Buy-to-let mortgages explained

If you’re planning to rent out your property, you’ll need a buy-to-let mortgage. Many lenders consider a buy to let mortgage as higher risk so you may need to need certain conditions to be eligible for one. These typically differ from lender to lender and may include the following:

• This isn’t always the case, but your lender may make it a condition that you already own your own home, whether outright or with an outstanding mortgage.
• You should have a good credit record and not stretched too much on your other borrowings, for example, credit cards.
• You may have to provide evidence of employment income or earnings from self-employment separate from rental earnings. This is typically around £25,000+ a year - if you earn less than this you might struggle to get some lenders to approve your buy-to-let mortgage.
• Lenders have a maximum age requirement which is usually around 75 years of age although some lenders may have lower age limits.
• A loan to value ratio (LTV) limit of at least 75%, so you’ll need a minimum 25% deposit for a buy-to-let mortgage.
• The amount you can borrow is based on the monthly rental you’re getting or are likely to get. Your rental income should cover 125% of your mortgage repayments.

Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences.

• The fees tend to be much higher.
• Interest rates are usually higher.
• The minimum deposit is usually 25% of the property’s value (although it can vary between 20-40%).
• Most BTL mortgages are interest-only. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full. BTL mortgages are also available on a repayment basis.
• Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy-to-let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.

Advising, arranging, lending and administering BTL mortgages for consumers is covered under the same laws as residential mortgages and is regulated by the FCA.

The maximum you can borrow is linked to the amount of rental income you expect to receive.

Your lender will want to be sure your rental income from your property will cover the mortgage payments, plus a bit extra.

Lenders usually need the rental income to be 25–30% higher than your mortgage payment.

If the rental valuation of the property is not high enough, the LTV the lender requires might be impacted, meaning you would need a larger deposit.

To find out what your rent might be, talk to local letting agents, or check rental listings online to find out how much similar properties are rented for.

Most of the big banks and some specialist lenders offer BTL mortgages.

It’s a good idea to talk to a mortgage adviser before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.

Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.

Here are some popular websites for comparing mortgages:

• Moneyfacts
• MoneySavingExpert
• MoneySuperMarket

• comparison websites won’t all give you the same results, so make sure you use more than one site before deciding
• it’s also important to do some research into the type of product and features you need before making a purchase or changing supplier
• don’t just look at the headline rates offered on the mortgage - there are often other fees and charges involved.

Don’t assume your property will always have tenants.

There will almost certainly be ‘voids’ when the property is unoccupied or rent isn’t paid and you’ll need to have a financial ‘cushion’ to meet your mortgage payments.

When you do have rent coming in, use some of it to top up your savings account.

You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.

If you’re a basic rate tax payer, Capital Gains Tax (CGT) on buy-to-let second properties is charged at 18%, and if you’re a higher or additional rate tax payer it’s charged at 28%. With other assets, the basic-rate of CGT is 10%, and the higher rate is 20%.

If you sell your buy-to-let property for profit, you’ll usually pay CGT if your gain is higher than the annual threshold of £6,000 (for the 2023/24 tax year). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £12,000 (2023/24) to be made in the current tax year.

You can reduce your CGT bill by offsetting costs like Stamp Duty, solicitor and estate agent fees or losses made on a sale of a buy-to-let property in a previous tax year by deducting these from any capital gain.

Any gain from the sale of your property should be declared to HMRC and any tax due paid within 30 days. The resulting capital gain is included with your income and taxed at whatever marginal rate (18% and/or 28%) you would then pay. It’s not possible to carry any CGT annual allowance forward or back, so it must be used in the current tax year.

The income you receive as rent is treated as taxable income and may be liable to Income Tax. This should be declared on your Self Assessment tax return for the tax year it was earned in.

In England, Wales and Northern Ireland, this might be taxed at 20%, 40% or 45%, depending on your Income Tax band. In Scotland, it might be taxed at 19%, 20%, 21%, 42% or 47%.

You can offset your rental income against certain allowable expenses, for example, letting agent fees, property maintenance and Council Tax.

You will only pay tax on your rental income if total income for the tax year exceeds your personal allowance. 

Landlords are no longer able to deduct mortgage interest from rental income to reduce the tax they pay. You’ll now receive a tax credit based on 20% of the interest element of your mortgage payments. This rule change could mean that you’ll pay a lot more in tax than you might have done before.