There are some key differences between buy-to-let and standard ‘residential’ mortgages:
Interest-only: Most buy-to-let mortgages are taken out on an interest-only basis. So, you’ll only pay the interest charged on your mortgage. This means the repayments won’t be gradually whittling away your original loan (the ‘capital’).
As with any other interest-only mortgage, you’ll need a plan to repay the mortgage at the end of the term – for example, by selling the property, or using savings to pay off the debt.
Proof of rental income: Alongside some of the standard credit checks required, a buy-to-let lender will ask for proof of how much rental income you expect to receive from the property.
The rent should cover between 125% and 145% of your mortgage interest, under what’s known as ‘rental cover’. It means the monthly rent must be greater than your monthly mortgage payments. For example, if the monthly interest payment is £1,000, the rent you receive must amount to at least £1,250 a month. However, criteria varies between lenders.
Rental cover will also be ‘stress tested’ against higher interest rates than attached to the mortgage deal (typically around 2% above) when it comes to assessing your affordability. Again, specific tests will vary according to the lender.
Higher costs: Arrangement fees for a buy-to-let mortgage usually cost more. They can be anywhere between 2% and, in some cases, up to 5% or 6% of the loan amount. This can add up to a huge sum which should be factored into your costs.
Interest rates on buy-to-let mortgages are also typically higher than for a standard residential mortgage. And buy-to-let mortgage costs have also been rising steadily over the past two years as the Bank of England has increased interest rates. That said, rents have been rising steeply too, which has mitigated some of the resulting loss in profits.
Upfront costs are higher for buy-to-let, too. You’ll typically need to stump up a deposit of at least 25% of the property value. And, just as with standard mortgages, the cheapest rates are for borrowers with deposits of at least 40%.
Property portfolio: If you’re an experienced investor with a portfolio of properties that you rent, you may be asked for details of these by a lender, including a business plan. However, if you’re using a mortgage broker this is the kind of thing they can help with, so it needn’t be a headache.
