Offering the potential for income and capital growth, buy-to-let has long been a popular investment for the over-50s. However, unless you can afford to buy a property outright, you’ll need to understand how buy-to-let mortgages work.
A buy-to-let mortgage is a specialist type of loan that can help you buy a property to rent out. Although buy-to-let mortgages work in a similar way to traditional residential mortgages, there are important differences, especially when it comes to how your application will be assessed.
When you buy your own home, your mortgage lender will want to know how much you earn and get a picture of your spending, before they rubber-stamp your application. With a buy-to-let mortgage, however, the lender will be more interested in the rental potential of your property, taking into account local tenant demand and the rent you can expect.
That’s not to say your earnings won’t be considered, they will just be a smaller part of the overall picture. Lenders will also charge a higher rate for buy-to-let mortgages and demand a bigger deposit. This is because they’re considered riskier than residential mortgages.
It’s possible for anyone over the age of 18 to apply for a buy-to-let mortgage – the key is that you meet eligibility criteria. It also helps if you have a good credit history, a stable income, and already own your own home.
Let’s take a closer look at how buy-to-let mortgages work, including the eligibility requirements and types of loan available.
As a rough guide, you’ll need a deposit of around 25% to get a buy-to-let mortgage, meaning the maximum LTV will likely be 75%. Some mortgage lenders only require a 20% deposit but interest rates on your loan will be higher. As with residential mortgages, the bigger your deposit, the lower your mortgage payments will be.
Typically, your mortgage lender will need your rental income to be at least 125% of your mortgage payment. This allows you to build up a bit of a buffer if, for whatever reason, your rent isn’t paid or you have gaps between tenants.
You might hear this referred to as your interest cover ratio. However, lenders may be more flexible if you have higher earnings and can afford to cover any shortfall from your personal income. The minimum income required by buy-to-let lenders is normally around the £25,000 mark.
You’ll likely pay a higher interest rate on your buy-to-let mortgage than you will for any loan on your own home, which means your monthly mortgage payments will be higher too. Exact rates will vary according to your circumstances but, as a guide, you can expect buy-to-let mortgages rates to be around 1% higher. (Failure to keep up with payments may result in repossession)
Just like residential mortgages, buy-to-let deals come in different shapes and sizes.
Most homeowners use repayment mortgages where they pay off capital and interest each month. At the end of the term you will have paid off the mortgage and will own your home outright. However, while it’s possible to take out a buy-to-let mortgage on a repayment basis, most landlords opt for interest-only.
This means you only repay interest charges each month and will need to clear the capital at the end of the term. This approach keeps your mortgage payments down, the catch is that you may need to sell the property to repay your loan.
Once you’ve chosen between interest-only and repayment, you’ll need to decide whether you would prefer a fixed or variable rate buy-to-let mortgage. With a fixed-rate, your interest rate will not change for the duration of the initial term – typically two or five years.
This can help you budget and you will have the peace of mind that your mortgage payments won’t go up if interest rates rise. The downside is that they won’t drop if interest rates fall. If you choose a variable rate mortgage your repayments can go up and down when interest rates change.
They’re normally available as a discount on a lender’s standard variable rate, or as a tracker which moves up and down in line with the Bank of England base rate. Having an opinion on what’s likely to happen to interest rates in the future can help you decide.
Before you apply for a buy-to-let mortgage, it’s best to do some research and a bit of groundwork.
Start by comparing lenders and the rates they’re offering on buy-to-let mortgage online. It’s important to get the lowest rate you can.
Before you apply for a buy-to-let mortgage, check your credit record and take any steps necessary to improve your score. The better your credit score, the better the deals you’ll get.
It’s also sensible to get an ‘agreement in principle’ – this will give you an indication of the amount you can borrow, without affecting your credit record.
There’s a lot to consider when you’re comparing buy-to-let mortgages. For this reason, lots of landlords find it helpful to use a qualified mortgage adviser. After an assessment of your finances, they will help you work out the amount you can borrow and recommend the best mortgages for you.
Importantly, they will also know which lenders are most likely to accept your application. Once you’ve made your choice, a mortgage broker will help you with the paperwork, submit your application and act as liaison between you and your lender.
It’s possible to compare mortgages yourself and apply direct to your lender of choice. Or a mortgage broker service, like Saga Mortgages, can help you see a range of options.
Before you apply, check you meet your lender’s eligibility requirements. Older people – including retirees – can get buy-to-let mortgages, but some lenders may impose maximum ages caps, either a maximum age at application or the end of the term. Also check whether your rental income will be enough to satisfy your lender’s income cover requirements.
When you apply for a buy-to-let mortgage, you’ll be asked to supply a raft of paper work, so gather the following before you start:
Once you have applied for the mortgage the lender will need to conduct a valuation of the property you’re buying before it makes a formal offer. You will also need to hire a conveyancing solicitor. The process typically takes between four and six weeks, but it can take longer.
In addition to budgeting for a deposit and mortgage repayments, there are a number of other costs to consider
Your lender will often charge you a fee to apply for your mortgage, typically the lower the interest rate, the higher the fee is likely to be. Buy-to-let fees are higher than residential mortgage application fees and could be anything from £1,000 to £2,500 or more .
Stamp duty land tax is payable when you buy residential property, however if the property you’re buying is not your first home, you’ll also need to pay a 5% surcharge (increased from 3% on 31st October 2024). Your rental income will also be subject to income tax.
Although it’s no longer possible to deduct your mortgage expenses from your rental income to reduce your tax bill, you can claim a 20% credit. When you sell your property, you may also need to pay capital gains tax. Alternatively, if you die before selling your property, it will form part of your estate and may be subject to inheritance tax.
When you let out a property to tenants it’s a good idea to invest in landlord insurance. This covers the building and its contents as well as loss of rent. Prices will vary according to the size and location of your property and the level of cover you buy, but according to NimbleFins, the average cost of landlord insurance in the UK is £226 a year .
You will also need to budget for the cost of maintaining your property – keeping the décor up-to-date and replacing appliances and furniture when necessary. If you want to use a lettings agent to find tenants and manage the property for you that will boost costs even further. For a full management service expect to pay between 12% and 15% of your rent each month.
Before you invest in property, it’s also important to think about the potential challenges you may face.
A major risk for property investors is house price falls – especially if you need to sell up. Tenant demand could vary over time too.
You will invariably have some periods between tenancies where your property sits empty, however your mortgage will still need to be paid. You may also experience problems with tenants paying rent or damage to your property.
If interest rates increase the cost of buy-to-let mortgages will go up. Even if you have a fixed-rate mortgage, you could still face higher costs when you remortgage.
While buy to let is a popular investment, it’s also a hands-on one. You’ll need to commit to maintaining the property and meet all the legal responsibilities of being a landlord, for example ensuring it meets safety standards.
You will also need to choose your property wisely to ensure you get a steady supply of reliable tenants. However, with the right property it could still be a good investment. If you want to find out whether it’s an option for you, or learn more about how buy-to-let mortgages work, talk to a mortgage adviser.
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