between BTL mortgages and normal mortgages?

Well, as I mentioned above, both require you to pay interest to purchase a house, and the loan will be secured on the property, but there are some major differences to be aware of.

Key differences with buy-to-let mortgages:

  • Rental properties only
    Obviously, a BTL mortgage needs to be for a property you intend to rent out. 
  • Most lenders will want you to have a standard tenancy agreement, called an Assured Shorthold Tenancies (AST), and some also lend on company let agreement.  
  • Higher fees for a BTL mortgage
    The fees can be much higher, mainly because lenders tend to charge a percentage rather than a flat rate for buy-to-let fees. However, 2018 saw a big rise in the number of fee-free buy-to-let mortgages on offer, so assess all the options.
Let's help you work out the overall cost
When you speak to us at Mojo, we can talk you through all the various application fees, booking fees, arrangement fees, telegraphic transfer fees, valuation fees (but never any broker fees, of course), to work out an overall cost for the mortgage term.

  • Larger deposits
    You're not going to get a buy-to-let mortgage with a 5% deposit. Banks will want 25% of the property’s value in the vast majority of cases. You'll need to hit a 60% LTV, so a deposit of 40%, to get the best mortgage rates, and therefore the best chance of a higher yield.
  • Higher interest rates for a BTL mortgage
    Normally, buy-to-let interest rates are higher than residential mortgages – usually to the tune of an extra 1% – and that's because banks see tenants as a higher risk than owners.
  • Most BTL mortgages are interest-only 
    Although you can get an interest-only residential mortgage, they're uncommon, while interest-only is the norm with buy-to-let. 
  • This is helpful when chasing a yield because monthly repayments with an interest-only mortgage are lower, but it means that at the end of the term, you still owe the lender the original loan amount. More on that later.
  • Not regulated by the FCA
    Buy-to-let mortgages are classed as a commercial transaction, so are not regulated by the Financial Conduct Authority. 
  • The one exception is in the case of Consumer buy-to-let. This aims to separate “accidental” landlords, or others who may need consumer protection such as if you are going to let out your property to a family member, from “professional” landlords. A simple rule of thumb to determine if you are a consumer landlord is: 'have I lived in the house I wish to rent out'.
  • Lenders work out affordability differently
     I'll discuss this in more detail later, but lenders assess both your finances and the rental potential of your buy-to-let.

What types of buy-to-let mortgages are there?

It's a very similar line-up to standard residential mortgages, with the major variations between the different types of mortgages structured around how the interest rate is set.

Types of mortgage currently available to landlords:

  • Fixed rate deals
    As straightforward as you'd expect, fixed rate deals involve you paying the same amount every month for a set number of years – ideal if you need to budget for the future (as most landlords want to do) and are happy with the rate offered. 
  • Variable rate deals
    The rate on these deals can change over the course of your mortgage term, hence they are variable and you could be paying different amounts back every month. 
  • You usually opt for these because they are cheaper than fixed prices (at least initially) or you think interest rates will fall. It's further complicated (only a little) by the fact there are a few types of variable mortgages available to the buy-to-let landlord.
  • Tracker mortgages
    These track the base rate set by the Bank of England. The rate you pay is normally around 1 to 3% above the current base rate of 0.75% depending on the lender and their product range.
  • SVR mortgages
    The rate you pay here is the bank's standard variable rate (SVR) and these tend to be around 2 to 5% above base rate. The SVR is what you fall onto when your current mortgage deal comes to an end and you don't arrange a remortgage or product transfer, so they are rarely the best first option.
  • Discounted variable
    These are the same as SVR mortgages, except you pay a set percentage less than the SVR. So, if a bank's SVR is 4.5% and your deal is discounted by 2%, you'll pay 2.5% – until the bank changes its SVR, at which point your rate will also change. However, the rate will always be the SVR minus your discount until the term ends.

