2. How big a deposit do you need?
Note that buy-to-let mortgages usually require a bigger deposit than residential options.
“Buy-to-let mortgages typically require a larger deposit than residential ones, often 25pc or more of the property’s value. The deposit required is often driven by the anticipated rental income yield. The more deposit you put down, the better the interest rates you may get,” said Adrian Anderson, of mortgage broker Anderson Harris.
3. Interest only vs repayment
You’ll need to make sure you’re clear on the difference between interest and repayment mortgages, and which option would work best for you.
Mr Mendes said: “Most buy-to-let mortgages are interest-only, meaning you only pay the interest each month, keeping repayments lower and maximising rental profits. However, this means the full loan amount is still outstanding at the end of the mortgage term, so you’ll need a clear exit strategy, such as selling the property or remortgaging.
“A repayment mortgage, on the other hand, gradually pays off both interest and capital, ensuring full ownership by the end of the term – but with higher monthly costs that may reduce your net rental income. Choosing between the two depends on your financial strategy and how long you plan to keep the property.”
4. Tax implications
As a landlord, there are three main taxes which you may be liable for:
- Stamp duty: There is a minimum 5pc stamp duty land tax surcharge if your buy-to-let purchase results in you owning more than one property. The tax payable is 10pc on a property’s value between £250,000 and £925,000, rising to 15pc on the value up to £1.5m and 17pc over this threshold. The stamp duty bill for a £275,000 buy-to-let property would be £17,500.
- Income tax: Rental income is taxable, payable at your 20pc, 40pc or 45pc tax rate – however, there are plans to increase these rates by 2 percentage points from April 2027, as announced at last month’s Budget. You can deduct certain expenses, such as landlord insurance or energy bills, or make use of the £1,000 tax-free property income allowance. Mortgage interest tax relief is no longer fully deductible, and is instead limited to a 20pc tax credit. You’ll need to declare your rental income via self-assessment.
- Capital gains tax: If you sell a property that is not your home for a profit, capital gains tax is likely to apply above a £3,000 annual exemption. This is charged at 18pc for basic-rate taxpayers and 24pc for those who earn more than £50,270.
5. Hidden costs
There are other costs you’ll need to factor in, Mr Mendes warns buyers.
“Buy-to-let mortgages come with various fees, including arrangement fees, valuation costs, legal fees and early repayment charges. Many lenders charge an arrangement fee – this can be a flat fee or a percentage of the loan amount, which could add thousands to your costs.
“On top of that, landlords must budget for landlord insurance, maintenance, property management fees, letting agent costs and potential void periods when there’s no tenant in place. Ensuring the rental yield outweighs all these expenses is key to running a profitable buy-to-let investment.”