Is your client ready for a buy-to-let mortgage?

The buy-to-let market in the United Kingdom continues to attract new and experienced landlords. Most of them see property as a way to build long-term wealth while others see it as an option to boost their current earnings. But buying a rental property is not the same as buying a residential one. 

This is where mortgage brokers come in. Landlords often need expert advice to understand the different rules and costs involved. In this article, Mortgage Introducer will talk about everything you need to know about buy-to-let mortgages in the UK. We will discuss if this type of mortgage is worth it, how much deposit is needed, and more. 

What are buy-to-let mortgages? 

A buy-to-let mortgage is used when the borrower wants to rent the property to someone else. They don’t intend to live in the property since they’ll lease it out to tenants. Their goal is to make money from rent or from selling the property later. 

This type of mortgage can have higher interest rates than standard home loans. It also requires a larger deposit. Banks and mortgage lenders can ask for more than 20 percent of the property price. They might also check the expected rental income. 

Most buy-to-let mortgage providers require the rent to cover the monthly mortgage payments by at least 125 percent. Some ask for 145 percent. 

Watch this video to further learn how buy-to-let mortgages work: 

If you wish to be one of the best mortgage brokers in the UK, you should learn how to navigate the buy-to-let market and become a top choice for landlords. 

How much deposit is needed for a buy-to-let mortgage? 

While the rules around buy-to-let mortgages can be similar to regular residential mortgages, there are some variations. One of those key differences is the deposit that your clients will put down. 

The minimum deposit for a buy-to-let mortgage in the UK is 25 percent of the value of the property, which is higher than most regular mortgages. Occasionally, buy-to-let mortgages can be anywhere from 20 percent to 40 percent.  

A buy-to-let mortgage could also provide your clients with capital growth. This means that their property will likely appreciate over a longer period. Then, when they eventually sell the house, they will make an additional profit. 

Who is a buy-to-let mortgage for?

As mentioned above, buy-to-let mortgages are for those who want to rent out their property to gain profit. Some of them might already own other rental properties, making them experienced landlords. Others might be buying rental property for the first time. 

Your clientele can include those who are: 

• saving for retirement 
• planning to earn extra income 
• looking for long-term investments 

If you’re a mortgage broker or an aspiring one, you must check if taking out a buy-to-let mortgage is a good decision for your clients. 

How to help buy-to-let mortgage applicants 

Here are five ways you can provide support to your clients who want to apply for buy-to-let mortgages: 

1. check if your clients understand the risks 
2. make sure your clients can afford a larger deposit 
3. verify the rental income carefully 
4. explain the tax rules and changes 
5. help your clients compare different mortgage options 

Let's take a close look at each: 

1. Check if your clients understand the risks 

Making sure that your clients understand the risks is vital. New and inexperienced landlords might think that buying rental property is safe and without loopholes. But property prices can go up and down. If they forgo this consideration, your clients could lose money. 

In worse cases, they might owe more on the mortgage than the property is worth. It’s also possible that the rent won’t cover the mortgage payments. There are expenses they must prepare for as well such as repairs, insurance, and others. 

And of course, your clients should plan for times when their property might be vacant. These are called “void periods.” The landlord must still pay the mortgage during these times. Ask your clients what they would do if they had no rental income for a few months. Do they have savings or other income to cover the gap? Helping them prepare for these risks will protect them in the long run. 

2. Make sure your clients can afford a larger deposit 

Most banks and mortgage lenders ask for a larger deposit on buy-to-let mortgages than they do for residential loans. A typical deposit is at least 20 percent of the property price. Some might ask for 25 percent or even 40 percent. 

Be sure that your clients know this before they start looking for a property. It can be disappointing if they set their heart on a property they cannot afford. 

On a positive note, a larger deposit not only helps them qualify for the mortgage but can also give them better rates. A lower loan-to-value (LTV) ratio means lower risk for the mortgage lender. For your clients, this can mean cheaper monthly payments. 

A bigger down payment can also give your clients more choices when it comes to competitive rates and deals. So, talk to your clients early on about how much they have saved. Remind them to keep money aside for other costs like legal fees. Finally, a larger deposit is good, but your clients should never use all their savings for it. 

3. Verify the rental income carefully 

Banks and mortgage lenders will usually check the rental income when they review buy-to-let mortgage applications. They need to see that the rent will more than cover the mortgage payments. Your clients might need to show a rental valuation from a letting agent. 

Some mortgage lenders accept expected rental income based on market research while others might want a formal valuation. Remind your clients not to rely on rental income alone. 

From the get-go, your clients should check local demand as some areas might have lots of empty properties or falling rents. Help them do their research so that they can be sure that their chosen property will bring in enough rent to cover costs. 

4. Explain the tax rules and changes 

Tax on rental income and capital gains tax when selling can affect how much your clients make. Some landlords don’t fully understand the tax rules. Plus, these rules have also changed in recent years. 

