Compare the lowest rates for buy-to-let mortgages

What is a buy-to-let mortgage?

You must have a buy-to-let mortgage if you want to buy a property to rent out to tenants. Here’s how buy-to-let is different from ordinary residential mortgages:

• More expensive. Buy-to-let mortgages are typically about one percentage point more expensive than residential mortgages. This is because banks view tenants as higher risk than owner-occupiers.
• Watch out for fees. Some buy-to-let mortgages also have high arrangement fees – as much as 3.5 per cent of the property value.
• You only pay interest. Most buy-to-let mortgages are paid on an interest-only basis. This makes monthly payments cheaper because landlords only pay the interest and don’t have to pay back any of the capital. When the loan matures, typically after 25 years, the capital will need to be repaid, usually by selling the property.
• Rent is crucial. You don’t have to pass the same affordability tests as you do with an ordinary mortgage. Instead, you normally need to prove that your monthly rental payment will cover at least 125% of the interest-only mortgage payment.It’s worth noting that many lenders use their standard variable rate (SVR) for this calculation, instead of your initial two or five year fixed rate, for example.So if your mortgage (on your lender’s SVR) was £500 a month, you would need to charge rent of at least £625.
  Your lender will send a surveyor round to assess the ‘rental value’ of the property.
• Running costs. Lenders calculate you will need this extra 25% to cover things like letting agent fees, maintenance, insurance and annual safety checks, for example. Bear these costs in mind.
• Larger deposit. You will need a deposit of at least 25 per cent of the property’s value to get a buy-to-let mortgage. This means if you were buying a £100,000 house, you would need to put down £25,000 from your own savings.

Who needs a buy-to-let mortgage?

You must have a buy-to-let mortgage if you want to buy a property to rent out to tenants. Here’s how buy-to-let is different from ordinary residential mortgages:

• Professional landlords. If you’re thinking of buying a house specifically to let, you will need a buy-to-let mortgage. You cannot just get tenants in and not tell your lender. This is breaking the terms of your contract.
• ‘Accidental’ landlords. It’s more complicated if you already own a home and are thinking of renting it out. This might apply if you’re unable to sell, for example. You must ring your mortgage lender and tell them your plans. You need to get their ‘consent to let’ the property. Unfortunately there is huge variation amongst banks when it comes to dealing with accidental landlords. Some will charge you perhaps 1 or 1.5 percentage point extra interest. Others will insist that you remortgage onto a buy-to-let deal, in which case you should shop around for the best deal. Talk to your existing lender first to find out your options.

What sort of mortgage should I get?

As with ordinary mortgages, you can choose a:

• Fixed rate. Where your mortgage payments are the same every month, or a
• Tracker rate. Where your payments go up and down in line with the Bank of England base rate.

Trackers are normally a bit cheaper but you are taking more risk as your monthly payments can increase. Your choice will largely depend on what you think will happen to the base rate over the coming years.

If you are worried that the base rate will increase soon, and you might not be able to afford the increase in monthly payments, it’s best to opt for a fixed rate.

If you’re confident the base rate will stay low for several years, and could afford an increase in mortgage payments, opt for a tracker.

You can work out how interest rate rises would affect your monthly payments using a mortgage calculator.

Save as much as possible for a deposit

Unlike residential mortgages, you will need a deposit of at least 25% of the property’s value if you want to become a landlord.

The interest rate you get depends on the size of your savings. The cheapest rates are for those with a deposit of 40 per cent or more of the property’s value. So if you were buying a house for £100,000, you would need £40,000 in savings to access the best deals.

What happens when my buy-to-let deal comes to an end?

WARNING: It’s vital to take action a couple of months before your initial fixed or variable rate ends. Look at our best-buy deals or speak to a mortgage broker to see if you can remortgage onto another cheap rate. Otherwise you will be automatically placed onto your lender’s standard variable rate (SVR) which is normally much higher and will mean a sharp increase in your monthly payments.

• Bear in mind that buy-to-let arrangement fees can be very high, which makes it expensive to keep re-mortgaging to a cheaper interest rate. So you could choose a longer term deal – such as five years – instead of two years if you’re confident you won’t need to sell the property in that time.