Buy To Let Mortgages explained

Buy To Let properties continue to be a popular investment choice. From Buy To Let mortgages, rental yield, tax implications, finding the right property and landlord responsibilities, we explain everything you need to know.

Katherine Binns Director, Research

What is Buy To Let?

Buy To Let is when you purchase a property specifically for the purposes of renting it out. And finding the right Buy to Let mortgage is essential to making a success of your investment, whether you’re buying your first Buy to Let or building up your property portfolio.

How does Buy To Let work?

When you own a Buy To Let property, you let it out in order to produce a rental return and income stream. It can also grow in value, producing a capital gain when you sell. The rent on a Buy To Let property should cover:

• The cost of the mortgage
• Expenses, typically building insurance, repairs and any letting agent’s fees
• And it should also provide you with a monthly profit.

What is a Buy To Let Mortgage?

Unless you’re a cash buyer, if you buy a property with the intention of letting it, this is where Buy To Let mortgages come in. With Buy To Let mortgages, you can rent out your property to tenants.

Buy To Let mortgages are similar to residential mortgages but there are some key differences:

• The amount you can borrow on Buy To Let mortgages is based on how much rent the property can generate versus the cost of the mortgage. Typically, lenders will want your expected rental income to meet at least 125% of the monthly interest payments on the loan. To get a rough idea of what you could borrow, use our buy to let mortgage calculator.
• Buy To Let mortgages may also require you to have a minimum salary, typically £20,000-£25,0000.
• Rates are typically higher on Buy To Let mortgages than standard mortgages due to the greater risk involved.
• The minimum deposit required for Buy To Let mortgages is generally 20-25% of the purchase price. However the cheapest deals require a deposit of 40% or more.
• Arrangement fees on Buy To Let mortgages can be higher than on conventional mortgages. These are sometimes calculated as a percentage of the amount you borrow, rather than a flat fee.
• Most Buy To Let mortgages are interest-only. This means you’ll only pay the interest each month. And at the end of the term you’ll need to repay the original loan in full.

Get fee free Buy-To-Let mortgage advice from our award winning mortgage partners at L&C

Buy To Let mortgage rates

Buy To Let mortgage rates remain much higher than they have been for many years. So, it’s even more important than ever to shop around for the best Buy to Let mortgage rates.

Speaking to a fee-free mortgage broker is the quickest and easiest way to do this.

How much can I borrow for a Buy to Let mortgage?

This depends on the amount of rental income you expect to receive. With Buy To Let mortgages, lenders usually require the rental income to be 25–30% higher than your mortgage payments. With Buy To Let mortgage rates now more expensive than we’ve seen in previous years it may be harder to achieve this. And there have also been reports of some lenders tightening up their ‘rent-to-interest’ calculation.

If the rental valuation isn’t high enough, you may need a bigger deposit. However some lenders allow landlords to use their own disposable income to meet any rental income shortfall on Buy To Let mortgages. So it’s important to shop around.

Get an idea of how much you could borrow with our Buy to Let mortgage calculator.

Deposits for a Buy to Let mortgage

The minimum deposit required for a Buy To Let mortgage is generally 20-25% of the purchase price. This can vary according to the amount of rental income you expect to receive. Note that the cheapest Buy to Let mortgage deals require a deposit of 40% or more. You can get an idea of how much you could borrow with our buy to let mortgage calculator.

What is a good rental yield?

To assess if a Buy To Let is financially viable, and when applying for a Buy To Let mortgage, you need to know a property’s rental yield. This is the rental return a property generates. Average yields in the UK are roughly 5%. And 5-8% is seen generally seen as a good rental yield.

The rental yield is calculated by dividing the annual rental income by the purchase price, then multiplying by a 100, to give the gross rental yield as a percentage.

For example, annual rent of £7200 divided by purchase price, £145,000 multiplied by 100 gives a gross yield of 4.9%. To get an idea of how much you can rent a property for speak to lettings agents. And also use our rent calculator which works out how much rent you should charge based on your property type, location and local demand.