One of the biggest changes is that landlords can no longer claim full tax relief on mortgage interest. Instead, they get a tax credit worth 20 percent of their interest costs. This can make a big difference to higher-rate taxpayers. 

There are other taxes to think about too. Your clients might have to pay extra stamp duty when they buy the property. They might also have to pay income tax on their rental profit. When they sell, they might owe capital gains tax on any profit they make. 

These costs add up. You aren’t expected to give tax advice, but if you’re able, you could at least explain the risks. You can suggest your clients to speak to a tax expert if they are unsure. Connecting with related industry professionals can be a huge plus when it comes to referrals and repeat clients. 

5. Help your clients compare different mortgage options 

Buy-to-let mortgages can come with varying interest rates, fees, and terms. Since your clients might only be focused on the monthly payments, remind them that there are other things to think about. For instance, some deals can have high fees but lower rates. Other offerings might have no fees but higher rates. You can help your clients work out the total cost of each option over time. 

You should also explain the difference between repayment and interest-only mortgages. Most landlords choose interest-only mortgages because the payments are lower. However, they must plan how they will pay back the full loan when the term ends. Repayment mortgages cost more each month but reduce the loan over time. 

As a mortgage broker, you can ask your clients what their long-term plan is. Do they plan to sell the property? Will they use savings to repay the loan? Their answers to these questions can give you a picture of their goals for their rental property. 

Is it hard to get a buy-to-let mortgage? 

It depends. Getting a buy-to-let mortgage can be hard if your clients don’t meet the qualifications set by the bank or mortgage lender. 

Usually, they have certain requirements and limits for the following: 

• rental income 
• property type 
• personal income 
• down payment 

Proper planning and sound advice can help your clients improve their chance of approval. 

Is buy-to-let still worth it? 

Whether a buy-to-let mortgage is worth it depends on many factors, including your clients’ personal and financial objectives. Ask about their investment goals and long-term plans before taking out this type of property loan. There are landlords who want to build property portfolios as well as those who just want to earn extra monthly income.  

Talking openly about these plans early on can help your clients avoid mistakes. You’ll also be able to offer advice based on what matters most to them. 

Watch this video to help you analyse if buy-to-let mortgages fit your clients’ situation: 

External factors 

There are other factors aside from your clients’ reasons for investing. Whether a buy-to-let mortgage is worth it can also depend on what’s happening in the mortgage market. What’s the demand like in the area where they want to buy? Are property prices rising or falling? What types of homes are popular with renters? 

These are all vital questions and as a mortgage broker, you must be knowledgeable enough to know the answers. If not, take the time to research and educate yourself. If you’d like to go the extra mile, you can even take a real estate investing course. These programmes might be targeted at property investors but the lessons you’ll get will surely improve your skills and strategies. 

What are the current mortgage rates for buy-to-let? 

Buy-to-let mortgage rates can change often. They depend on factors such as: 

• the Bank of England base rate 
• economic factors (e.g., inflation, wage growth, political changes, and global events) 
• your clients’ LTV 
• your clients’ credit history 

Buy-to-let mortgage rates are usually higher than residential mortgage rates. This is because banks and mortgage lenders often see buy-to-let mortgage applicants as riskier. To know the current mortgage rates for buy-to-let, you can visit our guide to Buy To Let Mortgage Rates. You can check back weekly or favourite this page to monitor the ever-changing rates. 

Difference between residential and buy-to-let mortgages 

To compare the two mortgage types, let’s first go over buy-to-let mortgages again. This is for those who want to rent the property out. They won’t make it their primary residence and instead, will use it to gain additional funds. 

For banks and mortgage lenders, they’ll focus on the landlord’s expected rental income. They might also ask for a bigger deposit, often 20 to 25 percent or more. The interest rates are higher because mortgage lenders see it as riskier. 

On the other hand, residential mortgages are for people who plan to live in the property. This is the type of mortgage that people take out to purchase their main home. Mortgage lenders will look at the applicant’s financial profile to check if they can afford the monthly payments. 

As opposed to a buy-to-let mortgage, the deposit for a residential one can be much lower. It can sometimes start at just 5 or 10 percent, depending on the mortgage deal. 

Why buy-to-let mortgage applicants need mortgage brokers 

Buy-to-let mortgages give property investors a way to earn rental income and grow their property portfolio. But these mortgages can come with higher costs. Property loan providers can also ask borrowers to put a large down payment. These can also come with rental income checks. 

As for taxes, changes have made it harder for some landlords to turn a profit. This is why they need your aid to understand the full picture before they apply for a buy-to-let mortgage. 

You must explain how this kind of property loan works and compare mortgage offerings from various banks and mortgage lenders. You can also help your clients avoid mistakes by making sure they meet all requirements and understand the risks. With your advice and expertise, they can improve their chances of success in the rental market. 

Want to get the latest updates about the buy-to-let market in the UK? Check out our Buy-to-let News page!