If you want to start earning a rental income, then you need to be fully prepared to follow all of the rules and regulations that come with it. Some of those rules will come from the government, others from your mortgage lender.
For example, did you know you can’t just rent out your home? The only time you can rent out your main residence without contacting your mortgage lender is if you don’t have a mortgage lender at all and instead own the property outright.
There are also different buy to let mortgages, which work differently.
The good news is that you’re in the right place to learn more about how a buy to let mortgage works, so read on:
How does a buy to let mortgage work?
A buy to let mortgage lets you:
- Buy a rental property and start renting it out to tenants.
- Switch your residential property to a rental unit so you can rent it out to tenants.
A buy to let mortgage cannot help you in these instances:
- You want to rent three or more rooms out to non-related tenants (earn a rental income per room)
In this case, you would need an HMO mortgage and an HMO license from the local council. HMO stands for House in Multiple Occupation. Student properties count. If your tenants live with multiple flatmates, then it’s also an HMO.
- You want to rent out to businesses
If you want to buy and rent out a commercial property, you will need a commercial mortgage. You cannot rent out a residential property and use it for commercial purposes without first changing the planning permissions.
- You want to buy or develop an apartment building
You will again need a commercial property loan to buy an apartment unit or office building. You’ll need a special kind of commercial mortgage to develop one of these buildings.
How does a buy to let mortgage work differently than a standard mortgage?
Technically, a BTL mortgage will work the same as a standard mortgage. Every month, you’ll need to pay back the interest and the principle. At the end of the total loan agreement, you’ll own the property outright.
What changes is what lenders look for. So, what do lenders look for from your BTL mortgage application:
Loan to Value
BTL mortgages come with higher deposit requirements. This is because the LTV that they cover is usually between 60 to 75%. What does this mean? Essentially, you can get a loan that covers between 60 to 75% of the property’s cost. You will then need to cover the rest. If you already own the property and have equity in it, then this counts. Otherwise, you’ll need to put forward a 25% to 40% deposit.
Rental Ratio
Your lender will want to know if the rental ratio you can expect for a property like yours in its area will bring in more or less than your mortgage repayments. A rental unit in a very in-demand area of town, for example, can fetch higher rental rates than what you would pay on the mortgage.
In general, you will need the rental income to be 125% of the loan. If the rent is £1000, then the mortgage needs to be £800 or less per month.
How does a BTL mortgage work once you get it?
BTL mortgages work in the same way as many residential mortgages. This means that you have:
- Fixed rate: You pay a set interest rate for a select period of time. Once that period is over, you are switched to the standard variable rate until you remortgage or move mortgage products.
- Variable: You can pay the standard variable rate or the Bank of England’s base rate.
- Tracker: With a tracker buy to let mortgage, you will pay the rate set by the Bank of England, plus an extra percentage.
How to repay your rental’s loan
You will repay your rental property’s loan the same way you do your residential property. This means you make regular repayments on time. Some lenders may let you pay off a certain amount towards the principle per year.
You can also make a bigger deposit towards the principle at the end of the fixed term period. If you try to pay too much or pay it all off outside of those agreements, you may need to pay an early repayment charge.
How can you get a buy to let mortgage?
If you’ve familiarised yourself with buy to let mortgages and are ready to see if you qualify, you may be asking yourself, “how can I get a buy to let mortgage?”
The lending criteria is stricter for buy to let mortgages than it is for a standard residential mortgage. That’s why if you’re ready to make the step towards becoming a landlord, we recommend reading through our how to get a buy to let mortgage guide or getting in touch with a mortgage advisor to learn more about the process directly.
