What to watch out for when getting a UK buy-to-let mortgage

Kate Berrisford
August 19, 2022

If you're considering expanding your UK property portfolio or investing in residential property or other rental properties, you're probably keen to know more about how to finance your investment.

One of the most common ways of financing a property that you plan to rent out, is by getting a buy-to-let mortgage. But figuring out how a buy to let mortgage works, and how it's different from a residential mortgage can be complex and time consuming. And there are a host of things to watch out for when getting a buy to let mortgage in the UK.

We've summarised some of the most important factors to consider when getting a buy to let mortgage. And we've included some helpful tips to make the process of getting a buy to let mortgage easier to navigate.

Person holding a model house in their hands, indicating a mortgage is needed to buy the home

What to look out for when choosing a UK buy-to-let mortgage?

Below we look at some top tips on what to watch out for when choosing a buy to let mortgage.

Buy to let mortgages are different from residential mortgages in many ways. For example, their eligibility criteria are often stricter, and they typically require a larger deposit. Many buy to let mortgages are interest only and many lenders have specific exclusions (such as houses of multiple occupancy).

It's critical that you fully understand the rental property market and what will be expected of you in terms of your mortgage payments (and other fees). And you should be aware of how to accurately estimate your monthly rental income, as that affects your ability to meet your mortgage obligations and it affects how much you'll be able to borrow when applying for a loan.

It's also important to know which tools are available to help you make an informed decision when it comes to finding the perfect buy to let mortgage and finding the best buy to let property.

Image of a UK cottage with a thatched roof

Check whether you meet the eligibility criteria for a BTL mortgage

One of the first things to consider when you’re looking for a buy to let loan, is whether you meet each lender’s minimum eligibility criteria. 

Otherwise you could be wasting your time looking at attractive mortgages that you don’t qualify for.

Most of the large banks and building societies in the United Kingdom will require you:

  • are at least 18 years;
  • have a minimum income of £25,000 a year;
  • and have a good credit rating.

Often first time property buyers aren't eligible for buy to let mortgages. But there are specialist lenders who may be willing to provide finance to first time buyers. 

One important factor to bear in mind is that you'll usually need to show that your expected rental income will be at least 125% or more than your mortgage repayments. That also helps to ensure that you will be able to meet your monthly payments.

Useful Tips: 

  • In addition to looking at eligibility criteria for buy to let mortgages, also look at the mortgage provider and their specific exclusions. This will also help you see whether your specific circumstances exclude you from certain mortgage deal offers. 
  • For example, some lenders specifically exclude non-UK citizens. Other mortgage providers exclude certain types of building construction like houses built with thatched roofs. 
  • Many buy to let mortgage providers also specifically exclude properties that will be rented as houses of multiple occupation (HMOs), or homes that will be rented to a close family member.
  • Consider getting advice from a registered mortgage advisor at this stage, who can help you save time selecting buy-to-let mortgages that you would qualify for. If you choose a broker who offers 'whole of market' advice, then you’ll have access to a wide range of options (rather than a broker who only works with a limited number of lenders).

Be accurate when comparing the best buy-to-let deals

Once you've narrowed down the list of buy to let mortgage providers and deals that you’re eligible for, you can move on to comparing these mortgages. 

While you can also manually compare different deals, that can take a lot of time and effort.

To help you make accurate comparisons more quickly, there are a range of online buy-to-let mortgage comparison tools that can be helpful. They can help you narrow down the list of potential lenders and the deals that suit your personal circumstances. These buy to let comparison tools include Uswitch, MoneyFacts, MoneySuperMarket and Money.

Mortgage advisors can also help you compare deals, lenders, and mortgage options.

Useful Tips

  1. Make sure you use a range of mortgage comparison tools and don’t just rely on one, as they can provide slightly different results.
  2. Make sure you get advice from a reputable and registered mortgage advisor
  3. When comparing mortgage deals, compare mortgage rates, mortgage terms, associated fees, down payments and the deposit required. Also look at whether you’re eligible for overpayments (or if you'll face any penalties for making early payments) and compare the overall cost of each deal (not only the rates). 

choice, select, decide

Select a reputable buy-to-let lender

There are a range of different lenders that offer BTL mortgages in the UK. These include many of the big banks, building societies and specialist mortgage lenders. There are also some innovative peer-to-peer lending and fintech options becoming available. 

Whichever lender you decide on, make sure that they have a good reputation and that they are registered with the Financial Conduct Authority (FCA). It’s also worth checking how satisfied other customers have been with different lenders. There are many online customer satisfaction surveys of large mortgage lenders that can provide useful insights in this regard.

