What is a Buy to Let mortgage?
How does a Buy to Let mortgage work?
Unlike a residential mortgage, a Buy to Let mortgage is usually taken out as an interest-only loan. This means your monthly repayments cover any loan interest that’s accumulated, but not the original loan amount.
You’ll need to pay back any money you’ve borrowed at the end of the agreement. There are lots of ways to do this including selling the property, using savings or agreeing new mortgage terms.
People often use the money made from the rent they charge to cover the monthly mortgage repayments. As rental income isn’t always guaranteed – sometimes a tenant may be late in paying their rent or the property may be empty – this can be seen as a risk.
How much can you borrow?
As well as your own financial circumstances, rental yields can also impact how much you can borrow for Buy to Let properties.
Rental yield is the return a Buy to Let landlord could make on a property. It’s worked out by taking the total rent payments for a year and dividing it by the property value, then multiplying this figure by 100.
1,200 x 12 = 14400
14,400 / 200,000
You may be required to have more of a deposit for Buy to Let properties – often 40% of the full property value. Typically, you’ll require a deposit of at least 20-25% of the property’s sale price.
Like residential mortgages, your eligibility can depend on several factors, including:
- Initial deposit
- Current salary
- Credit history
- Existing debts
- Rental yield
Remember, you’ll have to pay Stamp Duty (Stamp Duty Land Tax in Scotland) on any property you won’t be living in that’s worth more than £40,000 – so make sure you consider this when borrowing for a Buy to Let property.
Find out more about our mortgage interest rates with our mortgage calculator.
You could lose your home if you don’t keep up your mortgage repayments
What do you need for a Buy to Let mortgage?
When you’re ready to apply for a Buy to Let mortgage, you’ll need a range of documents as well as the deposit for the property. Documents often required include:
- Utility bills.
- P60 form.
- Payslips for the last three months, or proof of income and tax returns if self-employed.
- Proof of existing mortgage statement.
- Proof of additional income.
- Bank statements on all current accounts for the last three to six months.
- Proof of outgoings.
- Proof of identity (passport or driving licence).
- Details of the property you are looking to buy.
Can you get a Buy to Let mortgage?
Lots of factors are considered when assessing a Buy to Let mortgage application:
- Rental yield – Typically, this should be enough to cover your monthly repayments, plus any profit you wish to make.
- Age – Your age could affect whether you are eligible for a Buy to Let mortgage.
- Credit record –Your credit record is a report on your borrowing history and whether you’ve kept up with other repayments, such as credit cards and phone bills.
- Current income – Each lender has a minimum annual salary that applicants must meet.
- Current lending commitments – Your current financial situation will also be considered, including mortgage payments on your own home and any other monthly outgoings.
Costs associated with Buy to Let properties
There are several costs that come with managing a rental property, and you should consider these when deciding on a Buy to Let mortgage.
- Monthly repayments – even if the property isn’t rented out.
- Repairs and maintenance.
- General upkeep of the property such as cleaning and gardening.
- Mortgage interest and rental tax income.
- Rental agency fees.
- Annual safety checks on boilers and electrics.
- Redecorating and cleaning.
- Landlord insurance.
- Rent guarantee insurance.
Buy to Let mortgage benefits
There can be a number of benefits to having a Buy to Let property:
Things to consider with a Buy to Let mortgage
Having a Buy to Let mortgage also comes with risks – consider the following before making your application:
- You’ll need a larger deposit when applying.
- Fees and interest rates are usually higher.
- You may need Landlord and Buildings insurance to cover your property in case of damage.
- You’ll pay up to 3% extra on Stamp Duty (4% Lands and Buildings Transaction Tax in Scotland and 3% Land Transaction Tax in Wales) for any property that isn’t your primary residence.
- You’ll pay income tax on any rental income on top of your monthly mortgage payments.
- If you sell your Buy to Let property for more than the original price, you’ll be eligible to pay Capital Gains Tax.
- House prices can go up and down – this can mean you end up with negative equity. Negative equity is when you owe more on your mortgage than the property is worth.
What is a Regulated Buy to Let mortgage?
A Regulated Buy to Let mortgage – also called a Consumer Buy to Let mortgage – is for landlords who want to rent out a house they didn’t buy specifically to let. This usually occurs when:
- You previously lived in the property and moved out.
- The property was inherited.
Regulated Buy to Let mortgages are not available to people who already have a Buy to Let property.
Calculators & tools
We have a range of mortgage calculators to help you:
- Find out how much you could borrow from Lloyds Bank
- See how much you could save if you make overpayments on your mortgage
- Get an idea how a change to the Bank of England Base Rate could effect your monthly payments
Important legal information
Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065. Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278.
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