Buy To Let Mortgages: What It Is and How Does It Work?

A buy-to-let mortgage is a financing option that allows landlords to purchase a property in the UK and rent it out to tenants.

It is similar to a standard mortgage, but the deposit is higher, and the amount you can borrow depends on the property’s rental income.

In this guide, I have answered all of your questions regarding “Buy To Let Mortgages.”

What is a buy-to-let mortgage?

A buy-to-let mortgage is a financing option that allows landlords to purchase a property in the UK and rent it out to tenants.

They are similar to standard bank mortgages, where you borrow a certain amount of money from a bank and make mortgage repayments monthly. But, the deposits for getting a buy-to-let mortgage are higher. Also, instead of depending on your income and outgoings, the mortgage amount you can borrow depends on how much rent your property can earn. 

If you want to invest in a property but lack sufficient funds, buy-to-let mortgages can be a good financing option. It helps you buy an investment property that you and your family won’t live in but use as a rental property and earn a steady flow of income throughout the year. 

How do buy-to-let mortgages work?

Buy-to-let mortgages are mainly taken out as interest-only loans. It means your monthly repayments will cover the loan interest. At the end of the agreement, you must pay back the principal amount you borrowed as a lump sum. You can pay it by selling your property or using your savings or a pension fund. 

Another type is a repayment buy-to-let mortgage, in which you pay off the entire loan amount by the end of the term. In that case, you can keep the property and continue renting it out for higher rental income or sell it and keep the entire selling amount with you after paying taxes. 

Here’s how a buy-to-let mortgage works:

 

• • First, you need to talk with the mortgage broker about your budget and the property you have in mind for your investment. They will provide you with a fact-finding document, including your financial details, to complete.

• • After receiving your document, the broker will research the market to find suitable lenders and mortgage rates and discuss all the lenders and mortgage choices with you. 

• • Upon selecting the right product, your broker will apply for a Decision in Principle or Agreement in Principle (that indicates how much the lender is willing to lend you for your mortgage) from the lender.

• • After agreeing to the DIP, you can complete the lender application. The lender will then ask you for a property valuation from a surveyor to confirm your property valuation, monthly rental income, and current property condition.

• • After analyzing the surveyor report, the lender will process your application and issue a formal mortgage offer outlining all the loan terms and conditions. You can ask your solicitor to proceed with the legal requirements if you agree to the offer. 

• • After fulfilling all the legal requirements, you must agree on the date for exchanging contracts. Once they are exchanged, you pay the deposit amount and become responsible for paying for the property. Then, you can arrange a completion date.

• • Upon completing the process, you get the keys to the property and become its new legal owner.

How much do I need for a buy-to-let mortgage?

You need to have nearly 20-25% of the property’s sale price as a deposit, according to the criteria of the top financial institutions in the UK, like Lloyds Bank. 

There are several things to consider while approving a buy-to-let mortgage loan, like

 

• • Initial deposit 

• • Current income

• • Credit history 

• • Existing debts

• • Rental yield of the buy-to-let property 

Barclays, one of the top financing institutions in the UK, provides buy-to-let mortgages to anyone above 18 years old. To borrow a £1 million mortgage, at least one of the three applicants must have an annual gross income of £25,000. However, single applicants must have a gross annual income of £75,000. Barclays allows you to borrow up to £2 million for each buy-to-let property. 

Some additional fees are required when applying for a buy-to-let mortgage, like

 

• • Arrangement fee

• • Property valuation fees

• • Surveyors’ fees and legal expenses 

• • Stamp duty on the property 

• • Building and landlords’ insurance purchase

• • Required repairs and maintenance

• • Additional insurance 

• • Letting agents fees

• • Buy-to-let income tax

👉 Use our free online buy to let mortgage calculator

Do I need to pay stamp duty on rental income?

No, you don’t need to pay stamp duty on rental income, but you pay SDLT (Stamp Duty Land Tax) when purchasing the buy-to-let property in the UK. 

SDLT has a certain threshold; if you buy a property above that, you must pay the one-off cost at the time of purchase. 

