What is a buy-to-let mortgage?

A buy-to-let mortgage is designed for borrowers who want to buy a property, to let out to a third party (e.g. tenants).

Also known as investment mortgages or BTL mortgages, it can be a good long-term investment option, but there are risks which need to be seriously considered. You could end up making much more money from your spare cash than you would with a savings account or a pension, but you could also lose a lot of time and money. You need to accept that there’s a risk that things can go wrong, and decide if it’s worth it in an attempt to make a profit.

Aspiring landlords cannot borrow a standard loan to purchase a property; it must be a buy-to-let mortgage. Avoid the temptation to apply for a standard residential mortgage to save money, because this is mortgage fraud and could carry serious repercussions.

While buy-to-let mortgages and normal home loans are similar, there are some key differences. Lenders assess the property’s profitability, which can be a more important factor than your own income, and it’s rare to borrow more than 75 per cent of a property’s value.

When buying a second property to let, you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month, or are you looking to make a profit through increased equity from the second property as it increases in value over time? The decision may affect the type of property you purchase, and the location.

How much can I borrow with a buy-to-let mortgage?

The amount of money you can borrow depends largely on the rental income you expect to get each month.

Generally speaking, most lenders will require your rental income to be 125 per cent of mortgage repayments. For example, if you were paying off a buy-to-let loan of £500 per month, you would need to be clearing rent of £625.

You will have to pay a larger deposit when getting a buy-to-let mortgage compared to a conventional home loan, because there is more risk involved. You are essentially relying on a third party (tenants) for the money required to pay off the mortgage, and therefore this is riskier; what happens if they stop paying, or you don’t find a tenant?

The absolute minimum deposit you should expect to pay on a property is 20 per cent, but it’s generally no lower than 25 per cent. It is not uncommon to have a 40 per cent deposit, especially to get the best deals, so you definitely need to be quite well off to begin with.

It’s important to realise that buy-to-let is not a short-term investment. Mortgages take many years to repay, often around 25 to 40 years, so it is a big commitment.

The Dos and Don’ts of buying an investment property to let

DO seek the advice of a letting agent who understands the local market.

DO budget for every eventuality. Make sure that the gross rent will cover all your costs and borrowings. Also, be aware that void periods when the dwelling is empty are a possibility and factor them in.

DO make sure that your buy-to-let property is furnished to a high enough standard to attract the best tenants. This includes kitchens and bathrooms, both of which are essential to letting out a house.

DO maintain the high standard of repair by managing your property well. Be aware of when tenants are looking to move out, and make sure you repair any problems quickly in order to avoid empty periods.

DO make sure that your letting agent is registered with the Association of Residential Letting Agents (ARLA).

DON’T let your personal tastes affect your choice of property. It is essential that your property meets all market requirements and is attractive to a wide range of people who live in the surrounding area.

DON’T purchase a property that has large maintenance requirements, particularly if it does not add to the property’s rental attraction. Anything that constantly costs money to maintain must be considered carefully.

DON’T be fooled into thinking that running a buy-to-let property will be easy. Being a private landlord is a time-consuming task, and tenants need a management service on call constantly.

DON’T try to write a tenancy agreement yourself, unless you are very experienced. It is necessary to provide an inventory and condition report before a tenant moves in.

DON’T furnish your buy-to-let property with cheap second hand furniture. As well as being unattractive to many tenants, it is possible that this type of furnishing will contravene some legislation.