Quick Navigation
- A buy-to-let mortgage is a specialised loan for purchasing rental properties.
- Key differences from residential mortgages include a higher deposit requirement (usually 25%), higher interest rates, and more stringent eligibility criteria focused on property rental income.
- Investors often prefer interest-only buy-to-let mortgages for maximising cash flow, while repayment mortgages reduce debt over time.
If you’ve just begun your property investing journey, you may be asking what on earth a buy-to-let mortgage is, along with a bunch of other questions about these specialist mortgage products.
If you’ve got a specific question in mind, feel free to use the above links to skip straight to what you’re after. Or work your way down this guide to learn everything you need to know about buy-to-let mortgages. Be sure to also check out our guide on whether buy to let is worth it in 2024?
What’s a Buy To Let Mortgage?
A buy-to-let mortgage is a specialist mortgage product meant for purchasing properties that you intend to let out. In other words, it’s a mortgage for a rental property.
If you want to become a landlord and start renting properties out, you’re going to need BTL mortgages to fund the purchases (there are other methods of course but utilising BTL mortgages allows you to leverage your investment and thus is favoured by most property investors/landlords). Important to add here is that, excluding really niche mortgages for other types of properties, buy-to-let mortgages are the only ones under which you can rent your property out. It is considered mortgage fraud to rent you a property whilst on a residential mortgage.
How Do Buy-To-Let Mortgages Work?
Buy-to-let mortgages are similar to normal mortgages in how the principles work – you provide a deposit on the house, the lender gives you the rest as a loan and you pay them interest on it. However, there are some key differences:
- Deposit – whereas a residential mortgage requires a minimum of a 5% deposit, buy-to-let mortgages require at least 25%, although this can vary depending on the state of the economy. During growth phases, you may be able to deposit 15-20%. However, during recessions, lenders may bump this up to 30%.
- Interest Rates – Interest rates for buy-to-let mortgages are often higher than residential mortgages.
- Fees – The fees that lenders charge such as a mortgage arrangement fee are often higher. This is due to the lenders carrying out more checks on the property as BTLs are considered higher risk than residential properties.
- Repayment – whereas residential mortgages are most often repayment types (meaning that you pay off your loan and the interest on it), BTL mortgages are interest-only (you do not pay off the initial loan). BTL repayment mortgages are available but they’re not very popular as investors prefer to minimise their monthly payments in order to boost cash flow.
- Eligibility Criteria – there are a lot of differences here so it’s best we split it up into a new section. We’ll dive into these differences next.
What Do I Need For a Buy-To-Let Mortgage?
The eligibility criteria for buy-to-let mortgages are quite different than for residential ones because the lenders focus on the property more so than the borrower – they want to know that the rental income will be able to cover the monthly mortgage payments. This isn’t to say that they don’t look at you because they do but the property itself and its potential rental income are larger factors.
We covered the criteria in more detail in our ‘step-by-step investment property buying guide’ so we’ll just quickly summarise them here; they are:
- Rental Coverage – this refers to how many times the rent can cover the monthly payments. Most lenders will require rental coverage of at least 125%. So, for example, if your monthly mortgage repayments are £500 a month, you will require a rental income of at least £625.
- Your wage – you need to earn at least £25,000
- Do you own a property? – lenders prefer to see that you own your house as it shows that you have some knowledge of the purchasing process and that you’re in a stable situation.
- Credit score – a good credit score is vital for mortgages.
- Your age – most lenders will have a limit on how old you can be, this is usually around 75 years. Other lenders may also have minimum age criteria.
The Key to Successful Investments
Interest Only vs Repayment BTL Mortgages
I mentioned earlier that the majority of property investors prefer interest-only buy-to-let mortgages because the monthly payments are lower. However, this may not be the best approach for you and your property investing strategy so let’s explore the differences between interest-only and repayment mortgages.
| Interest Only | Repayment | |
|---|---|---|
| Monthly Payments (for £100k property) | £293.12 @ 4.69% | £392.31 @ 4.69% |
| End of Term Loan Amount Remaining (after 25-30 years) | £75,000 | £0 |
| Best For | Interest only BTL mortgages are best for investors looking to maximise their cash flow. They’re not concerned with paying off the initial amount because they believe that the property will rise in value over the term and inflation will depreciate the loan amount at the same time. At the end of the term, they will either get another mortgage or pay off the loan which should be worth a lot less by then. | Repayment BTL mortgages are best for investors who want to reduce the amount of debt that they’re taking on. Whilst this reduces the monthly income from the property, it will over-time reduce the monthly mortgage payments until the property is fully paid-off. It’s common for investors/landlords to initially go for interest-only mortgages and then switch to repayments once they’re no longer interested in adding more properties to their portfolio. |
As you can see, there are upsides and downfalls to each type of mortgage – which you prefer comes down to what your goals are – would you rather increase your cash flow and grow your property portfolio or reduce your debt?
Buy To Let Mortgage Pros and Cons
Now that we’ve covered the differences between interest-only and repayment mortgages, let’s look at the pros and cons of using buy-to-let mortgages to purchase a rental property as opposed to using other funding methods, such as cash.
| Pros | Cons |
|---|---|
| It allows you to leverage your property investment since you only have to deposit 25%. Therefore, if the property value were to rise by 4%, that would represent a 16% gain on your investment capital. | Your monthly income will be less than what it would be if you were to purchase using cash. |
| They make property investment more accessible as you do not require the cash for the entire value of the property. | There are criteria that you and the property have to meet in order to receive the lending. Therefore, using a BTL mortgage may not be possible for everyone either due to the property or their personal situation. |
| Instead of purchasing one property with cash, you can split that into 3-4 properties to diversify your portfolio. | If the property is void, you will need to cover the payments yourself. |
Final Thoughts
Hopefully, this buy-to-let mortgage guide has helped you to understand what buy-to-let mortgages are, how they work and whether you wish to use one to purchase your rental property. It’s important to consider what your goals are and whether you prioritise cash flow or debt reduction. If you’re just starting out and wish to build a property portfolio, it’s generally recommended that you opt for an interest-only mortgage to maximise your rental profit.
Check out our recommended buy-to-let mortgage broker Lendlord.
Recommended Finance Options:
Victor Sterling
Hi, my name’s Victor - I’ve been investing in property for three years now, with my preferred strategies being buy-to-let, BRR and house flips. My goal with Amateur Landlord is simple - to provide beginners with easy-to-follow resources that simply weren’t around when I started, and to offer these for free and without ads.