Currently, 5-year fixed is the most popular mortgage option, but each type of mortgage has its own pros and cons and the best type will depend on your circumstances. This chart from UK Finance shows the number of buy-to-let products available has increased and average rates have fallen over the past 6 years.

Chart showing how many btl mortgages are available and the average interest rate for a buy-to-let mortgage

With close to 3,000 options on the market, after you see what options are available to you, your Mojo Mortgage adviser will help you figure out the best BTL mortgage for your requirements if you're unsure.

Who can get a buy-to-let mortgage?

This section explains if you can get a BTL mortgage and, if not, what you need to do to get one.

Can I get a buy-to-let mortgage?

Most people can. You don't need to have any previous landlord experience, but just like with any mortgage, lenders will have a set of criteria that apply to your application.

There's a more detailed breakdown of the buy-to-let eligibility criteria here, but in general this is what lenders are looking for:

  • Understand the risks that investing in property brings
  • Own your own home, whether outright or with a residential mortgage – some lenders do not require this
  • Be the right age – usually older than 25, but young enough to not be 75-80 by the time the mortgage terms ends

What stops you getting a buy-to-let mortgage?

Like most mortgage applications, bad credit history is the main reason for a buy-to-let rejection, but there are some other issues you may want to look out for too. Here's the rundown:

  • Problems with credit in the past 
    Banks rarely lend to people who have missed payments, or have had similar credit problems in the past. You may also be rejected if you currently have too much debt. 
  • Too many BTL mortgages already
    If you have a large portfolio, particularly with a lot of outstanding buy-to-let mortgages, lenders may see a new loan as risky. For instance, Lloyds, the UK's biggest BTL lender, allows you to hold a maximum of 5 mortgages or borrow up to £3 million across its brands.
  • No plan to pay back an interest-only mortgage
    If you go down the interest-only option, lenders will also want to see some evidence or plan which shows how you will pay them back. Most landlords say they'll sell the property after the term and then pay back the full loan amount, but there are other options available to you, including:
  • Endowment policies
  • Stocks and shares
  • ISAs or other savings
  • Unit trusts
  • Investment bonds
  • Pensions
  • The sale of another property

Can I afford a buy-to-let mortgage?

Affordability checks are the first major hurdle in your mortgage application.  

As mentioned already, you'll need to have at least a 25% deposit for a BTL mortgage. 

This is a significant restriction to many people. In fact, even though the average buy-to-let property is cheaper than a residential purchase (£122,786 to £226,709), you'll need a bigger deposit. 

The average deposit amount is £30,696.50 to compare to £22,670.90 for residential purchases as people opt for a 10% deposit when buying a house for themselves. 

If you can afford the deposit, have enough income and have no major credit issues, lenders will want to know about the rental potential of your property.

Buy-to-let affordability formula: Working out my rent and mortgage repayments

Yes, your lender will want to know your own personal finances are solid, before they offer you a mortgage, but they will also check the income potential of your property. 

In 2017, the Prudential Regulation Authority stated lenders needed tougher rental cover tests, that involved capped loan amounts and stressed interest rates. And this has implications for how much they are willing to lend you.

The maximum you can borrow for a buy-to-let depends on the amount of rental income you expect to receive. 

‍The usual benchmark lenders use is your rental income should be 25 to 45% more than your mortgage repayments. This buffer helps account for stuff like tax, voids, ground rent, maintenance and insurance and then gives lenders confidence you can repay them from the rental income.

In fact, there's a handy, but rough, formula you can use to quickly work out what your what your rents need to be to cover the repayments.

It is:

Loan amount x 5.5% (a stressed interest rate)/12 (months) x 145%* (which creates the buffer).

So, if you want to borrow £100,000. The formula works like this:

  • 100,000 x 5.5% = 5,500
  • 5,500 / 12 = 458.33 This figure is your monthly repayment
  • 458.33 x 145% = 664.58 This figure is what your rental rate needs to be

*If you are a basic rate taxpayer, you can multiply the repayment by 125% instead of 145%

Some lenders like Santander offer a BTL calculator that shows you an estimated total amount they can borrow you based on your affordability, but you can use the Mojo Mortgage Matcher to search the whole of the market and see exactly what rates and monthly repayments you can get right now.