You may choose to buy a property further afield it you can achieve higher yields. Or you may consider investing in a house of multiple occupation (HMO) or student accommodation for higher rental income, although that comes with added responsibilities and costs.

Use our Rent Calculator to get an idea of how much rent you should charge based on your property type, location and local demand.

Is Buy To Let worth it?

Buy To Let continues to be a popular way of creating a second income. However there are a number of factors, including the current economic climate, you should weigh up with this investment option.

• Mortgage costs: The available rates on Buy To Let mortgages are significantly higher than they have been in recent years. So if you need to take out a mortgage in order to purchase a Buy To Let make sure you get the best Buy to Let mortgage rate you can. Speaking to a mortgage broker is the quickest and easiest way to do this.
• Could property prices fall? While none of us really knows what’s going to happen, it’s something to consider if you’re thinking of investing in a Buy To Let. However if you’re planning to keep the property for the long term you may be prepared to take the risk that it could go down in value in the short term and hopefully up in the longer term.
• Strong rental market: Some factors may be working against landlords but the rental market remains strong, especially in certain hot spots. So by making sure you buy the right property in the right place and at the right price, you may find you get a solid long-term investment.

How to apply for a Buy To Let mortgage

If you want to apply for a Buy To Let mortgage, the first step is to speak to a fee-free mortgage broker. They’ll run through all your options when it comes to Buy To Let mortgages so you’ll know you’re getting the best mortgage rate.

And just like when you apply for a traditional mortgage, when you apply for a Buy To Let mortgage, the lender will check your credit reports. So make sure you check them first and ensure everything contained in them is correct. If there are any errors, get these corrected.

Buy To Let mortgage document checklist

To apply for Buy To Let mortgages you’ll need:

• 3 months of pay slips, bank statements, last P60 and/or self-assessment returns (if self-employed) to verify your earnings.
• Proof of ID and current address.
• Proof of deposit (a gifted deposit from parents needs to be backed up with their bank statement and letter confirming it is a gift).
• Details of your solicitor who’ll carry out the transaction.
• Details of the estate agent you are buying through.
• Mortgage statement for your existing property or properties
• Proof of rental income (usually a report from an ARLA-regulated agent)

How long will my Buy to let mortgage application take?

It usually takes around four to six weeks to get an offer with Buy to Let mortgages. And completion usually takes around another four weeks as long as there are no complications. If your application is more complicated, for example if you have bad credit, it can take longer. However, this is one area where a using a mortgage broker can be particularly useful.

Buy To Let mortgages for first time buyers

If you can’t afford to buy a home where you live you may consider purchasing an investment property in a cheaper area and letting it out. It is possible to get Buy To Let mortgages for first time buyers however it’s not always easy. Not all lenders will offer Buy To Let mortgages to first time buyers so it’s a good idea to speak to a fee-free mortgage broker. They’ll know which lenders will be most likely to accept your application.

And bear in mind if you buy an investment property as a first time buyer you’ll miss out on first time buyer stamp duty relief. With first time buyer stamp duty relief, first time buyers purchasing a home up to £300,000 in England and Northern Ireland do not have to pay any stamp duty. While if the first time buyer’s new home is worth £300,001 to £500,000 they’ll pay 5% stamp duty, but only on the value above £300,000.

Buy To Let tax implications

Stamp duty on buy to let properties

If you purchase a Buy To Let (and you already own a property), in England and Northern Ireland, you’ll pay the stamp duty surcharge of 5% on top of normal stamp duty rates. To understand the exemptions, how much you could pay and common questions see our guide on stamp duty for buy-to-let.  There is also a stamp duty surcharge on additional homes such as Buy To Let properties in Scotland and Wales. For more details on the additional stamp duty charges, see stamp duty for second homes or try our stamp duty calculator below.