And, you may want to look at the lender’s track record when it comes to mortgage complaints lodged with the Financial Ombudsman Service. Your mortgage broker should be able to give you advice about the best lenders, so that you can ensure that your investment and deposit are safe. 

Useful Tips:

  • You can check with the FCA whether your chosen lending firm is registered with them (and therefore regulated by the Financial Conduct Authority).

home, couple, mortgage

Check that your mortgage broker is qualified and registered

There are a range of benefits to using a mortgage advisor or broker. If you’re wondering how to choose a good mortgage broker in the UK, then the first step should be to check that they’re qualified and registered. 

In the UK, mortgage brokers should have a Certificate in Mortgage Advice and Practice (CeMAP) or Chartered Insurance Institute Certificate in Mortgage Advice (Cert MA) that’s approved by the Financial Conduct Authority (FCA)

Mortgage brokers also need to be registered with, and authorised by, the UK Financial Services Authority to provide mortgage advisory services, which you can check on the financial services register.

You can also use online customer service reviews to get a sense of how happy others have been with the broker you have in mind to use.

Useful Tips:

  • Ask your broker if they are “whole of market” which means that they can access all mortgage deals from a wide range of lenders. That’s because some advisors are tied to one or two specific lenders only, so you’ll only get access to a limited number of deals. 
  • Ask your advisor what brokerage fees they charge, and if those fees are a flat rate, a percentage rate, or commission-based. Many mortgage advisors don’t charge fees as they are paid commission directly by lenders. 
  • Ask your mortgage advisor what services they offer and if they handle the administrative tasks involved in your mortgage application like following up with lenders. 

Check what mortgage deposit is required (it's usually more than with residential mortgages)

It's good to be aware of the fact that deposits for buy to let properties are usually higher than for residential mortgages. Most UK BTL lenders will therefore require you to put down a minimum deposit of about 25% of the property’s value. 

When searching for BTL mortgages, it’s tempting to just look at the lender’s interest rates. But it’s important to consider the whole range of costs and implications of the mortgage you’re considering. And that includes how much deposit will be required, whether it's a fixed rate or a variable rate, what the term (or duration of the mortgage is), and any additional fees.

Consider carefully whether the deposit amount is affordable for you. In general, the bigger the deposit you’re able to put down, the more favourable the mortgage rates you may be offered. 

useful Tips

  • Consider the source of funds for your deposit. Most lenders want this to be from income saved. If you're planning to rely on funds that are gifts, or from other sources like cryptocurrency, then it’s best to check with your lender whether this will be acceptable. 
  • Use an online mortgage calculator tool to help you estimate what mortgage you're eligible for and how much deposit will be required.

calculator, calculation, insurance

Check if the type of property you want to buy is eligible for a buy-to-let mortgage

As mentioned above, many mortgage providers have specific exclusions when it comes to buy to let home loans.

There are certain types of properties that you may struggle to find a buy to let mortgage for. That frequently includes houses of multiple occupation (HMOs), properties that are intended to be holiday rentals, and properties with specific types of construction like thatch roofs. 

If you’re looking for a specialist BTL mortgage, then you may want to look at specialist buy to let mortgage lenders. They may be more willing to offer loans for properties that typically get excluded from mortgages.

useful Tips

  • Check each lender's list of specific exclusions when it comes to their buy-to-let mortgages.
  • Consider up front who you will be renting your property to, and whether that is a commonly excluded property use by lenders.

apartments, architecture, balconies

Accurately calculate your expected rental yield (and rental income)

Another critical factor to consider when you’re getting a buy to let mortgage is whether you've accurately calculated your expected rental yield. 

That’s because lenders will need this information to decide on how much they’re willing to provide as a mortgage. If you’re a basic-rate taxpayer, lenders usually require that rent has to be 125% of the interest that you owe on your outstanding mortgage.

Calculating your rental yield is also important for cash flow. That's because if you've overestimated this amount, you may not be able to afford your mortgage payments and could run into debt.

Calculating your rental yield means you also need to work out all the costs associated with owning a property. These costs need to be deducted from your rental income.

When you’re trying to figure out how to accurately calculate your expected rental yield, there are some useful tools and resources that can be helpful. That includes online rental yield calculator tools. 

It's also prudent to speak to local estate agents in the area where you’re buying the property to see what other similar properties monthly rentals are. That can give you a rough idea of how much rental income to expect - and also whether the property value has been correctly estimated.

