Buy To Let Mortgages – GMC Finance

Buy-to-let mortgages

Save money on interest and fees with the right buy-to-let mortgage

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While mortgages don’t qualify as a specific product, explore and compare buy-
to-let mortgage options to discover the most suitable deal for your needs.

What is a buy-to-let mortgage?

A buy-to-let mortgage is designed for individuals looking to purchase a property with the intention of renting it out instead of residing in it themselves. Although the fundamental workings of mortgages for rental properties mirror those of standard residential mortgages, there are notable distinctions.

Buy-to-let mortgages typically require a larger upfront deposit compared to residential mortgages, and the interest rates associated with them are generally higher.

Choosing a buy to let mortgage

Who can get a buy-to-let mortgage?

Opting for a buy-to-let mortgage can be an excellent choice for individuals venturing into the rental property market. Whether you’re embarking on your initial journey into property management or expanding an existing portfolio of rental properties, a well-suited buy-to-let mortgage has the potential to unlock lucrative investment opportunities.
Securing eligibility for a buy-to-let mortgage may require meeting stringent criteria, as these loans are often deemed higher risk by many lenders.

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

A buy-to-let mortgage usually requires a significantly higher minimum deposit compared to a residential mortgage. While the specific amount varies by lenders, typically, a buy-to-let deposit must be at least 20% to 25% of the property’s value, which is double the usual deposit for a residential mortgage. In certain cases, certain buy-to-let mortgage providers may even demand a deposit as high as 40% for their buy-to-let deals.
Using a £250,000 property as an example, you would need to contribute an amount ranging from £50,000 (20%) to £100,000 (40%) of your own funds.

How do buy-to-let mortgages work?

1 .Collect your deposit and organize it.

A larger initial deposit reduces the required borrowing amount, providing increased financial security for both you and your lender. With a higher deposit, the risk of payment default is minimized, offering greater protection, especially during periods of property vacancy or potential rent non-payment by tenants.

2 .Choose what type of mortgage is best for you

Many buy-to-let investors typically choose an interest-only mortgage, enabling them to make reduced monthly payments that can be offset by the rental income generated from their property.

3 .Repay the entire loan amount upon the conclusion of the mortgage term.

An interest-only mortgage requires you to settle the remaining balance at the conclusion of your mortgage term. Numerous buy-to-let investors opt to utilize their ISA savings or liquidate their rental property to repay the initial debt.

What is the maximum amount I can borrow for a buy-to-let mortgage?

The potential borrowing capacity through a buy-to-let mortgage is contingent upon the anticipated rental income. Generally, lenders prefer the rental income to exceed the mortgage by 20-30%. To estimate potential rental earnings from a property, conduct online research or consult with a letting agent.

What are the borrowing costs associated with a buy-to-let mortgage?

The interest rate you’ll be offered dependson several factors, including:

Individuals with an outstanding credit history typically qualify for the most favorable buy-to-let mortgage rates.
The aggregate mortgage sum
The mortgage option you choose: fixed-rate or variable.

Buy-to-let mortgage types

You’ll need to decide whether you want an interest-only or repayment mortgage.

Interest-only mortgage. You just pay the interest – keeping your monthly payments lower than a repayment mortgage – but you’ll have to pay off the capital in a lump sum at the end. Most people do this by selling the property on at a profit, although if house prices fall it could be worth less than you paid for it. You’ll need to make sure you have a Plan B to pay off the remaining debt just in case.

Repayment mortgage. With this type of mortgage, you pay off both the interest and capital each month. Your payments will be higher than an interest-only mortgage, so it’s only suitable if you’re able to charge a high rent to cover it. The upside is you’ll own the property at the end of the mortgage term, so you can either continue renting it out and keep all the income, or sell it and keep the full sale amount.

Once you’ve decided on repayment or interest-only, you’ll then need to consider whether you want a fixed or variable rate mortgage.

Should I get a fixed or variable interest rate?

Whether you get a fixed or variable rate will depend on your personal circumstances and preferences.
Variable rate mortgage: your payments could go up or down as interest rates change. There are different types on offer:

Standard variable mortgage – the lender decides on a rate and can change it at any time.
Discount variable mortgage – offers a discount on the lender’s standard variable rate for a particular period.
Tracker mortgage – follows the Bank of England’s base rate and goes up or down in line with how the base rate changes. If interest rates change, so will your monthly mortgage payments.
Fixed-rate mortgage – the interest rate and your monthly payments will remain the same for an agreed length of time. A fixed-rate mortgage is usually fixed for two, three or five years, but other terms are available. Typically, the longer the fixed period, the higher the level of interest. At the end of the deal, you’ll usually be switched to your lender’s standard rate of interest unless you remortgage.

Am I eligible for a buy-to-let mortgage?

To be eligible for a buy-to-let mortgage, you must fit specific criteria. While this varies among lenders, the following usually applies for most buy-to-let mortgages:

Age: you must be over 21 years old. Lenders also tend to have an upper age limit – normally you can’t be older than 70 or 75 when the mortgage term comes to an end.

Other properties: you’ll usually need to either own your own home outright or have an existing mortgage on it. In some cases, you’ll only be allowed a buy-to-let mortgage on a property that has a lower value than your residential property.

Credit history: lenders will expect you to have a good credit history and proof that you’re a reliable borrower. If your credit score is less than perfect, you might want to build it up first to give you the best chance of acceptance.

Minimum income: some lenders may want you to earn a minimum amount per year, as a safeguard for covering your mortgage repayments (£25,000 is standard) – this is often the case for first time buy-to-let borrowers.

