What is a buy-to-let mortgage and how do I get one?

With renting now officially cheaper than buying, the demand for rental properties is particularly high, which makes becoming a landlord for the very first time right now a particularly great move.

Becoming a landlord unlocks a long list of advantages. From the relatively high initial returns and the additional profit to be made from capital growth in the future to the security, flexibility and control that owning an asset of this nature offers, there are many reasons to get onto the buy-to-let (BTL) ladder.

Making your move into the buy-to-let industry however can be a little daunting, with the property buying and selling process more complicated and stressful than ever. Obtaining a buy-to-let mortgage can provide the access you need to purchase the first property in your portfolio.

Here we delve deeper into the buy-to-let mortgage and reveal how to secure the finance required to become a landlord.

An introduction to buy-to-let mortgages

In short, a buy-to-let mortgage is a mortgage product that allows would-be or existing landlords to purchase properties to start or add to their portfolios.

Buy-to-let mortgages are different from residential mortgages as they pay back only the interest, not the capital required to purchase the property in the first place. This means that at the end of a buy-to-let mortgage product, the landlord will have to settle the capital debt in full to deem the property ‘mortgage free’.

Alternatively, clients can elect to repay lump sums of capital on an interest-only basis. A move that erodes away the mortgage balance over time and puts the client in control, enabling them to repay capital when they can.

In the meantime, these interest-only mortgage repayments are covered by the rental payments made by the tenant. Like any mortgage product, however, it remains the property owner’s responsibility to keep up with the monthly repayments, whether the property is tenanted or not.

Whilst buy-to-let mortgages are usually arranged on an interest-only basis, selected lenders do offer mortgages on a repayment basis where the capital is repaid by the end of the mortgage term.

Why should I take out a buy-to-let mortgage?

BTL mortgages are extremely popular amongst first time landlords looking to enter the market. Just over half of landlords purchased their properties with cash in 2020, which is the lowest number on record.

There are many advantages to using a buy-to-let mortgage, the most obvious being that you don’t have to pay for a property in full when adding to your portfolio. Like a residential mortgage, buy-to-let products require you to put down a deposit to secure the additional finance required to purchase a property.

Whilst buy-to-let mortgage deals with 15% deposits disappeared due to the pandemic, you’ll require a minimum deposit of between 20 and 25%, which is significantly more affordable than purchasing the property with cash.

BTL mortgage rates are also falling, which means you’ll get to take advantage of some great mortgage products with low interest-only monthly repayments.

What are the downsides of a buy-to-let mortgage?

When considering a buy-to-let mortgage, it’s important to weigh up the pros and cons. Buy-to-let mortgages are more suitable for some landlords than others. They’re not as tax-efficient for higher rate taxpayers for instance as, unlike basic rate taxpayers, clients in this category are unable to offset their mortgage interest payments against tax.

Remember that whilst rates are extremely low across interest-only mortgage products at the moment, these interest rates rise over time. This can chip away at the potential profit to be made, and should they rise sufficiently could even exceed your property’s rental income leaving you running at a loss.

With this in mind, it’s not surprising that we recommend longer-term fixed rates. Long term fixed rates make perfect sense for clients who have a medium to long term strategy to consider, ensuring the security of payments for between 5 and 10 years.

Those considering a buy-to-let mortgage also need to be aware of rental voids and maintenance costs. Talking to one of our advisors however, will help you to evaluate the merits of buy-to-let in wealth creation as a serious option.

How do I secure a buy-to-let mortgage?

Securing the finance you need to get onto the buy-to-let property ladder isn’t easy, especially as tougher lending rules take hold. Even after you’ve saved a deposit for your buy-to-let, you’ll undergo several stringent affordability checks to obtain a BTL mortgage.

An assessment every buy-to-let mortgage applicant will face is the interest cover ratio (ICR) stress test. We’ll let Which? explain what this entails:

“A lender’s ICR is the ratio to which a property’s rental income must cover the landlord’s mortgage payments, tested at a representative interest rate (most banks currently use 5.5%). Lenders are required to test at 125%, meaning the projected rental income must be at least 125% of the landlord’s mortgage payments. However, many impose higher levels of around 145%.”

If this isn’t your first time applying for a buy-to-let mortgage, prepare to face stricter criteria. Whilst previously, existing landlords could use their portfolios to evidence profit and loss, lenders will now delve deeper into your portfolio and wider business model before awarding finance.

For further advice on buy-to-let mortgages for first time and portfolio landlords, speak to our experts.

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