Leanne Macardle

Leanne Macardle

Editor
Published: 29/01/2019

At a glance

  • A two-year buy-to-let mortgage can be used to invest in a property that you are planning to rent out to someone else.
  • Your monthly repayments will stay the same for two years, even if interest rates rise.

What is a two-year buy-to-let mortgage?

A two-year buy-to-let mortgage can be used to invest in a property that you are going to rent out to someone else. The rates you pay to your lender will not increase or decrease for two years. After the two years are up, you will usually be transferred to the lender’s standard variable rate.

How do two-year buy-to-let mortgages work?

A buy-to-let mortgage is when a buyer purchases a property with the intention of renting it out to tenants. Some landlords do this as part of an investment strategy, but increasingly it is individuals changing from a residential mortgage on their own home, to a buy-to-let mortgage when they move out (perhaps to move in with a partner or during a period of working abroad).

Buy-to-let mortgages are very similar to a mortgage on your home, with fixed rates and trackers available. However, you should expect higher arrangement fees, as well as a different way of assessing whether you are eligible for the mortgage.

Most mortgage lenders link whether you can afford the mortgage to the rent you are charging or propose to charge. Generally speaking, you'll need the rent to be at least 125% of the mortgage payment in order to satisfy your mortgage lender, but you should check carefully before making an application that you will be eligible, as a significant number of lenders have more stringent affordability requirements, especially for higher rate taxpayers.

Remember too that while the lender may consider the mortgage affordable, you need to be happy it is too. Lenders don't factor in the other costs of running a buy-to-let property, such as insurance, agent's fees and other maintenance costs.

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

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

Fixed rates are great 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. Sometimes fixed rates aren't as cheap as the best tracker rates available to landlords, but they do offer the certainty that your payment will not increase for two years.

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

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. However, a two-year fixed buy-to-let mortgage will usually come with higher interest rates than a residential mortgage of the same duration. They may also have higher application fees and often require deposits of at least 20%.

Remortgaging after a two-year fixed buy-to-let

With short-term fixed rates, you should also consider the costs of remortgaging your buy-to-let property regularly. When your fixed rate period comes to an end your mortgage will  usually switch to your lender's buy-to-let standard variable rate, or possibly a tracker based variable rate. This is likely to be higher than your fixed rate, so if you don't remortgage, it's important you have enough manoeuvre in your budget to absorb the higher mortgage costs. Remortgaging will involve paying new mortgage fees and possibly legal fees if you move to mortgage to a different lender.

Pros and cons

  • Lower interest rates. Two-year fixed rate buy-to-let mortgages usually offer lower interest rates than those with longer terms.
  • Security of fixed repayments. You can budget reliably, with the certainty of your mortgage costs for the rental property.
  • Ideal for those with only a few buy-to-let properties. If you have a greater number of buy-to-let properties then you may need to look at a commercial buy-to-let mortgage rather than a standard buy-to-let mortgage.
  • Less flexibility. If you'd prefer the choice of paying extra off your buy-to-let mortgage, you should be aware that a fixed rate buy-to-let mortgage may make this harder to do as it can incur early repayment fees.
  • Higher fees of remortgaging – a shorter fixed term will mean you need to remortgage more frequently and as a result incur the associated fees that go with this.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Make sure you know the rental coverage for your buy-to-let property.  Different lenders may set different minimum requirements and this may be different dependent on your tax status.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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At a glance

  • A two-year buy-to-let mortgage can be used to invest in a property that you are planning to rent out to someone else.
  • Your monthly repayments will stay the same for two years, even if interest rates rise.

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