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Buy to Let Mortgage (Part 1)

Billy Drury and Oliver Potter talk to us about Buy to Let mortgages.

What is a Buy to Let mortgage and how does it differ from a regular mortgage?

A normal residential mortgage is for somewhere to live, and a Buy to Let mortgage is for somewhere you’re going to rent out, in very simple terms.

There are usually different criteria. A Buy to Let mortgage requires a larger deposit than a standard residential mortgage, and the affordability is based on what you can rent a property out for as opposed to your income.

Sometimes income is taken into account – it just depends on the kind of mortgage we’re looking at – but less so than on a residential mortgage.

What are the eligibility criteria for obtaining a Buy to Let mortgage?

A Buy to Let mortgage tends to require more deposit. You’re looking at a minimum of 20% with some lenders, but more commonly it’s a 25% deposit.

The mortgage is not so much based on income. People are often concerned with the income level they have, but the affordability is mainly based on rental coverage.

There is something called top slicing, where you can use your income as an affordability bump. But most people don’t usually go down that route.

How much deposit is usually required for a Buy to Let mortgage?

The industry standard is 25%. We don’t really get any less than that. Some lenders are dipping their toe in for lower deposits, but 25% is the base.

Obviously, you can put more in if you want to. The more deposit you put in, the better the Loan to Value and the better the rate you’ll get. That means a lower monthly payment.

Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?

Rental coverage is about what you can rent your property out for – or what you’re already receiving at the moment. It needs to cover a certain percentage of the mortgage payment.

Depending on the deal you go, that could be 125% or 145% of the mortgage payment. It also depends on whether you’re a higher or lower rate taxpayer. At the time of recording in April 2025, Buy to Let affordability is a little bit tougher.

That’s why you’ll see deals with lower interest rates but slightly higher product fees at the moment. Generally the lower the rate, the more you can usually afford to borrow, so the lenders make up the difference with a product fee.

Are there any specific fees associated with Buy to Let mortgages?

I view interest rates and arrangement fees as a bit like a seesaw. You either have a lower interest rate with a higher arrangement fee, or a higher rate and lower fee.

The lower the interest rate, the more you can borrow. But that fee tends to be quite chunky – some go up to 7% of the mortgage loan.

Some people don’t have the option. If you’re in a location where the rent is lower, those lower interest rates and higher arrangement fees could be the only way to borrow what you need.

There are also potentially valuation fees and stamp duty if you’re purchasing. As we’re recording in April 2025, stamp duty costs more on Buy to Let than on a regular residential. This is usually a second property, so you’ll pay additional rate stamp duty at 5%.

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Should I choose interest only or repayments on a Buy to Let mortgage?

It completely depends on your goal. The majority of landlords choose interest only as opposed to repayment to make more profit on a monthly basis. When you’re just covering the interest as opposed to actually paying off the loan itself, your payments will be lower, so you’ll have a higher profit margin.

Some people prefer a repayment basis. They like to build up the equity and reduce the loan amount over time. They see the property as a savings pot – they’re slowly paying off the mortgage and will eventually sell or draw equity out of the property. It’s all down to personal preference.

What are the implications of recent tax changes on Buy to Let mortgages?

With regards to stamp duty, that hasn’t really changed for Buy to Let – only for First Time Buyers. The additional rate for Buy to Let has been there for some time and people are still buying and selling properties. We aren’t doing as many Buy to Let mortgages as before, which probably has got something to do with stamp duty, but people are still buying.

As long as the figures stack up and there’s money to be made, investors will continue to buy, regardless of whether interest rates are higher. If I were going to invest in something, it’s about the end figures and whether I’m still going to make money, not the interest rate.

We can’t advise on tax, just that’s not our speciality. But if you are looking for advice on tax, we can put you in contact with an accountant or tax specialist. A lot of people are now buying Buy to Let properties in limited companies, as they can claim expenses on the property to reduce the tax liability and improve the profit. You don’t have the same ability to do that if you buy in your personal name.

Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?

Not necessarily. Occasionally lenders may blacklist certain areas, but that’s usually due to overexposure. There might be a new build development of 100 houses, for instance. If someone like Halifax already has mortgages on 25% of that estate they may say they’ve met their appetite and stop lending in that specific area.

Some lenders specialise in student lets, or lets for asylum seekers. There are also HMOs – a house of multiple occupancy, where instead of renting one house to one family, you’re renting individual rooms. Some lenders like that, some lenders don’t. Obviously, we can discuss your aspirations and advise accordingly.

Other tenants lenders don’t like might be with corporate contracts, where you are potentially going to rent property out to Serco, or the NHS, or a big firm with a large workforce. They don’t tend to like those contracts. They prefer tenants to be individuals, families and working professionals. Some lenders will accept it, but they’ll be a bit more specialised rather than the high street banks.

It’s the same with Airbnbs. A lot of lenders don’t like these, even though it’s very popular. These are classed as holiday lets, which again is a different speciality. If you’ve got a beautiful house in Devon, you’re probably charging more money in the summer than winter. Lenders work out affordability based on the high, mid and low season.

Are there any government schemes or support specifically for Buy to Let investors?

No. If there were, perhaps we’d have more Buy to Let mortgages going through our books at the moment. But there aren’t any schemes for this at all.

The government isn’t too hot on people having second properties, which is why there’s the higher rate of stamp duty. You might choose to rent a property to the council and gain guaranteed rent, but you couldn’t really call that a government scheme.

How can a mortgage broker help with Buy to Let mortgages?

We’ll get you the right rate and be here throughout the whole process to guide you. With Buy to Let, the market is much more specialised than residential. It’s not as clear cut.

A lot of people go into Buy to Let properties to start a portfolio. It’s less common to just have one Buy to Let and people often want to expand their portfolio. We’re here to help you work out how best to do that.

We can also act as moral support when things get a bit tricky – we help with negotiations with the other side’s solicitors, or the estate agents. We’ll help you find the right direction to go in.

We’re often telling clients that things will be fine and we will get it sorted – and people are so thankful for that support. We’re there for people that are unsure what to do next.

We also know the lenders in the Buy to Let space, or those with a finger in both pies – the residential and Buy to Let market. Buy to Let is just more specialist. We know how to answer the questions and approach certain topics. We recognise that these deals can be a little bit more challenging than a residential mortgage.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE SOME FORMS OF BUY TO LET MORTGAGE AND TAX PLANNING.

For specialist tax advice, please refer to an accountant or tax specialist.

Podcast recorded 04/2025