If you want to buy a property to rent out you’ll need a buy-to-let mortgage. This is a mortgage where the amount you borrow depends on the rent, not on your income. So, who offers them and how can you get a competitive buy-to-let mortgage?
How to get a competitive buy-to-let mortgage
Buy to let lenders
There isn’t as much competition between buy to let lenders now as there was before the credit crunch. But there’s still a reasonable amount of choice. Some lenders to consider include:
- Accord Mortgages – this mortgage lender is owned by the Yorkshire Building Society and you can only get a mortgage from Accord if you take advice from an independent mortgage broker.
- BM Solutions, Halifax and Lloyds, which are all part of Lloyds banking group.
- Coventry building society
- Leeds Building Society
- London & Country
- The Mortgage Works is owned by Nationwide building society. Please note that The Mortgage Works’ and BM Solutions’ websites are designed for use by mortgage brokers only.
- Virgin Money
How buy-to-let mortgages work
The deposit: As with an ordinary mortgage, you have to come up with a deposit. You will struggle to get a buy-to-let mortgage without a 20% deposit and you will get more choice of mortgage deal and lender if you can come up with a deposit of 25% or more. You may have to come up with a bigger deposit if you’re buying a new build flat.
SAVVY TIP: The lowest rates are reserved for anyone with a 40% deposit, but for every 5% over the minimum that you can provide, you’ll get access to a better range of mortgage deals and the chance of a lower rate.
What you can borrow: Unlike with a residential mortgage, where the amount you can borrow is based on what you can afford, with a buy-to-let mortgage, it all depends on how much you can rent the property out for. Typically, the rent must be between 120% and 130% of the monthly mortgage payments.
SAVVY TIP: Some lenders say it should be a straight equation whereby the rent covers the mortgage, while others impose a minimum mortgage rate (so, for example, the rent would have to cover the mortgage by 125% and — even if you were on a cheaper deal — would do the rental calculations on the basis of a minimum rate of 4.5%). Other mortgage lenders state that the rent should cover the mortgage by 125% at the rate you’re paying plus 0.5%.
Mortgage fees and conditions
Most mortgages charge arrangement or booking fees. However, the fees on buy-to-let mortgages tend to be higher than for residential mortgages.
- Arrangement fees vary between several hundred to several thousand pounds, although these would normally be added to the loan.
SAVVY TIP: These fees are often the same whether you’re taking a one, three or five-year deal. That means the longer the deal lasts, the lower the fee is on a ‘per year’ basis.
- Have fees are either a flat rate or a percentage of the loan.
SAVVY TIP: If you’re taking out a large mortgage, you have to weigh up the impact of percentage-based fees quite carefully. On a £250,000 loan, a fee of 3% works out at £7,500, so you’d have to be sure you could save enough money on the mortgage rate to justify the high fee.
- Will limit loan-to-value levels on new build property (especially flats). If you want to buy a new build flat to rent out you may struggle to find a mortgage unless you have a large deposit.
SAVVY TIP: Be aware that buy-to-let mortgages aren’t usually regulated by the Financial Conduct Authority. It means that you can’t complain to the free Financial Ombudsman Service if you feel you were sold the wrong product.
The Money Advice Service has some useful basic information on buy-to-let mortgages.