What is a buy-to-let mortgage?

Mortgages can come in all different shapes and sizes to suit various buying situations and property types. If you’ve never looked into mortgages before, it can feel overwhelming – but the key to success is to identify the right mortgage for you and understand all its terms and conditions.

One kind of mortgage popular with those looking into securing an investment property is the buy-to-let mortgage. Below, we explore what a buy-to-let mortgage is, how it differs from a standard owner-occupier mortgage and how you can get one for yourself.

What does buy-to-let mean in mortgages?

The term buy-to-let is largely self-explanatory – it describes a mortgage that allows you to buy a property in order to let it out in the rental market. Unlike a traditional owner-occupier or residential mortgage, you can’t live in a property you’ve bought with a buy-to-let mortgage. However, a buy-to-let mortgage is a legal requirement if you want to rent the property out.

Usually, a residential mortgage will be a repayment mortgage, meaning that your payments go towards the accrued interest and the original capital of the loan. Buy-to-let mortgages offer the same payment method however they can be paid by “interest only”. Please note that not all lenders offer interest-only anymore but it may be an option This works differently; you have lower monthly payments which serve to pay off the interest only. Then, at the end of the loan term, you’ll need to repay the full capital.

Because of this, you’ll need to have a plan in place for how you’re going to repay the mortgage when you first apply. This could mean:

• Using the savings you’ve accumulated through lower monthly payments
• Refinance the property with a new mortgage
• Sell the property.

Of course, if you choose to sell the property, it’s always possible that the new value of it might not be enough to cover the capital of the loan. That’s why it’s important to plan ahead and have a backup strategy in place to ensure you can afford to pay off the capital in full.

Another difference between residential and buy-to-let mortgages is the required deposit size. Since a buy-to-let mortgage is usually seen as a bigger risk for lenders – because you are relying on someone else paying you rent in order to make your mortgage payments – you’ll typically need a larger deposit. The exact figure can vary between lenders, but in most cases 30% of the purchase price should be enough.

How to get a buy-to-let mortgage

The process for getting a buy-to-let mortgage follows much the same path as a residential mortgage, although the criteria for approval can be slightly different. For advice specific to you and any investment properties you’re considering, seek an expert mortgage consultation.

The first thing you should do when considering a buy-to-let mortgage is to find one you like the look of. Different lenders will offer different rates, terms and conditions, so shopping around is a great way to find a product that suits you. Having a shortlist of a few acceptable options is a good idea, just in case you’re refused for your first-choice mortgage.

Next, you’ll need to prepare your application. Getting together a deposit is one of the most important parts of this. If you can, try to gather a larger deposit than you think you need. If you do end up needing it all, then you have it to hand; if not, then you can use the remaining funds to either secure a better rate or to cover costs during the early days of the loan period.

But to let applications are based largely upon the expected rental income that you are likely to receive for a particular property. A property would need to be identified prior to submitting an application so the lender can asses the future rental potential of that particular property.

Proof of income is another crucial aspect of a buy-to-let mortgage application; this is the part where you demonstrate to the lender how you’re going to afford the monthly payments and the repayment of capital at the end of the loan term. Aim to have your estimated rental income amount to around 125 to 150% of your monthly payments. This shows to your lender that you’ll be able to put away money each month for times when the property is empty, or to go towards capital repayment.

You should also look carefully at any available information on the specific buy-to-let mortgage products you have in mind. There may be requirements for certain lenders that you can prepare ahead of time to help increase your chances of a successful application.

Buying an investment property isn’t the right choice for everyone, but if you’re interested in doing it, a buy-to-let mortgage will almost certainly be essential. Preparation is key when it comes to mortgage applications, so do your research and don’t be afraid to seek advice from a professional in the buy-to-let industry.

Want to consider your options before settling on this form of investment? It’s smart to know where you stand. Book an investment consultation with an expert adviser who can help you to understand how you can make your money do more for you.

Warning:

This article is for general information purposes and is not an invitation to deal with or address your specific requirements. Any expressions of opinions are subject to change without notice. The information disclosed should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information of the various source materials, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.