5-minute guide to buy-to-let mortgages

5-minute guide to buy-to-let mortgages
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Buying a property to let out offers the appealing prospect of a potential rental income, plus the possible increase in equity in the future. But it’s important to understand that a buy-to-let mortgage costs more than a residential ones, typically by 1 per cent to per cent more interest for both fixed and tracker rates. That’s because there is more risk for the lender. If your tenants don’t pay the rent, or if the property is unoccupied for long periods of time, you could struggle to cover the mortgage.

A buy-to-let mortgage costs more than a residential one

Buy-to-let mortgage deposits

Buy-to-let lenders typically require larger deposits than they do for regular residential mortgages. For the best rates you'll need a 25 per cent deposit, although there are lenders that offer buy-to-let mortgages with a 15 per cent deposit.

Buy-to-let mortgage fees

Set-up fees for buy-to-let mortgages are also higher than for residential ones, so you'll need more cash up front. Initial fees can be as high as 3 per cent of the value of your loan – so it’s important to ask what the fees will be at the start of the process.

Buy-to-let mortgage lending criteria

There are various criteria you need to satisfy in order to qualify for a buy-to-let mortgage. As well as looking at the amount you are borrowing, a buy-to-let lender may also look at how much rent you’ll get as a proportion of the mortgage you'll be paying. Typically, mortgage lenders will want a rental income to cover a mortgage payment by 125 per cent on a future proofed interest rate of between 5 per cent to 6 per cent. However, rises in interest rates could increase that margin, so you should ensure you are well above the minimum.

Lenders may also impose other criteria, including:

  • 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 tenant
  • A limit to how many buy-to-let mortgages you can have.

Calculating Costs

To be eligible for a buy-to-let mortgage you will need to show the lender that the rent will cover your interest payments but you’ll need that additional money to cover things like:

  • Maintenance costs: These will vary depending on the property but if you have insurance you should budget for costs of about £250 a year
  • Refurbishment costs: Every few years it’s likely you’ll need to redecorate or refurbish parts of the property - you should budget for costs of around £2,000 over five years
  • Letting agents: If you decide to use a letting agent to find tenants should budget for a fee of around £250. If you would like the letting agent to fully manage the property for you should budget for 10 per cent -15 per cent of your annual rent
  • Landlord insurance: You can get different levels of landlord insurance and the cost will vary depending on where you live, the property type and how comprehensive the cover is
  • Void periods: You should also allow for the property being empty for about 8 per cent of the year between tenancies or during repairs.

It's sensible to have a contingency fund set aside to cover any costs that are greater than expected. Also bear in mind that any increase in mortgage rates could also eat into your rental income.

The tips were provided by Which? Mortgage Advisers. For more information or advice on but-to-let mortgages or for more mortgage advice click here.

  • Plus read our guide to being a landlord here.