What about buy-to-let taxes?

Before applying for a BTL mortgage, make sure you fully understand the taxes involved with BTL too

Stamp Duty is 3% higher than a residential purchase for the same amount. For example, you'll pay 3% Stamp Duty on the first £125,000 of the property’s value, 5% on anything above that up to £250,000 and 8% on anything above that up to £925,000… and so on.

As a landlord you may be liable for other kinds of taxes too, such as income tax and Capital Gains Tax. It’s a good idea to get tax advice before taking out a buy-to-let mortgage, it may give you a clearer idea of where you want to run your portfolio as a landlord or limited company.

Buy-to-let mortgage interest tax relief:
In the past, borrowing with a buy-to-let mortgage offered tax advantages. Now, the amount landlords can 'offset' has been drastically reduced.

Since April 2017, tax relief on mortgage interest has been gradually phased out. Since April 2020, you can't deduct any of your mortgage expenses from rental income to reduce your tax bill.

Because of the changes to tax relief over the past few years, profit margins in buy-to-let have become slimmer, making it really important to do a full comparison of buy-to-let mortgages.
See your best BTL rate

How to apply for a buy-to-let mortgage

At Mojo we help landlords apply for dozens and dozens of mortgages every day, here's what you need to know to improve your chances and get your deal done asap!

What are the stages involved in getting a buy-to-let mortgage?

Buy-to-let applications are very similar to regular residential applications with a few notable exceptions.

Step 1: Do market research and find a property

This has more to do with making sure you invest wisely rather than applying for a mortgage, but you'll uncover details and info that may be handy when the lender starts asking questions later on.

It's good to know:

  • How much you can buy the property for
  • How much rent you can achieve
  • Initial quotes for letting agents, maintenance costs and insurance 
  • What the running costs will be

You may also want to find out the rate of house price growth in the area too. This won't affect the mortgage, but a good investment will combine solid capital growth as well as the rental yields.

Step 2: Contact a broker and get a decision in principle (DIP)

Most sellers and estate agents will want you to have some sort of documentation showing you've got the funds to purchase the property. You can make an offer without this proof of funds, but sellers are less likely to take you seriously.

To get a (DIP), agreement in principle (AIP) or mortgage in principle (MIP) a broker or lender needs to do a Fact Find on you. It's just a few basic questions about your finances and the property you wish to buy.

Traditionally, this could take a couple of hours at a branch or over the phone, but you can download a MIP with Mojo in 20 minutes, plus at the end of it, you'll be shown a comparison of exactly what BTL mortgages you can get AND be ready to apply. More on that later.

Download a Mortgage in Principle

Bear in mind if you go direct to a lender, their advisers can only recommend their own products. A mortgage broker will compare mortgage deals from various lenders and recommend the best one for you some will charge you a fee of around £500 for this, but Mojo is free.

Step 3: Get your offer accepted and get your application underway

With a MIP, DIP or AIP in hand you can go and make your offer and when its accepted we can start discussing rates, requirements and other juicy mortgage details.

It's at this point you'll start seriously comparing mortgages. Remember, that you'll have a good idea of what rental income you can achieve and that lenders will want to keep your repayments around 25-45% less than this, so that may restrict how much you can borrow or the rates at which they offer it you.

Example rates from the BTL mojo mortgage matcher screen

Example rates from the buy-to-let Mojo Mortgage Matcher screen

Getting the best BTL mortgage for your circumstances is so important to good investment. Our Mortgage Matcher shows you exactly what you can get in real time and lets you compare the whole market, so you know you're getting the best deal you can possibly get. When you're ready to apply, your Mojo mortgage adviser will talk through all your options in a call that normally takes just over 30 minutes. 

