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Specifically for individuals who wish to buy residential property which they intend renting to tenants.
Buy-to-let (BTL) mortgages are specifically for individuals who wish to buy residential property which they intend renting to tenants. The property can be purchased in personal names or via Ltd company. Although a BTL mortgage is similar in a number of respects to a standard residential mortgage, there are some significant differences between the two.
Affordability
When considering their decision to make an advance or not, lenders will also take into account the amount of rent the borrower is hoping to release from the property. Unlike a standard residential mortgage, most lenders view the property’s rental potential — rather than the borrower’s salary — as the primary source of income for servicing the loan.
Deposit
Typically, the highest loan-to-value (LTV) mortgage available on a BTL basis is 85% — i.e. you will need a deposit of at least 15% of the property’s purchase price to proceed. Borrowers who are able to put down substantially more than the minimum 15% deposit (25%+ for example) will usually qualify for more favourable rates of interest.
Interest rate
Because BTL mortgages represent more of a risk for lenders than standard residential mortgages, BTL borrowers tend to be charged higher rates of interest.
Eligibility and lending criteria
Most banks and building societies offer BTL mortgages, but terms, conditions and costs vary across the different lenders.
Some mortgage providers will not lend to individuals who earn less than £25,000 a year. Lenders may impose an ‘upper’ age limit on the term of the mortgage by insisting that the mortgage is repaid in full before the borrower reaches a certain age — 70 is not untypical.
Flats, newly built property, former local authority-owned properties — or properties which are priced below a certain value — can be unacceptable to lenders. Lenders may also restrict the number of BTL mortgages a borrower can have with them at any one time. Or the lender may impose a ‘cap’ on the total amount of BTL funding they are prepared to advance to a borrower.
Which type of mortgage?
Depending on the lender, the types of mortgages available to the BTL borrower are usually the same as those available to the standard residential mortgage borrower — i.e., tracker, discount, fixed rate, capped rate and variable rate.
Given that most BTL borrowers buy for reasons of investment, some mortgage options may be more appropriate than others. With a fixed-rate mortgage for example, the borrower knows exactly what their monthly repayments are going to be; other borrowers prefer tracker or variable rate loans where the monthly repayment can sometimes be lower, but the cost can vary from one month to the next.
(Many BTL buyers have a preference for interest only mortgages, as distinct to a capital and interest repayment mortgage. An interest only mortgage, is a mortgage where the monthly repayment is used solely to pay off the interest on the loan but none of the capital, which is repaid only when the property is sold or at the end of the term of the current mortgage when a re-mortgage is obtained.)
As a mortgage is secured against your property, it could be repossessed if you do not keep up the repayments. Some Buy To Let mortgages are not regulated by the Financial Conduct Authority.