Best Buy-To-Let Mortgage Rates

Buy to let mortgages explained

A buy-to-let mortgage is similar to a residential mortgage as you borrow money from a bank, building society or other lender in order to buy a property. However, the difference is you won’t be living in the property yourself.

Because you can’t use a residential mortgage to finance a property that you will rent out, buy-to-let mortgages are specifically designed for landlords who buy one or more properties as an investment.

Lenders typically view buy-to-let mortgages as riskier than residential mortgages, so they may charge higher interest rates.

Note that you can take out a buy-to-let mortgage as an individual or a limited company. See our chart to compare buy-to-let mortgages for limited companies.

How do buy-to-let mortgages work?

Unlike most residential mortgages, buy-to-let mortgages are normally interest-only. This means the monthly repayments only cover the interest of the loan, not the amount you borrowed.

While monthly repayments on an interest-only mortgage are smaller than on a capital and interest mortgage, you need to repay the capital borrowed in full at the end of the mortgage term. This could be paid out of money held in savings or from the sale of the property, for example.

The interest rates on buy-to-let mortgages can be fixed or variable.

Are buy-to-let mortgages regulated?

Most buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA) as they are considered a form of business lending, not personal lending.

However, there are some exceptions to this. For example, the FCA regulates buy-to-let mortgages in the following circumstances:

• if you let out the property to a close family member, such as your spouse, children, siblings or parents
• if you’ve previously lived in or plan to live in the property at some point
• if you become an accidental landlord (if you inherit a property or have a property that you didn’t intend to let out at the time of purchase).

Regulated, or consumer, buy-to-let mortgages typically have stricter rules and criteria than standard buy-to-let mortgages. This is because these types of mortgages could pose a greater personal risk to borrowers in the above situations, compared to professional landlords who actively choose to invest in property.

Bear in mind that not all lenders offer regulated buy-to-let mortgages. Get professional mortgage advice if you need further support and help with your situation.

How much can you borrow with a buy-to-let mortgage?

The amount you can borrow with a buy-to-let mortgage will depend on a number of factors, but your expected rental income is particularly crucial.

Lenders will need to see how much you expect to earn from renting out the property as this will determine how much you can afford to repay on your buy-to-let mortgage each month.

Your rental income (or rental yield) typically needs to cover at least 125% of your mortgage payments, but this can vary between lenders. This is known as the interest cover ratio (ICR).

For example, if your mortgage costs £600 a month, you will probably need to earn at least £750 a month from your property.

Some lenders may also require higher-rate taxpayers to have a monthly rental income worth at least 145% of their mortgage payments, instead of 125%.

As well as your rental income, the amount you put down as a deposit, and so the proportion of the property you need to finance, will also affect the amount you can borrow.

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

You typically need a higher minimum deposit for a buy-to-let mortgage than a residential mortgage.

For example, many lenders ask for a deposit that will cover at least 25% of the property’s value, but others may ask for a higher 40% deposit.

Some lenders may accept smaller deposits, depending on your individual circumstances. However, bear in mind that lenders will usually offer the best interest rates to borrowers with a larger deposit.

How does buy-to-let mortgage eligibility work?

The eligibility criteria for buy-to-let mortgages can be relatively strict. For example, lenders typically set the following requirements:

• a minimum age requirement (such as 21 years old), and a maximum age limit by which the mortgage needs to be repaid (such as 75 years old)
• a minimum deposit, which is typically 25% of the property’s value
• a rental income (or yield) that can cover at least 125% of your monthly mortgage payments
• a good credit history, although some lenders may accept applications from those with poor credit scores
• a minimum annual income (often around £25,000) that is separate from any buy-to-let income. This could come from employment, self-employment or a pension, for example.

Some lenders may also require you to own your own home, either outright or with a mortgage.

Bear in mind that certain lenders won’t offer buy-to-let mortgages for selected properties (such as non-standard constructions, student accommodation or houses of multiple occupation (HMO)), while others may have a cap on the number of properties you can mortgage with them at any one time.

If you want a buy-to-let mortgage for a holiday let, you’re likely to require a specialist holiday-let mortgage.

Read more: How to become a buy-to-let landlord

What influences the rate of a buy-to-let mortgage?

Several elements can influence buy-to-let mortgage rates, including:

• The Bank of England base rate: Mortgage rates typically follow the direction of the base rate so, if the base rate falls, buy-to-let mortgage rates may also fall.
• Wider economic factors: Along with the base rate, factors such as inflation, wage growth, political changes and global events can influence buy-to-let mortgage rates.
• Your loan-to-value (LTV): The bigger your deposit, and so the smaller the proportion of the property you need to finance, the lower the interest rates you could qualify for. Mortgages with a higher LTV are likely to charge higher rates.
• Your credit history: Borrowers with a better credit history and a record of making payments on time, for example, could qualify for lower interest rates. Lenders may charge higher rates if you have a poor credit history.

