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Buy to Let Mortgages Explained

Written by Reviewed by Graham Norwood

24th Mar 2020 (Last updated on 2nd Jul 2020) 6 minute read

Buy-to-let mortgages are designed for those buying property as an investment to let it out to tenants. There are key differences between these mortgages and those mortgages - we’ll call them residential mortgages - used by owner occupiers. 

In this guide, Compare My Move talk through what exactly a buy-to-let mortgage is, who can quality for one and how much deposit you need. We'll also answer commonly asked questions relating to buy-to-let mortgages.

This article will cover the following:
  1. How Does A Buy-to-let Mortgage Work?
  2. Who Can Get A Buy-to-let Mortgage?
  3. How Much Deposit Do I Need For A Buy-to-let Mortgage?
  4. How Much Can I Borrow For A Buy-to-let Mortgage?
  5. What Is An Interest-only Buy-to-let Mortgage?
  6. What Is A Repayment Buy-to-let Mortgage?
  7. Buy-to-let Mortgage Fees
  8. Mortgages For Portfolio Landlords
  9. Buy-to-let Mortgages For First-time Buyers
  10. Save On Your Move With Compare My Move

How Does A Buy-to-let Mortgage Work?

A buy-to-let mortgage is similar to a residential mortgage, but the main difference is that it usually comes with higher fees and deposit. Many mortgage lenders view buy-to-let mortgages as a higher risk, therefore making the criteria stricter for the amount of mortgage you can borrow.

Not to be confused with a let-to-buy mortgage, the majority of buy-to-let mortgages are interest-only loans, which means the borrower only pays the interest accrued each month. 

On most residential mortgages, borrowers pay off some of the ‘principal’ loan and a little of the interest each month - meaning that at the end of the term, usually 25 years, they own the property outright. With a buy-to-let mortgage, borrowers pay the interest only off each month - and so at the end of the term, they need to pay off the principal loan in full.

The required mortgage deposit that you need to save for a buy-to-let mortgage is typically 25% or more of the value of the property, but this can vary depending on your chosen mortgage lender. Investors looking for a better mortgage deal will have to pay a mortgage deposit of 40% or over.

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Who Can Get A Buy-to-let Mortgage?

Buy-to-let mortgages are suitable for investors and landlords who want to buy a property to let out to tenants. They’re generally more expensive than traditional mortgages so not everyone is entitled to a buy-to-let mortgage. We’ve listed the criteria for those looking to get a buy-to-let mortgage.

  • You are a landlord who will invest in property.
  • You have your finances in place to afford high mortgage fees and deposit.
  • You are a homeowner, whether that’s with a mortgage or without.
  • You have a good credit score.
  • You earn over £25,000.
  • You’re 45 or younger. Many lenders will have an age limit for when the mortgage term ends. 

How Much Deposit Do I Need For A Buy-to-let Mortgage?

The typical minimum deposit for a buy-to-let mortgage is 25% of the property’s value. The mortgage deposit is set at a higher minimum than a traditional mortgage as many lenders view buy-to-let mortgages as higher risk.

Although a 25% deposit is the more common minimum deposit, some lenders will accept a 20% deposit. For access to the best mortgage deals, with the lowest interest rate, you’ll need a deposit as high as 40% to 45%. 

How Much Can I Borrow For A Buy-to-let Mortgage?

The amount of mortgage you can borrow will be determined by how much income you expect to make from letting your property. Many lenders will require you to be earning an income that is separate from your buy-to-let property, too. 

Lenders will use interest cover ratios (ICR) to work out how much you expect to earn as part of their affordability assessment. To make a profit, landlords will typically require a 25-30% higher rental income than their monthly mortgage payments.

The current ICR amongst many lenders is 125%, meaning the expected rental income must be 125% of your mortgage payments. The ICR will vary between lenders, some may implement an ICR of up to 145%.

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What Is An Interest-only Buy-to-let Mortgage?

An interest-only buy-to-let mortgage means you will only pay the interest rate that your mortgage has accrued monthly. Whilst this will give you cheaper monthly payments than a repayment mortgage, you will have to pay off the capital debt in full once the mortgage term ends. 

Data from the National Residential Landlords Association shows that interest-only buy-to-let mortgages are more common with landlords. More affordable monthly payments allow landlords to finance their investment of the property, with the plan to sell the property at the end of the term.

What Is A Repayment Buy-to-let Mortgage?

With a repayment buy-to-let mortgage, you will pay interest and a small sum of the overall loan each month. Once the mortgage term is over, you would have paid off the interest and the full price of the house. You will then own the property outright at the end of the mortgage term.

By choosing a repayment mortgage, you won’t have to worry about paying off a large sum of money at the end of the mortgage term, but you will have to pay higher monthly payments than an interest-only mortgage.

Buy-to-let Mortgage Fees

The arrangement fee for a buy-to-let mortgage is usually 1.5% to 2% of the mortgage loan.

Buy-to-let mortgage interest rates will vary depending on the amount you borrow, how much rental income you expect from the property and the different type of mortgage you choose.

You will need to factor in the traditional costs of buying a house for your buy-to-rent property, too. Make sure you budget in solicitor fees for the conveyancing process, property survey costs and Stamp Duty charges - on buy-to-let properties there is the traditional Stamp Duty charge plus a 3% surcharge. 

You’ll also have to pay capital gains tax on the property when it comes to selling your buy-to-let

Mortgages For Portfolio Landlords

A portfolio landlord is someone who has four or more buy-to-let properties. From October 2017, The Bank of England’s Prudential Regulation Authority introduced stricter criteria for portfolio landlords to get a buy-to-let mortgage. It’s a higher risk to lend to a portfolio mortgage, therefore they must go through the portfolio landlord stress test which includes:

  • The landlord’s experience in the rental market.
  • Proof of their properties and outstanding mortgages.
  • Proof of the landlord’s assets and liabilities.
  • Current and future income of the landlord’s properties.

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Buy-to-let Mortgages For First-time Buyers

You can get a buy-to-let mortgage as a first-time buyer, but there will be stricter criteria you must follow. Some lenders will require an even higher deposit and you’ll still have to pay Stamp Duty charges too as you won’t qualify for Stamp Duty relief: however, if you own no other home apart from the buy-to-let, you will not have to pay the 3% surcharge.  You may face difficulties getting a mortgage for the first home you live in as many lenders will look at outstanding debt on your buy-to-let mortgage.

Save On Your Move With Compare My Move

When you’re ready to buy your buy-to-let property, make sure you use Compare My Move to save you time, money and effort. We’ve got everything you need for a successful buying a house process. We’ll help you compare conveyancing quotes, find a property surveyor and connect you with verified removal companies. To save up to 70% on the house buying process, get in touch with Compare My Move.

Martha Lott

Written by Martha Lott

Having written for Huffington Post and Film Criticism Journal, Martha now regularly researches and writes advice articles for everything moving house related.

Graham Norwood

Reviewed by Graham Norwood

Property Journalist and Editor,

With over 15 years of experience in residential property journalism, Graham is currently the editor for both Estate Agent Today and Letting Agent Today.