How Do Buy-To-Let Mortgages Work?

Investing in property to develop a portfolio is a very different kettle of fish than buying a home for personal use and you’ll find that the process and the rules aren’t entirely the same… so it’s wise to do some research to have a better idea of what to expect.

The good news is that there are financial products out there to help you move forward with this ambition, in the form of buy-to-let (BTL) mortgages.

The majority of these products are available on an interest-only basis, which means that you’ll only pay the interest on the loan each month and none of the capital, so you can minimise monthly outgoings… but you will need to have a plan in place to ensure that either the full loan is paid off or you refinance at the end of the mortgage term.

What deposit is needed for a BTL mortgage?

Typically, in order to secure a BTL mortgage for investment purposes, you’ll need to have a deposit of at least 20 to 25 per cent of the value of the property in question. The bigger your deposit, the better rates you’ll enjoy – in the same way as you would with standard residential mortgages.

During affordability checks, lenders will look at your existing portfolio and your history of buy-to-to let finance, where appropriate.

Interest cover ratios will also be used to calculate how much profit you’re likely to make through rental income. This is the ratio to which the rent must cover your mortgage payments, typically at least 125 per cent of your repayments.

Can I get a BTL mortgage as a first-time buyer?

If you are finding it difficult to get on the property ladder in your preferred location, you may want to think about investing in property somewhere else and renting it out instead.

As a first-time buyer, it’s possible to take out a BTL mortgage but it can be tricky and you may need to have a bigger deposit in order to attract the best rates. Also note that you won’t benefit from stamp duty relief if your first property purchase isn’t one that you’ll be living in yourself.

The trade-off, however, is that you won’t be charged as much as a non-FTB investing in BTL properties and will instead be charged a home mover rate, the same that a non-FTB would be charged for purchasing a home to live in.

Another point to consider is that you will have to pay the entire BTL/second home surcharge if you decide to buy another home to live in while keeping your BTL. 

And it can be difficult to take out a mortgage for your own home, as lenders will look at any debt you have left on the BTL mortgage when you apply for other financial products.

Get in touch

It can be difficult to navigate the landscape of the BTL market so if you’re finding it overwhelming and need some support, get in touch with the BR Needham team today.