WHAT ARE BUY-TO-LET (BTL) MORTGAGES?

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These are mortgages that are used usually by landlords or property developers of all sizes and experience, to fund the purchase or redevelopment of a property they intend to rent out. The rent charged to tenants is then used to pay the mortgage.

As they are specialised mortgages, they tend to have a few differences from basic mortgages such as:

  • Slightly higher interest rates
  • Need a larger deposit of at least 25%
  • Additional fees

Many Buy-to-Let mortgages are interest-only, but not all. BTL mortgages are not regulated by the Financial Conduct Authority (FCA).

In March 2016, a new class of BTL mortgage called a “Consumer Buy-to-Let”, was created for rare cases where people have inadvertently needed to become landlords with a BTL mortgage, for example through inheriting a property they used to live in. These are regulated under HM Treasury rules which are similar to FCA mortgage regulations.

THINGS TO NOTE...

13A.pngYour rental income from the property should more than cover your monthly mortgage payments.

Remember, your property might not be rented out 100% of the time so you need to include these barren months in your calculations. To account for this, lenders will check a ‘rental coverage ratio’ to be sure you have a cushion to cover barren months and still be able to make the mortgage payments.

As many are interest-only, many plan to repay the loan by selling the property. But it’s worth noting that if you’re selling your rental property, you will have to pay Capital Gains Tax – this needs to be considered when planning your exit strategy.

<< Back to Chapter 4: Second Charge Mortgages

Onwards to Chapter 6: Complex Buy-to-Let >>