Another useful tool that you can use to find real-time data about property rentals in any area of the UK, is Pivro’s property investment analysis platform that can help you identify the best property deals from across the United Kingdom. It allows users to drill down into property data aggregated from multiple sources, giving you quick, comprehensive, real-time analysis and insights.

useful Tips:

to build, reside, rent

Check what mortgage fees and other associated costs you will owe

Taking out a mortgage for a rental investment can be a complex and complicated process. That’s because in addition to the mortgage repayment rates, there are also a host of other associated mortgage costs that you need to consider. 

These costs can all mount up and become quite expensive, so you need to make sure you’re prepared for them and have included them in your overall budget.

List of possible fees that are directly related to your mortgage

Here are some of the typical costs related to getting a buy to let mortgage in the UK:

  • Mortgage advisor fees
  • Deeds release fee
  • Lender arrangement fee
  • Booking fee
  • Property valuation fee
  • Conveyancing fees
  • Legal fees
  • Early repayment fees
  • Mortgage exit/closure fees

mortgage, house, money

List of possible fees related to owning a rental investment property in the UK

And here's a list of other costs associated with owning a buy to let home that you'll need to factor into your budget:

  • Stamp duty
  • Capital gains tax (if you sell the property and make a profit)
  • Maintenance and repairs costs
  • Letting agent fees
  • Accounting fees
  • Buildings insurance
  • Compliance fees (e.g. annual gas compliance certificate)
  • Landlord insurance

diy, do-it-yourself, repairs

Understand the implications of your buy to let mortgage deal terms

It’s also vital to understand all the risks and implications of a buy to let mortgage. Knowing what you will be expected to pay, how often, and by when it is critical for your own financial planning purposes.

And knowing the full range of costs you’ll be liable for, will help you make a more informed decision when it comes to buying a buy to let and the type (and term) of buy to let mortgage.

useful Tips

  • Read the fine print! As will all legal contracts, it’s very important to read the full contract before you sign it. If you’re unsure about anything, then ask questions and get proper advice from a qualified and registered advisor. 
  • Be aware that there are key differences between buy to let mortgages and residential mortgages. And most buy to let mortgages aren’t regulated by the Financial Conduct Authority (FCA).

Other considerations before you purchase a buy to let property (and looking for buy to let mortgages)

Before you embark on buying a rental property, you may want to consider some of the risks involved.

Below are three key considerations to bear in mind, before you start looking for buy to let mortgages.

Should I set up a limited company before purchasing a buy to let?

Before you buy a BTL property, you may want to consider the benefits of setting up a limited company to make that purchase. 

You’ll need to get some expert advice on this, as the figures will be stacked differently for everyone, depending on your particular circumstances. 

Some of the benefits associated with buying a property through a limited company include the fact that then all the costs (including mortgage payments) can be deducted as business expenses when calculating how much annual tax you owe. There can also be tax benefits.

helpful tips:

  • Do more research about getting a buy to let mortgage for a limited company

laptop, office, hand

What's the risk of having undesirable tenants?

Have you thought about who you'll rent your property to?

Depending on the type of property, its location and the demand for rentals in that area, you may struggle to find a tenant. Or you may struggle to find the rental income you were expecting. Or you may get undesirable tenants who cause damage, nuisance, or refuse to pay.

Any of these scenarios can cause administrative, legal and financial costs and implications for you.

helpful tips:

  • Consider speaking to local rental agents about the types of tenants in the area you're looking to invest in.

office, space, desk

How important is local property market knowledge when buying?

If you’re not aware of local property trends, then you might struggle to find tenants. For example, is there weakening demand for rentals in a particular area?, Or how is the ban on letting agent fees affecting rentals in the area? And do you know what types of tenants to expect in your property's area?

When you buy a property to rent out, it’s good to have some local knowledge of the area where the property is located. 

helpful tips:

  • Speak to local estate agents to find out about the latest property trends.

houses, colour, colourful

Final thoughts on what to consider before getting a buy-to-let mortgage 

A buy to let mortgage is a serious commitment that comes with many risks and obligations. It's imperative to get proper advice, and to do thorough research before choosing a mortgage. After all, you want to be certain you can meet the repayment mortgage amount from your rental income.

Some of the important factors to consider when choosing a buy to let mortgage include the mortgage term, the minimum deposit required, the risks associated with interest rate changes, and your expected monthly mortgage repayments.

It's also important to consider all the costs of owning a buy to let property, such as agency fees and home insurance. Plus the logistics and admin of dealing with tenancy agreements, and doing the annual accounting and tax returns.

And don't forget about the importance of a realistic purchase price, property valuation and an accurate expected or potential rental income calculation.

Contact Pivro

To learn more, contact Pivro and speak with a marketing automation for property professionals expert who can answer any questions you might have.

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