Buy-to-Let Mortgages and Must-Knows

Whether a landlord lifestyle appeals to you or you’re looking to build a new career, lots of people find property is a great investment. From one second property to a whole property portfolio, it’s wise to gather the basic information (and then some) about how buy-to-let mortgages and the basics of being a landlord.

Basic practices of buy-to-let

Buy-to-let is a type of investment where you purchase a property to rent out to a tenant. Doing so generates rental income, and you may benefit from the property’s increased value over time. By purchasing a buy-to-let, you become a landlord – which comes with responsibilities and duties.

The buy-to-let market isn’t one to step into lightly. It’s best to be aware of all the ins and outs associated with becoming a landlord. It can be extremely rewarding in the long run, but only if you’re willing to deal with potential complications and downsides. Buy-to-let investments require financial and time commitments, which can directly impact how successful the project is for your pocket.

You don’t just need up-front cash as a property investor. As a landlord, you’re responsible for the property’s:

• Health and safety 

• Fire safety

• Gas safety

• Electrical safety

• Repair work and maintenance

• Paperwork and admin

All of which require the landlord to be active – or to get a letting agent to keep the property ticking away on their behalf.

Before you begin, we have more information on letting your house for the first time.

Buy-to-let mortgages

As you embark on the landlord lifestyle, you’ll first need a property to rent out. To purchase one, you’ll need a buy-to-let mortgage (unless you have the cash to buy the property outright), which is used to finance the property that’s intended to be rented out. If you’re planning to rent out the house you currently live in, you’ll still need a buy-to-let mortgage, even if that means switching from your residential mortgage.

Buy-to-let mortgages tend to be considered a higher risk to lenders, as opposed to standard residential mortgages. As such, there are certain criteria that you’ll be required to meet to be eligible for a buy-to-let mortgage, and these will differ from lender to lender. In general:

• Many lenders have a maximum age requirement – usually 75 but it could be lower.

• You’ll need to maintain a good credit score.

• You may need to provide evidence of income, separate from rental earnings.

• Some lenders may require proof that you already own your own home. 

Interest-only 

Typically, buy-to-let mortgages are interest-only, especially if you’re planning to sell the property at the end of the term. An interest-only mortgage means that the lender allows you to pay the interest on the loan, rather than the capital. This reduces the monthly payment, making it easier to manage the property’s cash flow and cover additional costs.  

Keep in mind that if you sell the property, you’ll need to repay the outstanding mortgage balance and any tax due on capital gains (or profits).  

Repayment 

With a repayment mortgage, you’ll pay interest, plus the capital mortgage balance. By the end of the term, the mortgage will be repaid (provided you don’t change this at a later date).  

Fixed vs variable rate 

Once you’ve decided on an interest-only or repayment mortgage, you can work with your mortgage advisor to decide if you want a fixed rate or variable rate mortgage. 

• Fixed rate: Your mortgage repayments remain the same, regardless of what happens to interest rates in the market. In most cases, you can lock in the same rate for two, three or five years.

• Variable rate: What you pay will depend on what’s happening with interest rates. As the rate changes, your monthly repayment will fluctuate.

• Standard variable rate: A standard variable rate (SVR) tends to follow the Bank of England (BoE) bank rate closely. You’re often moved onto a SVR once your fixed rate term has come to an end (unless you remortgage).

Get to grips with the different types of mortgages in the UK.

How much deposit do you need for a buy-to-let?

Although there’s no hard-and-fast rule for how much deposit you need, it’s fair to say that most lenders will require a larger deposit for a buy-to-let mortgage than for a residential one.

Some lenders may require at least a 25% deposit. But to unlock the more attractive mortgage deals for a buy-to-let, you may need around a 40% deposit. To get an idea of your affordability and potential mortgage deals, chat to one of our Purplebricks Mortgages advisors.

Key takeaways:

• A buy-to-let mortgage is a loan that’s taken out to fund a property that will be rented out to private renters. Usually, you only pay back the interest each month. 

• Landlords have many responsibilities, from keeping the property safe and energy efficient to putting the tenant’s deposit in a protection scheme.

• Don’t forget to budget for tax, insurance and maintenance expenses.

• Using a letting agent can help you stay compliant and manage the tenancy.

Let us help you with your buy-to-let property

Are you ready to start your buy-to-let venture? Talk to the advisors at Purplebricks Mortgages who can help steer you to suitable buy-to-let mortgage deals for your needs and budget. It only takes a quick chat to get started.