Buy-to-let vs. residential mortgages: What’s the difference?

With the vast majority of UK landlords funding at least part of their buy-to-let portfolio with a mortgage, the buy-to-let mortgage remains a popular option for those looking to profit from the property market during 2023 and beyond. Even as interest rates remain high, the choice of buy-to-let mortgage deals is growing. In fact, Which? reported that the number of buy-to-let mortgages available increased from 988 to 1,769 in just a two-month period.

While often mentioned in the same breath however, there are several key differences between the buy-to-let mortgage and the residential mortgage. Read on to discover how they compare to find the mortgage product that works for you.

Buy-to-live, not buy-to-let

The main difference between a residential and buy-to-let mortgage is that with a residential mortgage, the lender intends to use the finance to purchase a property where they will live. In comparison, a buy-to-let mortgage is for the funding of a property in which other people (i.e. your tenants) will live.

It’s cheaper to get a residential deal

Well interest rates are of course sky high at the moment due to ongoing BoE base rate hikes, purchasing with a residential mortgage is generally much cheaper than buying a property with a buy-to-let product. Lenders consider buy-to-let properties as higher risk when compared with residential purchases, predominantly because there are more parties involved in paying the rent that will cover the monthly mortgage repayments.

While 90%, 95% and even 100% mortgages are becoming increasingly accessible to home buyers, as a landlord, you’ll need a higher deposit to offset the risks mentioned above. Here PropertyHub explains the minimum deposit required when purchasing a rental with a buy-to-let mortgage:

“Most Buy-to-Let mortgages are a loan of 75% of the value of the property. That means the minimum deposit for a Buy-to-Let property is? It’s generally around 25% of the purchase price of the property. So if your Buy-to-Let property is £100,000, you’d need a £25,000* deposit if you’re buying with a 75% LTV mortgage. *This is excluding any additional fees which might be payable.”

You can earn income from your property

While residential mortgages make it very difficult indeed to earn money from your property – most mortgages require consent from the lender before you can let or even sublet part of the home – with a buy-to-let mortgage, there are no such restrictions.

Buy-to-let products are specifically designed with landlords in mind. They provide consent to let as standard so you can earn the rental income you need to make your property portfolio a success.

There’s different insurance requirements

Insuring your property as a landlord differs drastically from insuring it against any damage you may inflict on your property as a homeowner. With this in mind, you’ll need a different, and often more comprehensive, level of insurance as a UK landlord to ensure coverage for any damage caused by your tenants.

Want to know more about how buy-to-let and residential mortgages differ, and which product is the most suitable option for your property purchase? Contact our mortgage specialists today for further support.