What is a buy to let mortgage?

If you’re thinking about investing in property, a buy to let mortgage is likely to be one of the first things you’ll need to understand. This guide explains how they work, what you’ll need to qualify, and what to consider before you apply.

In this guide we cover:

• How does a buy to let mortgage work?
• How to get a buy to let mortgage
• What are the different types of buy to let mortgages?
• Pros and cons of a buy to let mortgage
• Can I rent out a property that has a standard mortgage?
• What deposit is needed for a buy to let mortgage?

A buy to let mortgage is a specialist loan designed for purchasing or refinancing a property you intend to rent out, rather than live in yourself.

Most buy to let mortgages are interest only. That means your monthly repayments cover only the interest on the amount you’ve borrowed, not the loan itself. Interest rates can be:

• Fixed — the rate and your monthly repayments stay the same for an agreed period
• Variable — the rate can change, so repayments may go up or down

At the end of the mortgage term, you’ll need to repay the full loan amount. Common ways to do this include:

• Selling the property
• Using savings
• Agreeing new mortgage terms with a lender

Because lenders view rental properties as a higher financial risk than residential ones, buy to let mortgages typically come with higher interest rates and require a larger deposit than a standard residential mortgage.

Before you apply, it’s worth checking whether you’re likely to meet the lender’s requirements.

Most lenders will want to know:

• Whether you’re aged 18 or over (some lenders set a higher minimum age)
• That you have at least 20% to 25% of the property’s purchase price available as a deposit
• What your income is, as many lenders set a minimum annual income threshold
• Some lenders may also ask whether you’re a first-time buyer or already own your home

If you already have a mortgage on a buy to let property, you may want to review how much you have left to pay before exploring new deals. Remortgaging could allow you to access a better rate or release equity for further investment.

If you haven’t already settled on a property, it’s worth researching the areas you’re considering. Rental demand, expected rental income, and the costs involved can all vary considerably depending on the location and type of property.

Lenders will usually want your expected rental income to cover a set percentage above your monthly mortgage repayment, often between 125% and 145%.

Before you apply, it’s useful to estimate your likely rental income and calculate your potential rental yield. This is the annual rental income expressed as a percentage of the property’s value.

You’ll want to decide between a fixed-rate or variable-rate mortgage. Your choice may also depend on what you’re planning to do with the property. For example, letting to short-term guests through a platform like Airbnb or running an HMO (house in multiple occupation) can affect what type of mortgage or specialist product you’ll need.

Once you’ve checked your eligibility, researched the market, and chosen a lender, you can go ahead and submit your application. Having all your documents ready in advance should help the process go smoothly.

Buy to let mortgages are broadly split by their interest structure:

• Fixed-rate mortgages — your interest rate and monthly repayments stay the same for an agreed period, usually two to five years. This can make budgeting more predictable.
• Tracker mortgages — the interest rate moves in line with an external benchmark, usually the Bank of England base rate. If the rate goes up, so do your repayments, and vice versa.
• Variable rate mortgages — the rate is typically set at a discount relative to the lender’s Standard Variable Rate (SVR). Once any introductory period ends, you may move onto the lender’s SVR unless you remortgage.

Beyond interest structure, there are also specialist products available for certain types of rental property, including HMO mortgages and holiday let mortgages.

• Rental income — if you charge enough rent to cover your mortgage repayments and other costs, a buy to let property could generate a regular income stream
• Long-term investment — property values can increase over time, meaning you may benefit from capital growth as well as rental income
• Portfolio building — once you have equity in one property, some landlords use it as a stepping stone to expand their portfolio

There are several important costs and risks to factor in before committing:

• Insurance requirements — most lenders will require you to have landlord insurance or buy to let insurance in place. You may also want to consider landlord buildings insurance to protect the structure of the property
• Stamp duty — if you already own a home, you’ll typically need to pay a 5% Stamp Duty Land Tax (SDLT) surcharge on top of standard residential rates in England and Northern Ireland. Different devolved taxes apply in Scotland (LBTT) and Wales (LTT).
• Void periods — if your property sits empty between tenancies, you’ll still need to cover the mortgage, council tax, and maintenance costs during that time
• Capital gains tax — when you come to sell, you may need to pay capital gains tax on any profit made from the sale
• Income tax — any rental income you receive is subject to income tax, and the rules around allowable expenses have become more restrictive in recent years

A standard residential mortgage is based on the property being your primary home. If you let the property out to tenants without telling your lender, you’ll likely be in breach of your mortgage conditions.

This could result in a financial penalty or your lender demanding full repayment of the loan. If you’re planning to rent out a property on a long-term basis, you should apply for a buy to let mortgage or seek your lender’s formal consent to let.

A buy to let mortgage deposit is typically between 20% and 25% of the property’s purchase price. This is higher than a typical residential mortgage deposit, because lenders consider rental properties a greater financial risk. There’s a chance the property could sit empty, or a tenant could fall into arrears, which affects the landlord’s ability to keep up with repayments.

A larger deposit generally means access to better interest rates, so it’s worth putting down as much as you can afford.

Choosing a specialist insurance provider can help to give you peace of mind as a landlord. Here’s why so many landlords choose Just Landlords:

• Rated Great on Trustpilot*, with over 1,000 reviews
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Below are some frequently asked questions about tenant background checks.

Please note that these frequently asked questions are not a substitute for the policy wording. For full terms and conditions, please see the policy documentation.

You’ll typically need to provide proof of identity (such as a passport or driving licence), recent bank statements, and evidence of your income, such as payslips or tax returns if you’re self-employed. Lenders may also ask for details of any existing mortgages or outstanding debts.

Yes, owning a buy to let property is likely to affect your tax position. Rental income is subject to income tax, and if you sell the property for more than you paid, you may also need to pay capital gains tax on the profit.

You will also typically face a higher rate of Stamp Duty when buying the property. Note that if you are a first-time buyer purchasing a buy-to-let property as your first ever home, you generally won’t pay the additional property surcharge, but you will not be able to claim standard first-time buyer stamp duty relief.

It may be worth speaking to a qualified tax adviser before you invest to understand what your obligations could be.

This depends on how you intend to use the property. If you’re buying it specifically to rent out through a short-term platform like Airbnb, you’ll generally need a buy to let mortgage or a specialist holiday let mortgage. You’d also need to make sure you consider having appropriate insurance in place, such as Airbnb insurance, which is designed for short-term letting.

HMO properties will usually require a specialist HMO mortgage rather than a standard buy to let mortgage. Lenders treat these properties differently because they’re rented to multiple tenants, which can carry a different risk profile. If you’re considering an HMO, it’s advisable to speak with a specialist mortgage broker.

The timeline can vary depending on how quickly you’re able to gather the required documents and how busy the lender is at the time. In straightforward cases, a mortgage offer can be issued within a few weeks, though it may take longer if additional checks are needed.

The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Just Landlords accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.