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Buy-to-let mortgages explained

From rates to affordability criteria, find out everything you need to know about buy-to-let mortgages.

In this article
Coronavirus (COVID-19) landlord update How do buy-to-let mortgages work? Video: buy-to-let mortgage basics How much deposit do I need for a buy-to-let mortgage? Buy-to-let mortgage rates and fees Mortgage rates for buy-to-let companies
How to compare buy-to-let mortgages Affordability rules for landlords Mortgages for portfolio landlords Remortgaging for landlords Buy-to-let mortgages for first-time buyers Accidental landlords: switching to a buy-to-let mortgage

Coronavirus (COVID-19) landlord update

The government has announced a series of temporary reforms for landlords, including three-month mortgage payment holidays and changes to eviction rules. 

You can find more of the latest updates and advice over on our dedicated Which? coronavirus information hub.

When you buy a property as an investment, you won't be able to fund your purchase with a normal residential mortgage. Instead, you'll need a specialist buy-to-let mortgage. 

The good news is that there are lots of deals out there, whether you're a first-time landlord, an 'accidental' landlord, or an experienced investor.

The bad news, however, is that the rules around buy-to-let mortgages can be a bit of a minefield. 

In this guide, you can learn the basics of how buy-to-let mortgages work and get to grips with how lenders will calculate your affordability.


How do buy-to-let mortgages work?

The vast majority of buy-to-let mortgages are provided on an interest-only basis. This means that, for each month of the mortgage term, you’ll only pay the interest on the loan, and none of the capital.

While this can be good news in the short term as your outgoings will be less each month, it's imperative that you have a plan in place to either pay off the full loan or refinance at the end of your mortgage term.

Video: buy-to-let mortgage basics

The 90-second video below explains the basics of how buy-to-let mortgages work. 

How much deposit do I need for a buy-to-let mortgage?

To get a mortgage on an investment property, you'll usually need a deposit of at least 20-25% of the value of the home.

And, as with standard residential mortgages, the bigger the deposit you put down, the better the rate you'll be able to get. The best buy-to-let deals are usually only available to investors with deposits of 40% and above. 

When assessing your affordability, lenders will consider your current portfolio (more on this later) and any previous history of obtaining and paying off buy-to-let finance. 

Buy-to-let mortgage rates and fees

Buy-to-let mortgage rates have been falling steadily in cost over the last couple of years.

In March 2020, the average fixed-rate buy-to-let mortgage had an interest rate of 3%, down from 3.94% five years earlier, according to data from Moneyfacts.

Variable-rate deals followed a similar pattern, with rates dropping from 3.85% to 3.01% between 2015 and 2020.

Mortgage rates for buy-to-let companies

Cuts to mortgage interest tax relief and wear and tear allowance have resulted in some landlords setting up company structures for their buy-to-let portfolios.

Company buy-to-let mortgages make up a relatively small percentage of the market, but they are on the rise - in fact the number of company mortgages on the market tripled from 80 to 235 between 2016 and 2018, resulting in more than 250 deals being available to investors. 

But moving to a company structure isn't the best move for everyone, as the interest rates on these deals tend to be significantly higher than those available to individual borrowers.

Which? research in spring 2019 found that the initial rate on an equivalent fixed-rate mortgage was around 1% higher for companies.

How to compare buy-to-let mortgages

While headline rates can be attractive, it's especially important to look beyond the initial rate when choosing a buy-to-let mortgage.

That's because these products have traditionally come with higher up-front fees than traditional mortgages.

If you take out one of the market-leading deals, you might need to pay as much as £2,000 up front, and while some lenders are beginning to offer cashback incentives and reduced fees, these offers make up a relatively small proportion of the buy-to-let market. 

Affordability rules for landlords

There are plenty of enticing mortgage offers out there for landlords, but you'll need to prepare yourself for strict affordability tests. 

That's because in recent years, the Bank of England (BoE) has looked to cool what it considered to be an overheating buy-to-let market by imposing tougher lending restrictions.

Interest cover ratios on buy-to-let mortgages

As part of their affordability assessments, lenders use interest cover ratios (ICRs) to calculate how much profit a landlord is likely to make.

