A Guide to Buy-to-Let Mortgages in 2024

May 3, 2024
A Guide to Buy-to-Let Mortgages in 2024

The UK buy-to-let (BTL) market comprises around 2.82 million private landlords with over 8.7 million rental properties, valuing the UK buy-to-let market at around £1.7 trillion.

The rental market is booming with a shortage of affordable homes, high house prices and high demand for rental properties!

And despite the ongoing legislation and regulation changes, landlords continue to enter the market and grow their portfolios and wealth.

Purchasing a buy-to-let property can be a great investment, and a buy-to-let mortgage is the most common way to own a property and generate a monthly rental income.

While the process can seem daunting and complicated, here is everything you need to know about buy-to-let mortgages in 2024.

What Is a Buy-to-Let Mortgage, and How Do They Work?

If you’re purchasing a property to rent out to tenants, unless you have the funds to buy the property outright, you will need a buy-to-let mortgage.

A buy-to-let mortgage is a mortgage designed specifically for landlords. It’s a type of property loan that allows investors to purchase a property that can be rented out to tenants for a profit. A buy-to-let mortgage can be used on various property types, such as houses and apartments.

What Types of Buy-to-Let Mortgages Are There?

Like a residential mortgage, a few options are available for a buy-to-let mortgage, such as a fixed, variable, tracker, discount or capped interest rate.

Interest-Only Buy-to-Let Mortgages

Most buy-to-let mortgages are interest only. That means the monthly repayments only cover the interest on the loan. And the amount you borrowed won’t be paid off unless you sell the property or pay off the loan another way.

Repayment Buy-to-Let Mortgage

With a repayment mortgage, you pay off the full loan amount by the end of the term. Once the mortgage has been paid, you can either:

  • Keep hold of the property and continue renting it out, keeping all the rental income.
  • Sell the property and keep the full sale amount.

The monthly payments for a repayment mortgage are more than an interest-only mortgage, and are only suitable if the rental income can cover the cost.

‍How Is a Buy-to-Let Mortgage Different to a Residential Mortgage?

A typical residential mortgage requires the homeowner to repay the monthly loan and interest. However, with buy-to-let mortgages, most landlords can secure an interest-only mortgage whereby they only pay the interest on the loan amount each month – a considerably lower payment than a residential mortgage.

A Guide to Buy-to-Let Mortgages in 2022

What Is the Difference Between Buy-to-Let and Consent to Let?

If you want to let out your home on a short-term basis, you’ll need permission from your residential mortgage lender. This is known as consent to let.

Many lenders require you to take out a buy-to-let mortgage, as there are certain risks that come with renting out a property. For example, you may be unable to pay the mortgage if your tenants stop paying their rent or if the property is vacant.

‍What Deposit Is Needed on a Buy-to-Let Mortgage?

The typical maximum loan to value (LTV) ratio for a buy-to-let mortgage is 75%. However, there are some specialist lenders that will offer 80% and even 85% under the right circumstances. This means that you will need a deposit of at least 15% and, in some cases, even more than that.

‍How Much Can I Borrow with a Buy-to-Let Mortgage?

Mortgage lenders will generally look at the rental income you expect to generate from the property when determining how much you can borrow. The higher the rental income, the more you can borrow. As a general rule of thumb, the rental income will need to cover between 125% and 145% of your mortgage interest.

Your deposit will also affect how much the lender will lend to you, which will impact the loan-to-value. For example, if you want to borrow £150,000 against a property valued at £200,000, this is a loan-to-value of 75%. So you would put down a 25% deposit, which in this case would be £50,000.

Depending on the specific lender’s criteria, there are also other factors that need to be considered, such as your credit file, income and outgoings (affordability).

To determine how much you’ll be allowed to borrow, start by establishing how much deposit you can afford and how much rent the property is likely to generate. You can do this by comparing similar properties in the area and speaking to local estate agents.

‍How Long Are Buy-to-Let Mortgages?

Buy-to-let mortgages typically have a term of 25 years. At the end of the mortgage term, you’ll need to pay off the remaining balance, if there is one. This is usually paid by selling the investment property. In most cases, the property's value will have increased to cover the remaining balance of the mortgage and provide you with a profit.

‍How Long Does It Take to Get a Buy-to-Let Mortgage?

While every case is unique, it takes around 4-6 weeks to receive a mortgage offer. Completion of the offer can vary depending on the duration of the property purchase. For example, if the property is part of a chain, this can typically take 12 weeks to complete.

‍Who Is Eligible for a Buy-to-Let Mortgage?

Each lender has its own specific criteria. But landlords will typically need to:

  • Have an existing annual income of at least £25,000 (especially if you’re a first-time landlord).
  • Have the deposit required to take out the loan.
  • Be an existing homeowner paying off a mortgage.
  • Be able to pay off the buy-to-let mortgage by the age of 75.
  • Have a good credit record.
  • Prove you can afford to maintain the property.
A Guide to Buy-to-Let Mortgages in 2022

What if I Can’t Get a Buy-to-Let Mortgage on an Unmortgageable Property?

