Buy-to-let mortgages: How do they work?

Whether you’re a first-time buyer or you’re looking to invest in more property, a buy-to-let mortgage may be the best fit for you, but the decision shouldn’t be taken lightly.

One of the many questions that pops up is ‘how does a buy-to-let mortgage work?’. 

With a buy-to-let mortgage comes a lot of responsibility, since you take on the role of landlord for the tenant. 

Over the last few years, landlords have had a lot to deal with: tax changes, tighter affordability tests, and rule changes around tenancies, so you may be wondering whether going down this route is still worth it. 

Today, we’ll talk you through what a buy-to-let mortgage involves, the benefits and drawbacks, and whether it’s the right choice for you. If you need further guidance, our team at J & M Green Mortgage Services can help you weigh your options.

What is a buy-to-let mortgage?

Buy-to-let mortgages are mortgages that are taken out for properties that you’re planning to buy and then rent out to tenants rather than living in them yourself. 

In other words, it is designed for investment property, where returns come from rental income, potential price growth, or both. Buy-to-let mortgages are great for those who have already gone through the mortgage process and want to build up their property portfolio. 

There are two main types of mortgages you can get:

• Fixed: The interest rate and your monthly payments never change for a set period of time (for example, two or five years).

• Variable: The interest rate amount can change in line with the lender’s standard variable rate (SVR) or the Bank of England base rate, meaning your repayments could go up or down.

  
  

A buy-to-let carries greater risk, which is why the standards to qualify are stricter, and it’s often more expensive than a regular mortgage. But that doesn’t necessarily mean that you won’t qualify for one.

Some lenders require applicants to have already owned a property for a few years, with a mortgage or outright, to increase their confidence in you that you can handle a loan.

The main things you should know

• Buy-to-let mortgages typically require a larger deposit amount, often around 25% (75% loan-to-value).

• These can be taken out in an individual's name, but most are set up through a limited company that holds one or more properties. 

• The rent you receive from our tenant should cover the mortgage repayments and other necessary outgoings. 

• Buy-to-let properties typically have higher rates and arrangement fees than comparable residential deals, since the risk is higher. 

• The loan size is often determined by how much rent you’re expected to receive and whether it will comfortably cover the mortgage repayments. 

  

  
  

How does a buy-to-let mortgage work?

Unlike a repayment mortgage, buy-to-let mortgages are typically interest-only. This essentially means that you won’t be making monthly repayments on the original loan amount, but instead on the interest on the amount you’ve borrowed.

The good thing is that monthly payments are usually lower than on a comparable capital-and-interest deal, but the total amount of money you need to pay back never decreases. 

So while it’s good for those who want to keep their monthly repayments cheaper, many opt for capital-and-interest buy-to-let mortgages to build equity without relying solely on house price growth. It also means you’ll have less to pay in one lump sum at the end of the mortgage term.

At the end of the mortgage term, you must repay the full balance (often by selling the property, using savings, or refinancing into another deal).

Who can get a buy-to-let mortgage?

You can usually take out a buy-to-let mortgage when you:

• Are purchasing a new rental property

• Are remortgaging an existing rental

• Are switching a property you already own from residential use to letting

  
  

The typical rules of renting out a property require you to be over the age of 21, below the age of 75, and be a legal UK resident with a UK bank account and address. 

While many lenders accept those who are self-employed, you must earn over £25,000 per year and be able to prove that you can handle the responsibility and cover any costs if anything falls through.

That’s why many would like you to already own your own home, as it’s proof that you can repay a loan on time. However, we work with specialist lenders that you won’t find on the high street, so just because you don’t reach a certain criteria doesn’t mean it’s an immediate no.

If you’ve found yourself an ‘accidental landlord’, such as by inheriting a property, and you want to keep it as an investment, you may need either a consumer buy-to-let mortgage or specific consent-to-let arrangements from your existing lender.

What do lenders look for?

With a residential mortgage, lenders focus heavily on your personal income and outgoings. With buy-to-let, they still look at your earnings, rental income, and credit history.

You’ll want to make sure that you have a good credit score, that you’re already familiar with handling a mortgage, and that you have no outstanding debts that could affect your chance of acceptance. 

When you choose us for mortgage advice, we’ll compare how various lenders treat the same property to see how much you could borrow and if you could manage the repayment stress-free.

We’ll consider the entire picture, including the fees, outgoings, and expected rent (not just the headline rate) to determine whether it’s the right choice for you. If your credit profile is less than perfect, we’ll look for more flexible lenders who may accept those with lower incomes, retired applicants, or those with more complex earnings.

The real costs to budget for

As a general guideline, you’ll need to make sure that your rental income covers 125% of the mortgage repayments. It’s better to have a safety net in place and make sure everything is covered so you’re not scrambling to find any last-minute cash to cover it.

Here are all the mortgage-related costs you should factor in:

1. Interest and lender fees (these can add up to several thousand pounds)

2. Lender product and booking fees

3. Surveyor valuation and legal costs (such as solicitors' fees and land registry fees)

4. Stamp duty land tax 

5. Property refurbishment, furnishing, and compliance costs

6. Letting and management fees (if you’re using a letting agent)

7. Landlord insurance 

8. Savings for maintenance and repairs or void periods 

   
   

The main responsibilities 

During your time as a landlord, you’ll need to be able to juggle many things at once while running your own home or other properties if you’ve built up a portfolio. 

If you’re a first-time landlord, you should expect to:

• Pay your mortgage repayments through direct debit each month.

• Arrange landlord insurance, which typically covers buildings and may include optional extras like loss of rent and landlord liability.

• Make sure you fulfil all legal requirements, including gas safety certificates, right-to-rent checks in England, deposit protection and licensing when necessary.

• Budget for maintenance and void periods, as you remain liable for the mortgage even if the property is empty or the renter is behind on payments. 

• Selling the property and using the proceeds to clear the debt, or refinancing to a new mortgage.

  
  

Are you looking for a buy-to-let mortgage?

The quickest way to find out if you could get a buy-to-let mortgage is to have an initial discussion with one of our brokers who understands the process inside and out. 

We’ll run you through the entire process, ask a few straightforward questions about your income, debts, deposit and property plans, and then provide you with an amount we think you’ll be able to borrow. 

Our search will cover all of the lenders who are likely to accept your application, so we can get your agreement in principle in place as soon as possible. Are you ready to get started? Contact us today to arrange your appointment.