The main difference between a mortgage and a buy-to-let mortgage is the varying lending rates. Buy-to-Let mortgages tend to have a slightly higher lending rate than residential mortgages. 

These greater interest rates are associated with the greater risk involved in loaning money on a Buy-to-Let property. A Buy-to-Let relies heavily on a steady and assured rental income in order to keep business booming. 

This income can be impacted by a number of unpredictable factors such as the ability to find a tenant, delayed rental payments, damage to property and even tenant illness or death. Any of these situations could affect a landlord’s ability to make the mortgage repayments and as such, lenders typically increase their Buy-to-Let mortgage rates to reflect this. 

Buy-to-Let mortgage requirements can vary from lender to lender.  Generally, lenders will often look upon you favourably if you fit the following criteria:

• You already own a home (either with a mortgage or bought outright).
• You have a salary of approximately £25,000 a year or above.
• You’re below the upper age limit of 70-75 years old - although this will be different for different lenders. Also, a person in their 60s could remortgage or even buy a property if their mortgage term finishes before they reach the upper age limit.

When calculating how much you can borrow, Buy-to-Let lenders will typically look at how much rental income the property can realistically expect to see. The monthly rent will usually need to cover a minimum of 125% of the monthly mortgage payments - some lenders may require as much as 145%. The higher rent you’re able to charge, the greater the loan you’ll be eligible for from your lender. 

Example:

 

Mortgage repayments	Percentage rental return	Required rental income
£500	125%	£625
£500	145%	£725

Like residential mortgages, Buy-to-Let mortgages are available with a number of different rates. This means if you want to take the plunge, there are a number of different options available to suit your individual needs and circumstances.

 

Fixed rate

Fixed rate Buy-to-Let mortgages offer the security of a stable, monthly interest that won’t budge for the duration of your fixed mortgage term. This is great if you need reassurance regarding the repayments on your mortgage and it can mean your tenants’ payments won’t need to increase over this time. However, you may not always be benefiting from the lowest rates available.

 

Discounted variable rate

Discount variable mortgage rates are usually offered for a set period of time. During this time, your rates will remain below your lender’s SVR (standard variable rate) but that rate can fluctuate as the SVR changes. This means you have to be able to accommodate inconsistent monthly payments.

 

Tracker

Tracker mortgages set their rate at a percentage above or below the Bank of England’s base rate - not your lender’s SVR in the case of discounted variables. Your interest rate may change as the base rate does, which can be great when it drops but you’ll also need to be prepared if it rises. 

 

Standard variable rate

On the plus side, standard variable rates offer landlords the opportunity to jump ship to a better deal without incurring exit fees, at any time during the mortgage term. 

The downside is that standard variable rates are often some of the most expensive mortgages available as these rates can change at any time throughout your term.

 

Buy-to-Let mortgage deposit

When it comes to the deposit for a Buy-to-Let mortgage, the majority of lenders will require a larger deposit than with residential mortgages. The amount typically sits somewhere between 25% and 40% of the property’s total value. 

The need for a higher deposit is due to the greater risk lenders incur when loaning money on a Buy-to-Let property. It serves as a protective cushion should landlords default on their monthly repayments owing to issues collecting rent or if the property remains unoccupied.

When up and running, a Buy-to-Let investment can be a rewarding pursuit as well as a profitable venture. However, before you take the first steps towards becoming a landlord, there are a few other costs to consider. It’s important to get your ducks in a row to ensure you can cover all the costs associated with purchasing a Buy-to-Let property.

 

Letting agent fees

If you appoint a letting agent to manage your property and the tenant relationship on your behalf, they’ll charge you a fee. This can be anything from 10% to 20% of your monthly rental income on an ongoing basis. 

They can be incredibly helpful; carrying out tenant credit checks, chasing unpaid rent and even providing property maintenance for you. Their use depends on your capability and capacity to handle the ongoing management of the property on your own. 

You may only require a letting agent to source new tenants on an ad hoc basis and in this case they’ll usually charge a one-off fee of approximately one month’s rental income. 

 

Income tax

As the rent you receive is classified as business income you’ll be required to pay income tax on this - either 20%, 40% or 45%, depending upon your tax bracket. Don’t forget to factor this in when considering your financial situation. 

 

Landlord insurance

Landlord insurance is an absolute must and should cover the property itself as well as your contents within it. Landlord liability is often included within your landlord insurance and this will cover you in the unlikely event of a tenant’s injury or death whilst within your property, amongst other things.

An Energy Performance Certificate, otherwise known as an EPC, is a document that indicates how energy efficient a property is on a scale of A to G (with A being most efficient). The scoring is based on environmental factors such as expected energy output and energy performance features in the home, including insulation and solar panels.

In April 2018, the government introduced the Minimum Energy Efficiency Standards (MEES) legislation which meant all homeowners and landlords were required by law to maintain an EPC band rating of ‘E’ or above.

However, a consultation launched in January 2021 will see this raised to an EPC band ‘C’ with an expected increase to band ‘B’ a number of years later. A phased trajectory for achieving the new regulations will see the MEES brought in on new tenancies from 2025 and all tenancies from 2028. This means EPC documentation will need to be made available to tenants at all times and can be requested by your prospective tenants when viewing the property.

For more information on EPC ratings for landlords, take a look at our EPC guide