The current thresholds are:

 

• • £250,000: For residential property purchase 

• • £425,000: For first-time home (residential property) purchase worth £625,000 or less

• • £150,000: For non-residential land and property purchase 

How much SDLT you need to pay depends on whether you use the land or property for residential, non-residential, or mixed-use property and whether you are eligible for an exemption. 

What are the advantages of Buy to Let mortgages?

The advantages of buy-to-let mortgages are as follows: 

 

• • You can purchase properties with a small percentage of the total upfront cost (the minimum deposit for a mortgage)

• • Your rental income covers the mortgage payments (other income sources aren’t affected) and also generates good profits 

• • For interest-only mortgage options, you pay lower monthly payments with an option to sell the property and pay the total amount at the end of the agreement term.

• • It enables you to acquire multiple properties over time without worrying about funding. 

• • Offset your upkeep and repair costs against the annual tax bill

What are the disadvantages of Buy to Let mortgages?

The disadvantages of buy-to-let mortgages are as follows:

 

• • You need to pay higher interest rates than residential mortgages

• • They require a higher deposit to get mortgage-sanctioned 

• • Some lenders provide strict lending criteria

• • When property prices for your capital reduce, it creates a difficult situation, especially when you have an interest-only mortgage. 

• • While selling the property, you need to pay a higher tax bill as the CGT allowance is reduced from April 2024

Read more: How to Overcoming Challenges Faced by Buy-to-Let Investors

How long does it take to get a buy-to-let mortgage?

For most lenders, getting a buy-to-let mortgage takes 3-6 weeks, while filling out the application takes a few months. Completing the whole process may take up to another four weeks. However, this timeframe can vary depending on different factors. Remortgaging is faster than getting a buy-to-let mortgage. 

Who is eligible for get a buy-to-let mortgage? 

If you are above 18 years old and haven’t reached the maximum age limit (mostly 75 years), and you are a UK resident, you are eligible for a buy-to-let mortgage. Additionally, you need to prove that your property’s rental income will cover their monthly mortgage payments and fit the lender’s criteria for getting the mortgage. Some banks and financial institutions check the applicant’s income other than the rental income as a guarantee, and they must have a good credit score.

You need to provide certain documents to apply for a buy-to-let mortgage, like

 

• • Recent utility bills 

• • P60 form 

• • Last 3 months payslips for employed individuals and proof of income and tax returns for self-employed

• • Proof of existing mortgage statement 

• • Additional income proof 

• • Bank statements on all your current accounts for the last 3 to 6 months 

• • Proof of outgoings 

• • Identity proof, including passport or driving license 

• • Details of the property you are willing to buy

If you are a non-resident of the UK or a foreign national living in the UK for less than 12 months, you need to check with the lender which country or region’s citizenship they allow. Additionally, you must speak proficient English, have a set annual income, and your Loan to Value (the percentage of the property price you want to borrow) can be a maximum of 75%. 

Where to get a buy-to-let mortgage?

You can get a buy-to-let mortgage at top financial institutions in the UK like Barclays, Lloyd, HSBC, and NatWest. Additionally, you can look for building societies like Nationwide and Yorkshire Building Society or other specialist lenders like Aldermore for mortgages. However, you can hire a broker who understands your budget and financial needs and research the market to source the best lenders. 

👉 Check out the Best Areas in UK for Buy-to-Let Investment

Is Buy-to-let worth in 2024?

Yes, Buy-to-let in the UK is worth it in 2024. Over the last 12 years, we have worked with multiple property investors and have found that buy-to-let investments are a great idea, especially when you want to increase the value of your property. 

Some significant concerns of such landlords are how to source and manage properties and get tenants regularly to avoid vacancy rates, etc. We ensure you have nothing to worry about these things. Pluxa Property does it all! 

We assist in finding the best buy-to-let properties in the top locations where rental demands are high and your target market is significant. It ensures you get a quick mortgage loan. Also, we assist in refurbishing property if needed, do all repairs and maintenance tasks, and help sourcing reliable tenants. 

Our team will speak to you over a one-to-one call and give you a personalized investment strategy that suits your budget and other criteria. We make investments peaceful for property investors and ensure higher ROI.