What is a buy-to-let mortgage and what are your options in 2023

What is a buy-to-let mortgage? Who needs one? How are they different from normal residential mortgages? And how do you find the best mortgage deal?

If you’re considering a buy-to-let property, these are just some of the questions you might have. This guide will explain the difference between residential and buy-to-let mortgages, the process of applying for one, and how to find the best mortgage products.

In this guide

What is a buy-to-let mortgage? Do I need one?
How do buy-to-let mortgages work?
How are buy-to-let mortgages priced?
Buy-to-let mortgages – How expensive are they?
How many buy-to-let mortgages can I have at one time?
How to get a buy-to-let mortgage
Buy-to-let mortgage calculator UK
What will I need to apply for a buy-to-let mortgage?
Can I change my buy-to-let mortgage to residential?
Can I change my residential mortgage to buy-to-let?
How much of a deposit will I need for a buy-to-let mortgage?
Are buy-to-let mortgages interest only?
Does having a buy-to-let mortgage affect having a residential mortgage?
Should I speak to a mortgage broker?

What is a buy-to-let mortgage? Do I need one?

Buy-to-let mortgages (also known as BTL mortgages) are mortgage products developed specifically for buy-to-let landlords. Anyone buying a property that they want to rent out, rather than live in themselves, will require a buy-to-let mortgage.

How do buy-to-let mortgages work?

You will apply for a buy-to-let mortgage in a similar way to applying for a residential mortgage, but the mortgage company’s lending criteria will be quite different. Most major mortgage lenders offer a selection of buy-to-let and residential mortgages, but there are lenders who specialise in buy-to-let mortgages and other commercial lending, so it’s important to shop around to ensure you find the best deal.

How are buy-to-let mortgages priced?

Mortgages for buy-to-let properties usually have higher product fees than residential mortgages, and will also have higher mortgage interest rates. This is because lenders consider tenants ‘higher risk’ than owner-occupiers.

Buy-to-let mortgage rates – how expensive are they?

The average interest rate for buy-to-let mortgages is current 5.55%. This is an improvement on the 6.79% average seen in August 2023, but still significantly higher than the 3.38% average rate in April 2022.

Any buy-to-let investor coming to the end of a fixed rate deal in the next few months is likely to notice a steep increase in mortgage costs.

How many buy-to-let mortgages can I have at one time?

There is no set limit on how many rental mortgages you can have at one time, but the more you have, the more high-risk a lender might consider you. If you have more than four buy-to-let properties, a lender is likely to carry out additional checks when processing a mortgage application.

How to get a buy-to-let mortgage

If you’re considering a buy-to-let mortgage to buy a rental property, you’ll need to:

Have a deposit available of at least 25% of the value of the property you hope to buy.
Have a good knowledge of the local rental market. Will there be strong demand for the property? Does is meet the needs of local renters? How much rent could the property achieve?
Approach a mortgage lender or broker that deals with buy-to-let products and find out how much you might be able to borrow. Make sure you research the different options available to you – interest-only or repayment, fixed or variable rate etc – to find the product that best meets your needs.
Look at the figures – do they add up? Make sure you consider other costs such as Stamp Duty, legal fees, insurance, property maintenance and management fees.
Take into account different taxes payable as a landlord and factor these into your calculations. Landlords are required to pay higher Stamp Duty than owner-occupiers, and all profit generated through rent will be subject to Income Tax. You will also have to pay Capital Gains Tax on any profit you make when you sell the property.

You’ll need to provide your lender with evidence that realistic rental payments will be enough to cover mortgage payments and any costly vacant periods (lenders typically require rent to be at least 25% higher than mortgage payments).

Buy-to-let mortgage calculator UK

An online calculator can be a useful tool in finding out how much you might be able to borrow and what your repayments might be.

What will I need to apply for a buy-to-let mortgage?

If you want to apply for a mortgage for a buy-to-let property, you’re likely to need:

At least a 25% deposit
Other income of at least £25,000 per year (either employed or self-employed)
A good personal credit score
Healthy personal finances (eg. credit card debt and personal loans will go against you)
Likely rental income that covers at least 125% of the proposed mortgage repayments

Can I change my buy-to-let mortgage to residential?

If you decide to move into your buy-to-let property, you’ll need to change your mortgage to a residential one.

To do this, your mortgage lender will need to check your affordability. You’ll need to provide your three most recent payslips (or 3 most recent annual accounts if self-employed) and bank statements covering the last 3 months.

Buy-to-let lending is based on rental income rather than personal affordability, so having a mortgage as a landlord doesn’t mean you’ll automatically be approved for a residential mortgage on the same property.

Can I change my residential mortgage to a buy-to-let?

If you’re considering renting out your current home, you’ll need to change your residential mortgage to a buy-to-let product. To do this, you’re likely to need at least 25% equity in your property and achievable rental payments should be at least 25% higher than mortgage repayments.

If this is something you’re considering, your first step should be to contact your current mortgage lender and discuss your options.

Should your current lender turn down your application to move to a buy-to-let product, you could look at remortgaging with a different lender. It’s important to keep in mind, however, that early repayment charges may be payable if you choose this route.

How much of a deposit will I need for a buy-to-let mortgage?

Buy-to-let mortgages require a higher deposit than residential mortgages. Most lenders will require at least a 25% deposit.

Are buy-to-let mortgages interest only?

It is possible to get both interest-only and repayment mortgages for rental properties, but many landlords will choose an interest-only product.

When you’re considering your options, many investors will be tempted by interest-only products due to the lower monthly repayments. It’s important to remember, however, that with an interest-only mortgage product, you will be responsible for repaying the whole loan when your mortgage term ends. The monthly repayments on an interest-only mortgage will not pay off any of the capital loan so most landlords will plan to sell the property at the end of the term, repaying the outstanding loan from the sale proceeds and keep the remaining profit. A buoyant property market in recent years has left many landlords confident that their properties will naturally increase in value over the term of the mortgage, but that should not be assumed. Should property prices fall, you will be responsible for making up any shortfall between the outstanding mortgage and the sale price.

Does having a buy-to-let mortgage affect getting a residential mortgage?

When you apply for a residential mortgage, your lender will look at your financial circumstances. This will include your buy-to-let mortgage and how your rental property is performing. Your residential mortgage application is likely to consider the probability of you needing to use your personal income to make up any shortfall in your rental income (if the property were to become vacant etc), and therefore your rental property mortgage may make your application a higher risk prospect for your lender.

Should I speak to a mortgage broker?

It’s always a good idea to speak to a mortgage broker to help you find the best loan for your individual circumstances. Lenders have different criteria for rental property mortgages and a broker is likely to be able to advise which products you are most likely to be accepted for.

What is a buy-to-let mortgage?