Capital gains tax on Buy to Let

If your Buy To Let property rises in value by the time you sell it, you may need to pay capital gains tax (CGT). CTG charged on second properties is 18% on gains made when selling the property for lower rate tax payers, while the rate for higher rate taxpayers is 24%. But you’ll only need to pay these rates on the gains that exceed your capital gains allowance. The tax-free allowance is £3,000 per person in the tax year 2024-2025. You can reduce your CGT bill by off-setting costs like Stamp Duty and legal fees. It can be a good idea to get independent tax advice. Our partners at Unbiased can match you with the right tax adviser.

Income tax

When you’re a landlord, the rent you receive on your rental properties is treated as taxable income and may be liable to income tax. But you can reduce the tax you have to pay by deducting certain ‘allowable expenses’ such as letting agent fees and property maintenance. Again, you may benefit from independent tax advice.

Mortgage interest income tax relief

In the past, landlords were able to offset mortgage interest and Buy To Let mortgage arrangement fees against their income tax bills at up to 45% for the highest earners.  However, this tax relief was phased out between 2017-2020 and has been reduced and capped at 20%.

Wealthier, higher tax-paying landlords are, therefore, the most affected. Landlords could be up to £2000 per year worse off than they were, based on typical rents. Cash buyers and investors in the 20% tax band are least affected.

Find an independent tax adviser. Book your free initial consultation through our partners at Unbiased:

Buy To Let conveyancing

Buy-to-let conveyancing is the legal process of transferring ownership of a property to you. It begins when your offer on a property is accepted and continues until you get the keys.

As part of the work they undertake, your conveyancing solicitor should make sure there are no restrictions on renting out the property you are buying. They should also be able to advise you on wider issues such as tax implications or environmental and planning law. It is a good idea to explore any questions you have about future plans for your investment property with your conveyancing solicitor.

Buy To Let fees explained

When investing in a Buy To Let, as well as the costs of buying a house you’ll also need to factor in ongoing fees. These include:

• Letting agent fees: Unless you plan to manage the property yourself then you’ll need to pay letting agent fees. Fees typically range from 5% to 15%, depending on whether you want a fully managed service. You can also pay a letting agent to find and vet prospective clients. This can be a time-consuming process and by vetting tenants this could save you from letting to someone who can’t afford the rent or who has committed fraud. We’ve partnered with OpenRent which offers a much cheaper alternative. They offer a full tenancy creation service called Rent Now for just £69 which includes everything you need to rent out your home: gas & electricity safety certification, inventories, photography, and insurance.
• Landlord home insurance: The cost of this will depend on the size and location of your property, the type of tenants you have and the type of policy you take out. Typical policies landlords may need include: contents insurance, rental protection insurance, public liability insurance, legal expense cover and malicious damage by tenants insurance. If you have a mortgage your lender will also usually require that you have a buildings insurance policy in place too. Compare Landlord insurance quotes with our free tool.
• Maintenance: As well as meeting legal requirements, you’ll want to maintain your property to a good standard for your tenants and in order to protect your investment. Many landlords manage their own properties. It can be helpful to join a representative organisation such as The National Landlord’s Association or The Residential Landlord’s Association. Get to know good plumbers and builders to help you manage your property smoothly.

Do you need life insurance when buying a Buy to Let?

Life insurance cover can also be useful if you’re a landlord with Buy to Let mortgages on properties. By taking out life insurance to cover those mortgages, it means your loved ones won’t have to deal with making sure those mortgages are paid or have to sell the properties if they run into financial difficulties. See our guide for more information about life insurance options for a mortgage or get fee free expert advice and no obligation quotes from our partners at Lifesearch. Find the right life cover and compare quotes from a range of major UK insurers with our partners at LifeSearch.

Finding a letting agent

When you’re renting out your home it’s crucial that you pick the best lettings agent: you want the best service for the lowest fee. We’ve partnered with OpenRent, which has worked with 6.5 million tenants and landlords. It can find you tenants and help with referencing, contracts and more if you need it. Plus there’s a 100% free advertising option, no hidden fees and no renewal fees.

