Buy-to-let mortgages work in the same way as residential mortgages: a provider will lend you the money to buy a property over a set term and the loan will be secured against the property.
But, in addition to the fact that you won't be living in the property, there are a number of key differences:
Most buy-to-let mortgages are interest-only. This keeps the cost of repayments down as you only pay off the mortgage interest each month, not the capital.
But, at the end of the mortgage term, you will not own the property outright, so you will need to remortgage, sell the property or have another way of paying off the mortgage (for example, a separate investment plan).
Lenders will typically look at your potential rental income, rather than your salary or wages, to decide whether you can afford the loan. However, if it's your first buy-to-let mortgage, they may look at income from your job as well.
Because buy-to-let mortgages are riskier for lenders, you will generally need a bigger deposit than with residential mortgages – typically at least 25%.
Finding a buy-to-let mortgage deal
Due to the additional risk for lenders, buy-to-let mortgage rates can be higher than residential mortgages – you can often expect to pay 1% to 2% more in interest. However, there are plenty of competitive rates on the market.
Generally speaking, the larger your deposit, the better the interest rate you'll be able to get. The best deals are available to people with deposits of 40% or more.
The smallest deposit you can get a buy-to-let mortgage with is 20%, although your choice of products will be very small. A deposit of 25% or above is more typical.
Just like with residential mortgages, you can get fixed-rate and variable-rate (such as tracker) buy-to-let mortgages. Our guide, which type of mortgage deal is right?, will help you choose the best type of mortgage for you.
Buy-to-let as an investment
It's essential to do your research before taking out a buy-to-let mortgage. You need to be confident that your rental income will comfortably cover your mortgage and all your other expenses.
Lenders will usually want to see evidence that your expected rent will cover your mortgage payments by at least 125%.
A buy-to-let property should also be seen as a long-term investment. Over the long term, house prices are likely to increase but, in the short term, they could fall or stay the same. No one knows with any certainty what will happen to house prices in the future.
Buy-to-let mortgage fees
Set-up fees (which include arrangement, booking and valuation fees) for buy-to-let mortgages can be higher than for residential ones, so you'll need more cash upfront.
Initial fees can be as high as 3% of the value of your loan. Don’t add the fees to the mortgage if you can avoid it as you'll then pay interest on them over the life of the loan.
Buy-to-let mortgage lending criteria
Make sure you check the mortgage's terms and conditions to ensure that it suits your circumstances. Lenders may apply additional criteria, which can include:
- not being able to let the property to groups of unconnected individuals
- lower loan-to-value restrictions on new-build properties
- conditions about the type and length of letting agreement you have with your tenants
- a limit on how many buy-to-let mortgages you can have.
Buy-to-let mortgages for portfolio landlords
If you're a landlord with four or more mortgaged buy-to-let properties, you'll now to face stricter affordability testing when you apply for a new mortgage or remortgage an existing property.
Bank of England rules which came into force in September 2017 require portfolio landlords to declare mortgage details, cashflow projections and business plans for each of their investment properties.
The exact criteria differs between lenders, but the rent you bring in on each of your properties will need to cover a minimum of 125% of the mortgage payments - and in some cases as much as 145%.
Previously, landlords were able to rely on the overall performance of their portfolio when making a new mortgage application - now, each property will be assessed separately by the lender.
Get expert advice for your buy-to-let investment
Before taking out a buy-to-let mortgage, it can be helpful to talk to a professional adviser. For impartial advice on the best mortgage for you from an expert who doesn't work on commission, call Which? Mortgage Advisers on 0808 252 7987 or request a call back using the form below.