Buy-to-let mortgage

A buy to let mortgage is different to your regular mortgage and landlords must declare they are buying a property to rent out when applying for their mortgage. Here we look at how buy- to-let mortgages work and if they are right for you.

• What is a buy to let mortgage?
• How do buy-to-let mortgages work?
• Interest only buy to let mortgage
• HMO mortgage

What is a buy to let mortgage?

A buy to let mortgage is a loan taken out for a property the owner wants to rent out to tenants, rather than live in themselves. 

But to let properties have different circumstances than a property the landlord occupies, so it's important to tell the mortgage provider you are planning to rent the home out. You can also get different terms and most likely will be offered an interest only mortgage which will give you lower monthly repayments than a traditional capital repayment deal. This means more of your rental income will go to you each month.

How do buy-to-let mortgages work?

Buy to let mortgages work much the same way as other mortgages in that they can have variable or fixed rate interest rates. The difference is that the majority of buy to let mortgages offered are interest only - so the lender will only pay the monthly interest until the end of the term when the full amount is due. 

To get a buy to let mortgage you will need a bigger deposit than usual, with most lenders asking for at least 25%. This compares to a deposit from as little as 5% for standard mortgages. Why is the deposit so much higher? Lenders want to know their investment is safe because they are not receiving anything towards the value of the mortgage during its term. A higher deposit protects them in case the borrower can't keep up with repayments and the property is repossessed. Even if the property market plunges, having a deposit this high should mean the mortgage provider doesn't make a loss. 

Lenders will also look at the buy to let applicant's age, income and credit history, plus the amount of rent the applicant is likely to receive each month. They will want to see rental income is considerably higher than the mortgage payment, often about 30%.

A buy to let has more to it than simply renting out a home and taking the money. Tax will need to be paid on rental income so you may have to fill in a yearly self assessment and add the income onto any other earnings you already make, which could push you into a higher tax band. Or if you set up a larger scale buy to let operation and decide to start a limited company, you will have other tax obligations. 

There are also tax implications when it comes to selling the property, such as capital gains tax on any profit if the value rises. 

It is possible to get a capital repayment mortgage for a buy to let investment, but these are more scarce than interest only loans. The benefit of a capital repayment mortgage is that you chip away at the loan as well as the interest each month, so by the end of the term you'll have paid off the entire loan and own the property outright. 

Interest only mortgages leave the borrower needing to repay the mortgage in full at the end of the term which could mean selling the property if they have not put money aside or have another source of capital. Remember property prices can go down, or may not rise as much as hoped. But the benefit is the landlord has more income coming in each month so if the property needed maintenance they could use the extra rental income to fund this. Or it could be used to pay tax on the earnings from the home.

To summarise, how buy to let mortgages work:

• Can be variable or fixed rate interest
• Usually interest only payments
• Usually need a deposit of 25% or more
• Must show rental income is higher than interest payments
• Deals will depend on age, income and credit rating
• You'll be liable for tax on rent and when selling
• Capital repayment mortgages are available but less common than interest only.

 

Interest only buy to let mortgage

Interest only buy to let mortgages are the most common mortgage for property investors. While they are harder to come by for home buyers who want to live in their property, they make financial sense for landlords who may need access to cash throughout the term to maintain the home and pay tax on rental income. 

As the name suggests, an interest only buy to let mortgage charges the borrower the monthly interest on the loan, but they don’t make any payments towards the loan itself. At the end of the term the entire mortgage will be owed in a lump sum. This can make it more expensive than a capital repayment mortgage in the long run because interest is always charged on the entire loan, rather than a loan that becomes smaller and smaller each month. 

Interest rates for a buy to let mortgage are usually higher than standard mortgages when comparing like for like. 

But an interest only buy to let mortgage frees up capital in the short term to pay fees, maintenance, home insurance, tax, extra costs when the property is empty, and potentially provide a small income. 

Interest only buy to let mortgage pros and cons:

• Frees up capital to pay property expenses and tax
• More expensive overall than a capital repayment mortgage
• Generally higher interest rates than standard mortgages
• Can be a good long-term investment if property prices surge.
• Need a secure way to repay the mortgage at the end of the term – sometimes property prices go down!

To find out rates for an interest only or capital repayment mortgage you can compare prices via our partners.

 

HMO mortgage

A HMO mortgage is a specialist loan for investors who wish to rent their properties out to three or more unrelated tenants – that’s what defines a House of Multiple Occupancy (HMO) in the UK. If you’re planning on renting out a property as an HMO you will need an HMO mortgage rather than a standard buy to let which only covers single-household tenancies. 

Not declaring your buy to let as an HMO could lead your mortgage provider to take legal action. 

HMO landlords furnish properties and often pay some or all the utility bills. They must also follow stricter regulations such as ensuring there are enough bathrooms for the number of tenants, bedrooms meet size requirements, bedrooms are fitted with locks, and potentially be responsible for council tax payments.

Landlords must hold a HMO licence and can be fined if they are not registered. 

Although it is more complicated and expensive to set up as a HMO landlord, the amount of rental income can be staggering when compared to renting to a single household. 

A four bedroom house could cost £1,500 a month to rent to a family, but if each room was charged at £600 a month that’s £2,400 a month. Many landlords also convert a spare reception room into an extra bedroom bringing in even more revenue. 

There are options when it comes to HMO mortgages, with fixed, variable, tracker, interest only and capital repayment mortgages all available.

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