If you find a property that requires work, such as a derelict building or a property at auction, it’ll most likely be unmortgageable. That means you won’t be able to take out a buy-to-let mortgage to purchase it.

However, you can still purchase the property by taking out a bridging loan.

Many investors use bridging loans and buy-to-let mortgages together to start or scale their portfolios. When done right, the strategy allows investors to buy a property with a bridging loan, refurbish it, rent it out and then refinance it with a buy-to-let mortgage.

This is more than just a great way to purchase below market value properties. It also means you can recycle the initial cash you invested while earning a monthly rent income – and then continue to buy more properties.

>> Learn more about the BRRR Strategy here.  

‍What Are the Costs Associated with a Buy-to-Let Mortgage?

Other than the initial deposit required to secure a buy-to-let mortgage, there are also some other costs to consider.

Broker fees

Some brokers do not charge a fee. But others charge up to 4% of the loan amount for arranging the mortgage for you. This depends on the complexity of the type of product you need.

Lender fees

Every lender is different. Some offer fee-free products, others charge a non-refundable fixed fee of around £500, and certain lenders charge a percentage of the loan amount.

Valuation fees

Some mortgage products offer a free valuation report. This depends on the property’s value, type, location and mortgage product.

Mortgage exit fees

If you’re tied into a buy-to-let mortgage and want to exit the mortgage early, there may be additional costs. These are known as early repayment charges (ERCs). Again, some lenders require you to pay these while others don’t.

Legal costs

You’ll need a solicitor to carry out the legal checks for the property, and their fees can vary based on the type of property. Occasionally, lenders will include the legal costs in the mortgage offer as an incentive for you to take their mortgage deal over other lenders.

Stamp duty

A stamp duty surcharge applies to all buy-to-let landlords. This can vary between 3% and 15% depending on the property's purchase price and location.

Ongoing costs

In addition to the standard mortgage and legal fees, there will also be ongoing costs to consider. These include landlord insurance, letting agent fees and income tax on your rental earnings.

‍What Documents Do You Need for a Buy-to-Let Mortgage?

In general, most mortgage lenders require you to provide:

  • Proof of income with your last three months' bank statements.
  • A mortgage statement for your existing property.
  • Proof of expected rental income.
  • Proof of deposit.
  • Proof of ID.
  • Proof of address.
  • Current or most recent P60.
  • Your last two years of tax returns (if you’re self-employed).

How to Get a Buy-to-Let Mortgage?

You can get a buy-to-let mortgage yourself by going to a high-street lender and completing the application process. However, many high-street lenders won’t be able to offer you the competitive rates and terms that a specialist lender will.

Most specialist lenders are only available to brokers. So it’s always worth it to speak to an experienced broker to see the best deal for you and your circumstances.

The broker will also take care of the application process for you and provide all the relevant information to improve your chances of getting accepted for a buy-to-let mortgage. This is particularly important if you’re a first-time landlord.

‍How Does the Buy-to-Let Mortgage Process Work?

Step 1: Speak to your broker about the property you have in mind and the available budget for your investment. They will provide you with a fact-find document for you to complete.  

Step 2: Once you complete and return the fact-find document, your broker will research the whole of the market, source suitable lenders and rates to suit your circumstances, and discuss these options with you.

Step 3: Once you’ve selected the right product for you, your broker will apply for a Decision in Principle (DIP) – also known as an Agreement in Principle (AIP) – from the lender. Some lenders will require you to complete further documentation, and your broker will help you with this.

Step 4: After a DIP is agreed upon, you and your broker can complete the lender application. The lender will then instruct a valuation on the property by a surveyor to confirm the value of the property, the monthly rental income and the condition of the property.

Step 5: After the lender has analysed the surveyor report, providing everything is as it should be, the lender will then process your application and issue the formal mortgage offer outlining the terms and conditions of the loan. If you’re happy with the offer, you can instruct your solicitors to complete the legal requirements.

Step 6: Once the legal requirements are complete, you can agree on a date for the exchange of contracts. After the contracts are exchanged, the deposit is then paid and you become responsible for paying for the property. At this point, you can arrange a completion date.  

Step 7: Upon completion, you become the new legal owner of the property!

Find out how much you could borrow on a buy-to-let mortgage with Ramsay & White

At Ramsay & White, our experienced and award-winning property finance advisors can access market-leading buy-to-let mortgage rates, some of which aren’t available to high-street lenders. Whether you’re a first-time landlord, portfolio landlord, foreign investor or ex-pat, we can help!

Secure the best solution for your investment.

Related Resources:

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A Guide to Buy-to-Let Mortgages in 2024

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