Minimum deposit: it’s usually around 25%, but some lenders may ask for a larger deposit – sometimes as much as 40%.

Rental income: lenders want to see a monthly rental income that covers more than your mortgage repayments – typically 25%-30% above.

Find out more about mortgage eligibility

When considering mortgage affordability, it’s important to know that your home or property may be repossessed if you don’t keep up with your mortgage repayments.

Buy-to-let mortgages and tax

When you buy a property through buy-to-let, there’s a few things you need to know about tax.

As well as the standard stamp duty (or equivalent) you’ll need to pay, buy-to-let means paying an extra 3% of the purchase price.

You’ll also need to pay income tax on the rental income you make, over and above your annual capital gains tax exemption. This won’t usually apply for periods you lived in the property as your main residence. You are, however, entitled to some tax relief for costs related to the property.

Finally, if you decide to sell up, you’ll also need to pay capital gains tax on any profit you might make.

How can I get the best buy-to-let mortgage deal?

Here’s a few tips to help your find the best buy-to-let mortgage deal to suit your needs:

Check your credit score – the best buy-to-let mortgage rates are typically offered to those with an excellent credit rating. Find out what you can do to improve your credit score and get a better mortgage deal.
Consider which type of mortgage works best for you – a fixed-rate mortgage is easier to budget as you know exactly how much your monthly repayments will be. A variable rate, like a tracker mortgage, can go up or down but may work out cheaper in the long run.
Check the mortgage fees – a hefty early repayment charge could have a big impact on the cost of your mortgage. Something to consider if you might want to leave the deal early.

How do buy-to-let mortgages work?

Follow these steps to apply for a buy-to-let mortgage:

How do I get a buy-to-let mortgage?

Use our buy-to-let comparison service to find out what mortgages are available across the market. If you need help to find the right deal, speak to a mortgage adviser or broker. We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice.
Get a mortgage agreement in principle. This will give you an idea of how much you can borrow
Once you’ve had an offer accepted on a property you want to buy, you can begin the full mortgage application process.

About London & Country Mortgages Ltd (L&C)

London & Country Mortgages Ltd (L&C) are a multi-award-winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
L&C are not part of Compare The Market Limited. Compare The Market receive a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria
L&C will not charge you a broker fee should you decide to proceed with a mortgage.

Frequently asked questions

Is a buy-to-let mortgage cheaper than a standard mortgage?

Most buy-to-let mortgages are interest-only, so monthly repayments can be cheaper than a repayment mortgage. However, you’re most likely to need a deposit of at least 20% before you’re able to borrow, and the fees for buy-to-let mortgages also tend to be higher.

Also, the amount you’re able to borrow  is worked out  slightly differently, as it’s based on potential rental income as well as loan-to-value ratio (LTV).

Why can’t I get a residential mortgage and rent out the property?

Residential mortgages usually have a clause that stops you renting out your property to make money, including Airbnb-style rental. Ignoring such a clause could land you in legal trouble as you’ll be committing ‘mortgage fraud’.

As a worst-case scenario, your lender may decide you’re in breach of your mortgage terms and demand the mortgage is repaid immediately or they’ll repossess the property.

The only exception is if you want to rent out your main home for a short period of time. In this case, you can ask your residential mortgage provider if they’ll give you consent to let.

Can family stay in my buy-to-let property?

If you want to rent your property to an immediate family member, you’ll need a regulated buy-to let-mortgage. This is different to a standard buy-to-let mortgage. There aren’t as many lenders who offer this type of loan.

Can I switch my residential mortgage to a buy-to-let mortgage?

Yes, switching from a residential mortgage to a buy-to-let mortgage is quite common. Check with your lender to see if it’s possible.

Should I get a repayment or interest-only buy-to-let mortgage?

Whether the best buy-to-let mortgage for you is interest-only or repayment depends on your financial situation and personal preference.

With a repayment mortgage, you pay off the interest and some of the overall cost of the property each month. At the end of your repayment term, you’ll have paid off both the price of the house – the capital – and the interest on it.

With an interest-only mortgage, you only pay the interest on the loan. This means you’ll need to to pay off the outstanding capital at the end of the term.

Can I afford a buy-to-let mortgage?

There’s a few things to consider when looking at the affordability of a buy-to-let mortgage:

Mortgage costs: your interest rate will vary according to the type of mortgage you choose.
Repair and running costs: you’ll need to keep your property in good order, so will have to pay for repairs and refurbishments when necessary.
Rental income: how much you can borrow will depend on the rental income you’re likely to get. Your lender will have a view, but it’s useful to do your homework around the potential rent you can charge.
Unlet periods: there may be times when your property isn’t rented out. Make sure you have savings or other income to cover those periods, so you don’t risk defaulting on your monthly payments.

Why might a buy-to-let mortgage application be declined?

There are several reasons why your buy-to-let mortgage application could be rejected. Perhaps your projected rental income isn’t enough or you’ve reached your borrowing limit. You may also have a loan-to-value (LTV) ratio that’s considered too high.

What additional fees do I need to pay on a buy-to-let property?

Stamp duty: you have to pay a higher rate of stamp duty on a second property that isn’t your main home. Use our stamp duty calculator to find out more.
Income tax on your rental income: the income you earn through your buy-to-let property will be subject to income tax. However, you’ll qualify for a 20% tax credit.
Maintenance costs: make sure you build in an allowance for maintenance costs.
Landlord insurance: this can include buildings insurance, unoccupied property cover and rental protection insurance.
Letting agency fees: if you use one, a letting agency will charge fees to manage your property.