How do buy-to-let mortgages work?

Chris Torney / 04 October 2016

We explain the important differences of residential mortgages and buy-to-let.



Older people are increasingly considering investing in buy-to-let property. This is thanks to the continued growth in house prices as well as the new rules that make it easier to take money out of pension savings and make alternative investments.

If you have enough cash saved in your pension, it may be possible to buy a flat or house outright and rent it out. But if not, you’ll need to look at a buy-to-let mortgage (also known as a landlord mortgage).

These loans are similar to residential mortgages, but there are some important differences.

What are buy-to-let mortgages?

How much you can borrow

The size of buy-to-let mortgage you can qualify for depends on a number of factors. These include how much deposit you have to put down, your credit score, and – most importantly – the amount of rental income your property is expected to generate.

Usually, lenders stipulate that the expected monthly rent should be between a quarter to a third higher than the cost of your mortgage repayments.

How to become a landlord

Type of loan

Most landlord mortgages are interest-only: this means that repayments cover the cost of interest but do not serve to pay off the capital on the loan. 

This makes such mortgages cheaper than repayment loans, but it means that you will need to sell the property at the end of the deal to repay the debt in full.

The risk here is that if prices fall, you may not get enough from the eventual sale to clear your loan.

How do we buy to let to help our grandchildren?

Fees and rates

Annual interest rates on buy-to-let loans tend to be higher than on residential mortgages, as do administration fees. 

However, rates have fallen recently in comparison with the years immediately after the financial crisis of 2008, when landlord mortgages became particularly expensive.

Age limits

As with standard mortgages, buy-to-let loans typically come with age limits: this means you can’t take out a mortgage which is scheduled to run past a certain age, often 70 or 75. 

If you are forced to borrow over 10 or 15 years rather than the more common 25, your monthly repayments will be higher – although the total cost of interest will be less.

Good news for older borrowers

Deposits

Lenders usually require higher minimum deposit levels on buy-to-let mortgages: this is typically 25% or more.

Five things that make a good buy-to-let property

Mortgage interest relief

Under current rules, landlords can offset the cost of mortgage interest against their rental income when it comes to working out how much tax they have to pay.

For example, if someone received £12,000 in rent over the course of a year but paid £5,000 in mortgage interest, they would only be taxed on £7,000 of income.

From 2017, the government is phasing out this relief at the 40% higher rate of income tax. This means that, from 2020, the maximum tax relief available to landlords will be at the 20% rate.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.