Can energy efficiency affect property value?

Properties with a higher Energy Performance Certificate (EPC) rating may be worth more than less energy-efficient properties.

Furthermore, some buy-to-let mortgage lenders offer preferential rates for particularly energy-efficient properties, such as those with an EPC rating of 92 or higher (A).

However, while home improvements that are designed to boost a property’s energy efficiency can increase its value, it’s important to take care when choosing a contractor and deciding on the work to be done as, if it goes wrong, this could negatively affect its value.

Are buy-to-let mortgage interest rates higher than residential rates?

Interest rates on buy-to-let mortgages can be higher than on equivalent residential mortgages as lenders compensate for the increased risks involved in letting out a property.

Bear in mind that buy-to-let mortgages also often come with higher fees than residential mortgages, with some deals charging over £1,000 more in product fees.

How can I find the best deal?

To find the best buy-to-let mortgage, it’s important to compare deals from a range of lenders.

The interest rate will be a crucial factor for most borrowers. To help you compare deals on a like-for-like basis, including the interest rates and any fees, lenders display an Annual Percentage Rate of Charge (APRC). However, this assumes the interest rate won’t change and that you won’t remortgage during the term.

As a result, many borrowers may focus more on the initial interest rate charged instead of the APRC. This initial interest rate will apply for a specified period (such as two years), before it reverts to the lender’s Standard Variable Rate.

When comparing deals, you also need to think about your requirements and the type of mortgage you need. For example, you’ll need to consider:

• the size of your deposit and the amount you need to borrow
• whether you want a fixed or variable rate
• how long you want to lock into a deal for
• whether you have any special features or requirements, such as an energy-efficient property or a specialist type of construction
• any fees a lender may charge.

Because there’s a wide range of buy-to-let mortgage deals available, with lenders setting different requirements, it can be confusing to find the best deals that are suitable for your situation.

As a result, it may be useful to speak to a mortgage broker who can talk you through your options.

Is buy-to-let worth it?

The costs of being a landlord, including taxes and maintenance expenses, may deter people from going into the buy-to-let market. It can also carry risk, as you may have problem tenants or periods when the property is unoccupied, affecting your ability to make your buy-to-let mortgage payments.

Furthermore, managing one or more buy-to-let properties can be complicated, in terms of paying tax and meeting all the legal requirements. While it’s possible to use a tax adviser and a letting agency to manage a lot of these responsibilities, these will come at an additional cost. As a result, it’s perhaps not surprising that some existing landlords are exiting the market while potential landlords are put off from entering.

Nevertheless, property can be an attractive investment. Not only can the rent from the property provide you with an additional income, but the property may also increase in value if house prices rise. This means you could make a profit if you sell the property in the future.

There are pros and cons to having a buy-to-let property so, while it can be profitable for some, others may find the costs and paperwork involved outweigh the possible benefits. Ultimately, it’s important to consider all the different elements and eventualities (such as what would happen if you don’t have any tenants), as well as all the costs to decide if it’s right for you.

You can use our buy-to-let calculator to work out an expected rental yield on your property.

It’s often a good idea to get professional advice before entering the buy-to-let market.

What are the additional costs of being a landlord?

In addition to the buy-to-let mortgage, there are several other costs to consider when setting up as a landlord:

• Stamp Duty: For any buy-to-let property over £40,000, you’ll need to pay a higher rate of Stamp Duty (or the equivalent taxes in Scotland and Wales). See our stamp duty calculator for how much tax you may need to pay.
• Letting agency fees: Unless you decide to manage the property entirely on your own (which could be time-consuming and complicated), you’ll need to pay letting agent fees. Letting agents can help to find tenants and manage your property on your behalf.
• Landlord insurance: This is a specific insurance policy to cover rental properties. The most basic landlord policies will include buildings insurance, while more comprehensive policies can include cover for contents and damage, loss of rent and legal fees, for example.
• Maintenance costs: You need to make sure your property adheres to all the legal gas and electric safety requirements and has smoke and carbon monoxide alarms installed, for example. You will also be responsible for any routine maintenance costs, such as a boiler service, as well as any emergency repairs to the property if a boiler breaks, a pipe bursts or a fence falls down, for example. After a tenant moves out, you will need to clean and possibly redecorate your property.
• Tax: You need to pay tax on your rental income. There have been changes in the way rental income is taxed in recent years, so it may be worth seeking advice if you’re not sure about the tax implications on your buy-to-let property. If you sell your buy-to-let property, you may also need to pay Capital Gains Tax (CGT).
• Legal and accountancy fees: Depending on if you use the services of a solicitor and accountant, for example, you may need to budget for their fees, as well as the costs of drafting tenancy agreements, registering for a deposit scheme, setting up a limited company, or producing your annual accounts and tax returns.