When you've decided on a mortgage product and a lender, we'll even do the admin and apply for you.

Step 4: Initial application

This is really easy with Mojo. We'll simply need you to upload a few documents for your mortgage application

Each lender has slightly different requirements, but generally for a buy-to-let application you'll need:

  • Proof of identity: A passport or a driving licence 
  • Proof of deposit funds: 3 months of bank statements. Also if you have a large amount credited into the account, like for a gifted deposit, the lender will want the gifter to verify it. 
  • Proof of income: 3 months of payslips or tax returns. If you are a full time landlord or self employed, we'll need SA302s. However, there are BTL lenders who with no minimum income criteria
  • Additional documentation for buy-to-let applications:
  • If you're applying as a limited company, you'll need the latest company accounts and personal SA302s that show evidence of your dividends or salary
  • If your property's an HMO, you'll need your HMO licence or a copy of your HMO application to the local authority
  • A copy of your portfolio if you own three or more rental properties

Once we have these, we'll pass all your info on to the lender ...and that's it. It's at this point the lender will decide if they present you with a DIP.

Step 5: Valuation

After you receive your DIP and we tell the lender you're ready to proceed with your application, the lender will instruct a valuation on the property by a surveyor. 

They do this so they know what the property is worth what you are paying, and lending you the money you need doesn't represent a risky investment to them. For a buy-to-let property, the valuation will also confirm the expected monthly rental income. Some lenders will charge you around £200 to £600 for this.

Step 6: Underwriting

Because the underwriting process isn't very transparent, a lot of applicants get nervous about it, but it simply means your lender attempts to verify your finances and it covers stuff like income, assets, debt, debt-to-income and property details before a final approval on your mortgage.

Underwriting usually involves a hard credit search and you may need to answer a few questions or provide additional documents. With Mojo as your broker, we'll talk you through any additional requirements as they crop up.

It's at this point the lender will do a portfolio assessment if you own 3 or more mortgaged properties. They're looking to see how 'geared' you are and if any changes in interest rates or financial circumstances could stop you making repayments.

Step 7: Getting a buy-to-let mortgage offer

Almost there! Once, the lender's completed all their checks (it can take up to a few weeks), they'll send a formal mortgage offer. If you're happy with all the terms, you can instruct your solicitors or conveyancers to complete the legal requirements.

Step 8: Exchange and completion

Contracts are exchanged across your chain and a completion date's set. You'll pay a deposit at the exchange stage and from then on you'll be legally responsible for the property (with financial penalties should you pull out of the deal).

When you complete, you'll be the legal owner of the property and you'll get the keys.

How long does it take to get a buy-to-let mortgage?

The whole mortgage process takes around 6 weeks for purchases or 4 weeks for remortgages.

Get your buy-to-let mortgage online

At Mojo, we can do the Full Fact Find initial checks totally online. We'll certainly speed up the earlier stages and get you a DIP as quick as humanly possible. After that, it depends on the lender, but we'll always chase and keep you updated.

Why is my mortgage application delayed?

Most buy-to-let applications are smooth, but if there are hold-ups they tend to occur just after the DIP stage when lenders request additional documents. We'll help you as much as we can to ensure that all the documents you submit are exactly what the lender will want to see.

However, there are some lenders who are just slower than others or they may have a high volume of valuations or underwriting to do. 

If you ask your adviser before you apply, they'll be happy to let you know roughly how long your lender has been taking to complete a mortgage application recently.

Buy-to-let remortgages

Ready to remortgage and avoid the hit to your yields that the SVR will cause? This section explains your options.

Can I remortgage a buy-to-let property?

Yes, of course. It can be a bit of a pain, but when mortgage repayments are your main cost, it can also be an opportunity to increase your yield or release some money by finding a better deal.

Because as you come to the end of your initial term, your lender will push you on to their standard variable rate (SVR), you're nearly always going to save money by remortgaging as SVRs tend to be high rates.

