With the rental market booming, many may be wondering if they can get in on it with their own rental. Regardless of whether you want to start renting out a property you already own with a mortgage or you want to buy a property to rent out specifically, you are going to need a buy-to-let mortgage.

The only time you won’t need a buy-to-let mortgage is if you get a similar mortgage, like an HMO mortgage, or even a commercial mortgage if you plan on buying or developing an apartment building.

What you can’t do is rent out a property that’s on a residential mortgage.

With that knowledge in mind, you may be wondering what the difference is between a buy-to-let mortgage and if it’s more expensive than a traditional residential mortgage. This guide covers all you need to know about buy-to-let mortgage costs, so dive in.

Are buy-to-let mortgages more expensive?

Yes, buy-to-let mortgages are more expensive than residential mortgages, even if the mortgage you are getting is for the same building you already have. Why is that? Let’s get into it.

Why are buy-to-let mortgages more expensive?

There are several reasons why a buy-to-let mortgage is more expensive.

Tenants might refuse to pay their rent, for example. They may damage the property, or you might experience long vacancy periods where your property isn’t earning any rent at all. These facts make rental properties riskier to mortgage, hence the higher interest rates.

Even something like being a first-time landlord can make you a bigger risk for lenders.

Do note that you can expect higher interest rates for a buy-to-let mortgage even if you are an experienced landlord or property manager. You can have an impeccable credit score, too. The reason why these won’t matter is due to that initial tenant risk.

How much more expensive is a buy-to-let mortgage compared to a residential one?

You can expect a buy-to-let mortgage to have interest rates that are higher than residential mortgage interest rates by 1 to 2%. However, this may change depending on the economic situation and the lender.

This means that if your current mortgage is 4%, then you can expect to pay between 5 to 6%.

What affects buy-to-let interest rates?

One of the factors that will affect your interest rate is your loan-to-value (LTV). A smaller loan to value will open up more favourable interest rates. For example, if you have a 60% LTV, then you could get a 4.94% 2-year fixed rate. If you have a 75% LTV (which means the bank still owns more of your property), then a 2-year fixed rate would be around 5.09%.

What other costs change with a buy-to-let?

Higher interest rates aren’t the only increase that you can or should plan for:

Deposits

If you want to buy a property specifically to let out, then you’ll need a higher mortgage than your residential mortgage. While you can usually secure a residential mortgage for something as low as 10% or even 5% of the property price, buy-to-let mortgages usually need at least a 25% deposit.

Renovation costs

There’s a good chance that rental properties in the private rental market will legally need to meet Awaab’s Law if the Renter’s Rights Bill 2024 passes. This means you must fix health hazards like mould or damp within a set timeframe or face penalties. This may increase your initial investment amount.

Fees and Charges

On top of higher deposits and renovation costs, you may find that the conveyancing, valuation, and arrangement fees are higher. This is because you need not just to prove your financial standing but the value of the property as a rental unit. If you live in a highly popular area where units rarely go without a tenant, for example, you’ll have an easier time getting a rental unit than a remote location.

Do you have to get a buy-to-let mortgage?

You might wonder if you even need to get a buy-to-let mortgage if you already own the property. The answer depends on how you own it.

• You own the property outright: If you have the property outright, then you do not need to switch mortgages because you don’t have one.
• You own the property and have a mortgage: If you still have a mortgage, no matter how much of it is left, you will need to switch to a buy-to-let mortgage.

If your lender discovers you’re renting out your place without switching over your mortgage, then you risk heavy fines. In some cases, you may face imprisonment. If you want to rent out your property without switching to a buy-to-let, then you’ll need to pay it off in full.

How to reduce the cost of a buy-to-let mortgage?

There are a few ways you can reduce the cost of your buy-to-let mortgage.

1.    Use a higher deposit

The easiest way to reduce the costs of your buy-to-let mortgage is to simply put forward a higher deposit. This means you need to take out a smaller loan and prove you have equity already in the property that the lender can use as collateral to get their loan and interest back if you default.

2.    Wait till you own the majority of your home

If you already own your own, see what the loan-to-value of it currently is. If the loan now covers less than 50% (meaning you have 50% or more equity), you might be able to get more attractive mortgage rates for your buy-to-let mortgage.

3.    Pay off your mortgage

Of course, if you want to completely remove the buy-to-let fees from the equation, you can. You just need your property fully paid off and in your name.

4.    Shop around for offers

Going to a broker can help you see the available mortgage offers. If you can quickly see multiple offers from hundreds of potential lenders, you’ll be able to pick the mortgage product best suited to your needs.