Buy to Let tips

Here are some things to consider before buying a Buy To Let:

• Find the right location. The property adage, location, location, location, is doubly important with Buy To Let. Make sure it has good transport links, ideally within a fifteen minute walk of a train or tube station.
• Find a property to suit local demand. Do your research into what type of properties are most sought after and use this to determine the type of Buy To Let property you buy. A funky flat above a brasserie might suit commuting professionals but not a young family. If you get it wrong, you could struggle to rent the property out successfully.
• Think twice about new builds. Resale property is generally bigger and cheaper to buy than new builds. And be wary of buying into a block of flats with many other Buy To Let investors. Too many flats to let at the same time, means rents could fall. It can also make selling harder.
• Plan for voids. It’s important to plan ahead for any periods you don’t have tenants, known as voids. You’ll need to pay the mortgage regardless. So ensure you have a financial cushion in place to cover you if this does happen.
• Have a plan for repaying the mortgage. If you have an interest only mortgage, don’t assume you’ll be able to sell the property to repay the mortgage. If the house falls in value you may get less than you hope when you sell. And if that happens you’ll need to make up the difference.

Can I switch to a Buy To Let mortgage?

Not everyone renting out a property had planned to become a landlord. Some people are ‘accidental landlords’. For example a homeowner may find themselves with little option but to rent out their home because they need to move and are struggling to find a buyer. Or they may decide to move in with a new partner or a job opportunity may require moving to a new location.

As a short term solution, your mortgage lender may grant you a Consent to Let which allows you to let your property, usually for a maximum of 12 months, while maintaining your current mortgage. If not, you’ll need to take out a Buy To Let mortgage.

Get fee-free advice on Buy To Let mortgages from our partners at L&C. Start online or give them a call today about your mortgage needs

Remortgaging a Buy To Let

When you remortgage a Buy to Let you may not get as cheap a deal as you got in previous years. But for many it’s still worth investigating. For example if your fixed deal has ended and you’re on your lender’s standard variable rate you may save on your mortgage payments by opting for a fixed rate deal. And if you do this it also means you’ll be protected from future interest rate rises too. If you are having difficulty remortgaging, you may be considering selling your Buy to Let, see our guide for what to consider.

Buy To Let landlord responsibilities

Being a landlord comes with a wide range of legal responsibilities which include:

• Contract: You must provide your tenant with a contract, which sets out the rights and responsibilities for landlord and tenant. In England and Wales, the most common type is an AST (Assured Shorthold Tenancy). This gives tenants the legal right to live in the property for a fixed period or a rolling term.
• Tenancy Deposit Protection: You must also put your tenant’s deposit in a government-approved tenancy deposit scheme if the home is rented on an assured shorthold tenancy. In England and Wales, these deposits can be registered with DPS (Deposit Protection Service), TDS (Tenancy Deposit Scheme) or mydeposits.
• Right To Rent: All landlords are now responsible for checking their tenants have the right to rent in the UK. Give every tenant a copy of the Government’s How to Rent booklet.
• Gas and Electrics: Check gas appliances once a year using a gas safe registered tradesman and give tenants a copy of the safety certificate. Wiring and electrical appliances also need to be checked regularly. And you’ll need to give a copy of the gas and electrical safety certificates to tenants
• Fire: Furniture and soft furnishings must pass fire safety regulations. Check for fire retardant labels. Fire alarms have to be fitted. Fit a carbon monoxide alarm in any room with gas appliances. And ensure all tenants have a clear escape route in case there’s a fire.

EPCs – what landlords need to know

Your property must also have an up-to-date Energy Performance Certificate (EPC) before it can be marketed and you must give a copy to your tenant. An EPC is valid for ten years. See our advice guide on How to get an EPC and how to prepare for the energy assessor’s survey.

Also, currently, to let out a rental property it must have an EPC rating of at least E. However under the new Minimum Energy Performance of Buildings Bill the government wants to increase this to a minimum EPC rating of C for new tenancies from 2025. And for all rental properties by 2028, where practical, cost-effective and affordable. It is also proposed that the penalty for not having a valid EPC will be increased from £5,000 to £30,000 from 2025. Read more about the EPC changes.

Organise your EPC. Get instant quotes from Domestic Energy Assessors in your local area.

Frequently Asked Questions