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Investment

Investing in property: A guide to buy-to-let mortgages

If you want to buy a property that you plan to put on the rental market, you won’t be able to fund the investment using a standard residential mortgage. If you do need a mortgage to finance the purchase of the investment property, you’ll need a buy-to-let mortgage, also known as a BTL mortgage.

A BTL mortgage is a specific type of mortgage that is taken out to purchase investment property rather than a home to live in. They are often taken out by individuals or limited companies set up to hold investment property. There are different types of buy-to-let mortgages, just as there are different types of residential mortgages such as the different fixed-rate or variable-rate products.

Investing in BTL properties has a long-standing appeal because the property is considered a safe investment over the long term. Even though property values can dip over many years and decades, the majority of property values will increase at a greater rate than inflation. This guide will explain the fundamentals of buy-to-let mortgages and the process for those who are new to property investment.

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Have you heard…
 

A rental yield is the rental income from a property minus the accumulative costs of the investment, mainly the BTL mortgage repayments. In the third quarter of 2023, the East Midlands had the highest average rental yields in the UK, measuring in at 6.1%. On the other hand, Central London had the lowest average rental yield of 4.1%.

Understanding buy-to-let mortgages

Buy-to-let mortgages are used exclusively to purchase investment properties that, as their name suggests, are to be let out to tenants. You cannot use a standard residential mortgage to purchase a property as these are mortgages taken out to buy property to live in. BTL mortgages are known to be slightly more difficult to be approved for due to increased risk, however, they can be a lucrative long-term investment.

Lenders consider the purchasing of buy-to-let property as a greater risk for the investor and, therefore, for themselves when providing finance for these purchases. This is because the investor will typically rely on part of the rental income to keep up BTL mortgage repayments, which isn’t considered as reliable as repaying a residential mortgage with your salary. For example, bad tenants could stop paying rent, which could then cause the investor to miss BTL  mortgage repayments.  

For this reason, lenders will scrutinise projected rental income when assessing a BTL mortgage application, and it’s also why some lenders may offer a smaller LTV ratio on these loans, meaning you could need a bigger deposit. Lenders will consider many other factors when assessing you for a buy-to-let mortgage, including your credit rating, existing debts and personal income. If you can show less reliance on the projected rental income to pay the mortgage, the BTL mortgage provider could be more likely to approve your application.

Tips for getting a BTL mortgage

Our team can provide individual advice and assistance to secure a buy-to-let mortgage for your first investment or to add to your wider portfolio.  While every situation is different, we typically advise new investors applying for a BTL mortgage to:

  • Get your finances in order
  • Be open to a range of lenders
  • Be prepared to provide additional documentation
  • Know your investment plan
  • Put down a larger deposit if possible
  • Consider a government-backed loan (when available)
  • Work with a qualified mortgage broker
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Financing your buy-to-let investment

A buy-to-let mortgage is the most commonly used financing option to purchase an investment property. Lenders consider an array of data to decide whether to approve a BTL mortgage application or not. The lender will want to ensure the investment is affordable and typically prefers that you won’t rely on 100% of the rental income to repay the mortgage. Each lender uses its own eligibility criteria and assessments in this regard so there isn’t a standardised list of criteria or rules.

As part of the BTL mortgage affordability process, the prospective lender will calculate the property’s rental income projection based on similar rental properties in the same area, as well as your other debt liabilities and personal income. The lender will also consider the type of rental when calculating rental income projections, such as whether the whole property will be rented out to one party of renters (individual, couple or family) or whether the property is a House of Multiple Occupancy (HMO) with multiple parties renting different parts of the property.

Investors can use projected rental income and estimated BTL mortgage repayments (along with other costs) to calculate the rental yield. To get a more accurate estimate of a rental yield on different investment properties, it is best to speak with an experienced BTL mortgage adviser or financial adviser.

An alternative option to using a BTL mortgage is limited company financing. There are certain loans available to companies that wish to purchase investment property. Naturally, this will only be available if you are purchasing the property through a limited company, which offers some tax-efficient benefits compared to purchasing an investment property as an individual. There are also drawbacks to this option, which are best discussed with a financial adviser.

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Maximising returns and mitigating risks

Investors aim to maximise their rental yields, which is made easier by improving the property’s security and the quality of the finish to the property throughout. However, there is a balance to be struck as investors shouldn’t renovate the investment property to a standard that exceeds the ceiling of rental potential for their type of property in its location. Improving the quality of the property and keeping up with its maintenance is, however, essential to increase the value of the property over time.

Maintaining the property with regular, frequent checks can also be viewed as a way to mitigate the risks of owning an investment property. Another way to mitigate investor risk is to consider insurance products that replace rental income when tenants have not paid in full or on time, ensuring BTL mortgage payments won’t be missed.

To discuss BTL mortgages and your individual situation in more detail, don’t hesitate to contact our friendly team. We can also help with related financial products, such as property and rental income insurance.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

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