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Note

Most Buy-To-Let mortgages are not regulated by the Financial Conduct Authority (FCA). Whether a Buy-To-Let mortgage is regulated depends on your personal circumstances. The above information assumes that FCA regulation does not apply to the mortgage products shown.

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Five-year fixed buy-to-let mortgage

Leanne Macardle

Leanne Macardle

Editor

At a glance

  • Your monthly repayments will stay the same for five years, even if interest rates rise.
  • A five-year fixed rate buy-to-let mortgage interest rate is usually higher than fixed mortgages with shorter initial terms.
  • The amount you can borrow will be linked to both the rent you'll be charging on the buy-to-let property and your individual financial circumstances.
  • You should be aware that buy-to-let properties are subject to several taxes.

How do they work?

A buy-to-let mortgage is a mortgage used to buy a property with the intention of renting it out to tenants. A fixed rate buy-to-let mortgage is where the interest rate is fixed for the first five years. The decision to have a buy-to-let property or portfolio may be as part of an investment plan or run as a business under a limited company.

Buy-to-let mortgages do operate in the same way as a mortgage on your home, with the choice of fixed rates and trackers available. However, the application process and eligibility criteria can differ. For example, you will need to show that the rent you will charge sufficiently covers the cost of the mortgage. Usually this is at least 125% of the mortgage payment, but it is advisable you check this with the mortgage lender. You will also need to meet the lender’s affordability requirements; often higher rate tax payers will need to meet a higher benchmark to pass.

Also, remember to consider your additional costs, such as insurance, agent’s fees and maintenance costs.

Why choose a five-year fixed rate buy-to-let?

Five-year fixed rate mortgages can provide the security of fixed regular payments while still giving you the ability to remortgage after five years.

Fixed rates are ideal if you want to know exactly what you are paying for a set period. Specifically, in terms of buy-to-let they can be a great way to manage your costs. Despite fixed rates sometimes working out more expensive than the best tracker rates available to landlords, a five-year buy-to-let product offers the certainty that your payments won't go up for the long term.

Can I get a five-year fixed rate buy-to-let mortgage?

Most mortgage lenders link whether you can afford the mortgage to the rent you are charging or propose to charge on the property. Generally speaking, you'll need the rent to be at least 125% of the mortgage payment in order to satisfy your mortgage lender, though remember that this is a minimum – some lenders require as much as 140% or 145%, especially if you are a higher or additional rate taxpayer.

When you apply for a buy-to-let mortgage, your lender will perform certain checks to make sure you can afford the mortgage before they offer it to you. Their decision will be based on:

  1. Your personal finances. This will include your deposit and how much you earn each month. Your credit score will also be checked.
  2. Rent. Your lender will check that the rent you intend to charge on your property is greater than your monthly loan repayments. They will usually expect rent to be around 125% to 145% of your monthly payments.

How much will it cost?

This will vary from provider to provider, and will depend on your chosen loan-to-value (LTV) and deposit size. In general, five-year fixed buy-to-let mortgages come with higher interest rates and fees than lower LTV mortgages.

Additionally, you will pay a different amount of stamp duty compared to a regular mortgage, and potentially capital gains tax when you sell the property. All these extra costs, including possible renovation costs, need to be taken into account.

Remortgaging after a five-year fixed rate buy-to-let

You may find that after a longer term fix, such as five years that the mortgage rates available have changed since you last remortgaged. When your fixed rate period ends you usually revert to your lender’s buy-to-let standard variable rate. Often this is at a higher rate than your initial fixed rate deal. It is important to make sure you time remortgaging your buy-to-let deal before you revert to the standard rate as it could increase your monthly mortgage payment.

Pros and Cons of five-year fixed buy-to-let mortgage

  • Long-term fixed mortgage repayments. Given the current uncertain economic climate, many landlords are drawn to the fact that these fixed rate mortgages guarantee set monthly repayments for longer.
  • Potential for low deposit fixed rate buy-to-let mortgage.
  • Incur fewer fees. With a fixed mortgage that has a rate locked in for a longer term, borrowers will change products less often, potentially making savings on the fees typically charged when securing a new deal.
  • Higher interest rates. Five-year buy-to-let mortgages tend to have higher interest rates than their shorter-term counterparts.
  • With a longer-term mortgage like this, and given the increasing regulation in the buy-to-let market, you may face stricter lending criteria if you want to remortgage at the end of the fixed term

Moneyfacts tip

Moneyfacts tip Leanne Macardle

You could pay less tax on your buy-to-let property if you set up a limited company to manage it. However, many factors are involved with this process, so seeking advice from a specialist before taking this step is essential.

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