Remortgaging a buy-to-let property can take a few weeks as you're basically applying for a new mortgage with a new lender, and they'll want to do their checks.

Remortgaging buy-to-let properties with the same lender

At Mojo, we can even let you compare your current product transfer offers from your existing lender, side-by-side with the best you can get elsewhere on the buy-to-let remortgage market.

A product transfer (PT) is where you stay with the existing lender and move to a new rate – usually slightly cheaper than the SVR. Because this is really easy to do (we can do it for you in an afternoon), many people, including landlords, choose to go down this route instead of a full remortgage. 

However, because we can clearly show you how competitive your product transfer options are in a few minutes, it's always worth checking – we've seen landlords save hundreds of pounds a month by remortgaging instead of PTing.

Should I remortgage a buy-to-let property?

It's a fair question because as I mentioned, buy-to-let arrangement fees tend to be quite expensive. This means if you are remortgaging every few years you can be paying out thousands of pounds in dead money, but there are now more and more fee-free lenders.

Also, we've seen, a lot of landlords have opted for 5-year fixed rates while mortgage rates are at an all-time low in an attempt to lock in a rate they are happy with and avoid the arrangement fees for 5 years.

It all depends on your circumstance, but if you're about to fall on to an SVR, we'd definitely recommend you check your options with our Mortgage Matcher, and if you are still unsure, you can talk it through with our CeMap-registered advisers.

buy-to-let remortgage review - mojo mortgages
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Repayment options at the end of an interest-only buy-to-let mortgage

If you opted for an interest-only mortgage, there will come a time – after 20, 25, 30 years – that you need to pay the bank back their loan capital. This means you could be faced with a bill of £100,000+. And that can be pretty scary!

Of course, you'll have already told the lender your plan to do this when you originally applied for the mortgage. 

As I mentioned before, this normally involves a commitment to sell the property or use other funds, such as savings to pay the bank back. 

In the best case scenario, you choose to sell and you make further profit due to house price rise. However, if house prices fall you’ll still need to pay off the rest of the mortgage yourself, or look at other options such as a new repayment mortgage.

If you're unsure of where to turn, do get in touch and we'll talk you through what the market can offer you.

Buy-to-let FAQs

If this section I'll cover most of the buy-to-let mortgage questions we get asked on a daily basis.

What's the best buy-to-let mortgage?

That all depends on your circumstances and requirements. Currently, 5-year fixed mortgages are the most popular accounting for about two-thirds of the market.

Do you still pay estate agent fees on a buy-to-let

You will if you're selling a buy-to-let property with an estate agent.

What's more important to buy-to-let affordability checks, my personal finance or my potential rental income?

Both are equally important. There is a bit of a false understanding that it's all about the rental figures, but if you have bad credit or too much debt, you're application may be declined.

Can I get a buy-to-let mortgage if I don't own my own house?

Most lenders want you to own your own home, some will issue you a mortgage without being an owner occupier, if you pass all the other checks.

Can you use a normal mortgage to buy a property then rent it out?

In short, no. It's mortgage fraud.

It can happen that you buy a second home (or just move into rented for a work move), and end up renting your existing home while still repaying a residential mortgage. At this point you should contact your original lender.

What insurance do I need for a buy-to-let mortgage?

The lender will make no additional insurance demands before offering you a mortgage. This means, as with every mortgage, the only home insurance you need is buildings insurance.

However, if you’re paying your mortgage with rent money, you may want to plan for void periods when you don't have a tenant. Equally your tenant can take out income protection insurance, which ensures they will be able to continue paying the rent should they lose their jobs for instance.

Can I have as many buy-to-let mortgages as I want?

Most lenders will limit you to 3 to 5 mortgages. At that point you can use another lender. However, watch out as some lenders may be hesitant to lend to you if you have too many geared properties with other lenders. Speak to us for more info if you think you are at that point in the growth of your portfolio.

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