A lender's ICR is the ratio to which a property's rental income must cover the landlord's mortgage payments, tested at a representative interest rate (most banks currently use 5.5%).

Lenders are required to test at 125%, meaning the projected rental income must be at least 125% of the landlord's mortgage payments, but many impose higher levels of around 145%.

Mortgages for portfolio landlords

Professional landlords with four or more properties are often described as 'portfolio landlords'. 

This is an important distinction, as rules introduced by the BoE's Prudential Regulation Authority in October 2017 made it harder for these investors to access additional finance.

Portfolio landlord stress-testing

Previously, portfolio landlords could provide their overall profit/loss figures when applying to borrow more money or remortgage a home in their portfolio, but this has now changed. 

Instead, you'll now need to show mortgage details, cash flow projections and business models for every property you own when applying for finance.

If you have a heavily mortgaged portfolio, you may find that these regulations make it more difficult for you to obtain extra funds.

Maximum portfolio size and ICR increases

Portfolio landlords also face some other restrictions, which are set from lender to lender.

For example, some lenders will set a maximum number of properties you're allowed to have in your portfolio (up to 10 being the most common) and others use different ICRs and representative interest rates depending on how many properties you have. 

Other rules imposed by individual lenders include limits on maximum loan-to-value (LTV) ratios across a portfolio (for example, your overall portfolio must be at 65% LTV or lower) or the stipulation that the ICR from every property in your portfolio must be above 100%.

'Top slicing'

With landlords struggling to get finance, some banks have begun to adopt a more holistic approach to lending by introducing a system known as 'top slicing'.

Top slicing takes into account a landlord's personal income away from their portfolio - such as a salary or pension - and includes it in affordability assessments.

This means that if you have significant earnings away from property, you could theoretically use your personal income to bridge any shortfall when you're assessed by lenders.

Only a handful of lenders currently adopt this approach, so if you think top-slicing could benefit you, it's best to discuss this with a mortgage broker.

Remortgaging for landlords

A raft of taxation changes - including cuts to mortgage interest tax relief and the 3% stamp duty surcharge for property investors - has resulted in many landlords deciding to refinance their portfolios rather than adding to them.

One trend in the remortgaging market is lenders are cutting up-front fees to entice landlords. 

Some lenders are also moving towards offering cashback incentives, with more than a quarter of two-year and five-year fixed-rate remortgage deals coming with some form of cashback - the highest amount being a cool £1,000.

Buy-to-let mortgages for first-time buyers

If you're struggling to get on to the property ladder in your area, you might be considering buying an investment property elsewhere and letting it out.

The good news is that it is possible to get a buy-to-let mortgage as a first-time buyer - but it's not necessarily easy.

For example, you might need a bigger deposit than other investors to get a good deal, as the number of mortgages available to you may be significantly smaller.

You'll also be giving up on some benefits available to first-time buyers - especially when it comes to stamp duty. This is because, if your first property isn't one that you will live in yourself, you won't qualify for first-time buyer relief

You might also find it more difficult to get a mortgage when you come to buy your first home to live in yourself, as lenders will assess any debt you have outstanding on your buy-to-let mortgage.

On the plus side, as a first-time buyer you'll only have to pay regular stamp duty rates, and will escape the 3% surcharge usually levied upon buy-to-let investors.

But if, at a later date, you end up buying a property to live in while hanging onto your buy-to-let property, you'll have to pay the surcharge.

Accidental landlords: switching to a buy-to-let mortgage

Not everyone who becomes a landlord necessarily sets out to do so. For example, you might have inherited a property, or a change in your circumstances may have resulted in you moving back to the rented sector and choosing to let out your home.

Regardless of how you've become a landlord, it's vital that you tell your mortgage lender if you're going to let out a home that has an outstanding owner-occupier mortgage.

Buy-to-let properties carry greater risks for lenders, so if you don't tell your bank you could theoretically be invalidating your mortgage.

Some lenders will grant you a 'consent to let' on your current deal, while others may insist on you switching to a buy-to-let mortgage.