What is a buy to let mortgage?

If you’re thinking about investing in a property and have just started to research your mortgage options, you’ve probably already come across a number of terms that you don’t understand. From arrangement fees and fixed rate mortgages to comparison APRs, early repayment penalties and trackers, getting your head around mortgage terminology is the first step in getting your foot on to the property ladder.

One term you’ll hear over and over again is ‘buy to let’. A popular type of mortgage, buy to lets are a must-have for any investor looking to buy a property to rent out. If you’re thinking about purchasing a buy to let yourself, here’s a quick guide to this unique and useful type of mortgage.

Buy to let mortgages

A buy to let mortgage is an arrangement by which an investor borrows money from a lender to buy a property. Instead of living in that property, the investor rents it out to private tenants, bringing in an income and adding an asset to their portfolio.

Lenders, though more cautious than they were before the crash of 2008, provide a large number of buy to let products, giving professional landlords and investors an opportunity to make money out of the lucrative property market.

What is the difference between a buy to let mortgage and a residential mortgage?

There are a number of important differences between standard residential mortgages and buy to let mortgages.

For a start, buy to let mortgages are generally more expensive than residential mortgages. Most lenders charge larger arrangement fees and the interest rates can be considerably higher. What’s more, almost all lenders require a minimum 25% deposit for a buy to let mortgage, compared to just 10% for a residential option.

The formula that lenders employ to calculate the value of a property is also different to the one used on residential properties, as the income generated by tenants is taken into account.

Who can get a buy to let mortgage?

In theory, anyone with a deposit to put down can get a buy to let mortgage. However in reality, most lenders won’t offer loans to first time buyers unless they are investing with a person or persons who have previously had a residential mortgage.

Some lenders also have upper age limits on their mortgages. This means that the borrower will need to be less than 70 or 75 years old when the term of their mortgage finishes.

Can I rent my property without a buy to let?

If you're buying a property to rent out and are not planning to live there yourself, you’ll need to purchase your property using a buy to let mortgage. If you arrange a residential mortgage and then try to rent your property, you could face fines from your mortgage provider and put your property at risk.

However, if you have already lived in your house for a number of years and are planning to move into a new home and rent out your current property, you can apply to your lender to have your mortgage changed from a residential to a buy to let mortgage.

It’s up to the mortgage provider whether they agree to this change of use or not. If they do agree, most will ask for an administration fee to be paid before the transfer is complete.

Essential for all property investors, buy to let mortgages are a great way to make money out of the property market and add assets to your portfolio. As long as you follow the rules, raise the required capital and keep your finances in order, you should be in a great position to make the most out of your investments.