There are similarities between standard residential mortgages you would have on your main home and buy-to-let loans. We outline both below.
What’s the same?
Borrowers in both instances put down a deposit and take out a loan on a fixed, tracker or discounted rate of interest, making monthly repayments. Deals will typically be available over two, three and five years, or sometimes longer.
The bigger the deposit – or proportion of equity you have in a property for remortgagers – the more competitive the mortgage rate. Lenders will also consider the borrower’s credit score and affordability when advancing a loan.
At the end of the fixed, tracker or discounted rate term, the mortgage will roll onto the lender’s standard variable rate (SVR) unless the borrower remortgages to a new mortgage deal.
Any mortgage application will be subject to credit checks, so make sure your credit report is in good shape. Use credit reference agencies like Experian, Equifax or TransUnion to check your report
– Laura Howard, editor at Forbes Advisor
What’s different?
However, there are some important differences. Firstly, most buy-to-let lenders will only lend up to a maximum 75% loan-to-value ratio. That means you’ll need a 25% cash deposit for purchase (or the same level of equity in the property for a remortgage).
While some BTL lenders can go up to 80% and even 85% LTV, there is less competition in this sector, and rates can be high. In contrast, for an owner-occupier residential mortgage, borrowers can access loans at up to 95% loan-to-value, with some lenders going higher, up to 100% for first-time buyers.
The interest rates on BTL deals also tend to be higher than equivalent residential deals. Lenders view BTL as riskier, as there is an investment element to the property purchase. Plus you may be relying on rental income to cover some of the mortgage costs.
Lower BTL mortgage rates tend to come with high fees, which we explore in more detail below.
As well as standard affordability checks and credit checks as part of your application, buy-to-let lenders will also ask for information about rental income.
The fees charged on BTL mortgage deals will usually be much higher than those on residential mortgages. The fee is also often a percentage of the loan amount, such as between 2% and 7% in some cases.
Finally, while most lenders won’t allow residential mortgage borrowers to have an interest-only loan, this is more common in the BTL sector. This is because many landlords plan to sell their property (or other properties or assets they own) to repay the debt.
