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How is buy-to-let different from a regular mortgage?

Updated: Mar 2, 2021

Buy-to-let and standard mortgages are similar in lots of ways. For both, lenders want to see evidence their money will be paid back. But there are a few crucial differences – a standard mortgage is more about what you can afford, whereas a buy-to-let mortgage is about how much rent you can charge for the property.

For almost all buy-to-let mortgages:

1. Your mortgage payments will usually be interest-only, with a bill for the total loan due at the end of your term.

Like standard mortgages, you have a choice of mortgage type – repayment or interest. If you choose a repayment mortgage, it will be repaid in full at the end of the term.

However, most landlords opt to take interest-only mortgages. If you do, that means your monthly payments will be lower, but they won’t make a dent in the loan itself. That means at the end of the loan term, you’ll still owe the same amount you borrowed at the beginning.

Usually, if the property is on an interest only mortgage, buy-to-let landlords end up selling their property at the end of their term. Hopefully, its value will have gone up, so they pay off their loan in one go and pocket the profit (after paying their capital gains tax, of course).

Otherwise, you can choose a repayment mortgage – there’s nothing to stop you doing that.

It’s important you get professional advice when deciding whether buy-to-let is worth it for you, as there are lots of legislation and tax considerations. An accountant can help you make the right decision.

2. What you can borrow is based less on what you earn, and more on the rent you charge tenants.

So before they offer you a loan, lenders will check similar properties in your area to see what the demand is like. If there’s a similar property that’s been on the market for quite a while, or lots of available properties waiting for tenants, that might affect their valuation of the rental income. Lenders want to make sure your rent will cover at least 125–145% of the insurance you pay, also known as Insurance Cover Ratio (ICR).

If you have a higher salary, some lenders will take that into account and lower their ICR requirements – the idea being you’d be able to cover any rental shortfalls from your own income.

Before you approach lenders, you might like to do some market research of your own. Talk to letting agents in the area and look at listings to find out how much similar properties are being rented out for.

That doesn’t mean your salary isn’t important. You’ll probably need to earn more than £25,000 a year, and show you’ll still be able to make payments if interest rates rose… or the property sat empty for a few months.

If you’re a portfolio landlord (ie you let out 4 or more properties), lenders will look at your finances with more scrutiny, and how each one of your properties is performing.

3. You need a bigger deposit than a standard mortgage, usually 25% or higher.

That’s because lenders see buy-to-let loans as a bigger risk. So for a £230,000 property (the average house price in the UK in 2020) you would need a deposit of at least £57,500.

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