The basics of Buy to Let

How does Buy to Let work?

Buy to Let is where you get a mortgage for a home you want to rent out. The main difference to a residential mortgage is that with a Buy to Let mortgage the amount you can borrow is mainly based on how much rent you’ll earn, rather than your own income.

Your tenant’s monthly rent should cover your monthly mortgage payments. But keep in mind, you’ll have to make the mortgage payments, even if the property isn’t being let out.  

Becoming a landlord is not for everyone, and there are multiple things to consider before getting a Buy to Let mortgage.

How much deposit do you need for a Buy to Let mortgage?

As a general rule, you’ll need a deposit of around 25% or more of the property’s value, although some banks or building societies may ask for as little as 15%, provided the rental income is enough.

As with any type of mortgage, the more you can put down as a deposit, the better the mortgage deal you could get. A better mortgage rate means lower monthly payments and a bigger margin between your rental income and your mortgage costs.  

What is a Buy to Let property?

A Buy to Let property is any property that you own and plan to rent out. You can’t live in a Buy to Let property yourself.

How to choose a Buy to Let property

• Does the area have good transport links? Are there any plans to improve these?  
• What about schools, shops and local amenities (cinemas, restaurants, parks etc.)?  
• Is the area 'in demand' right now? Is that demand expected to grow long term?  
• What type of tenants are living in this area today (married couples, students, families on housing allowance etc.)?  
• Is that demographic expected to change any time soon?  
• What type of properties do tenants in this area desire most?  
• Is there a benchmark level of rent I can expect to receive here?  
• Are the majority of letting properties in this area furnished by the landlords?  
• Is there a certain property type which is expected to grow in this area, potentially even to a point of oversupply?  
• Are there any major developments due to begin here within the next 10 years?  
• What's the crime rate like in this area?
• What about schools, shops and local amenities (cinemas, restaurants, parks etc.)?  

These answers will help you make a more informed decision on your investment and give you a good understanding of how attractive your property might be to future tenants.

Becoming a landlord

Becoming a landlord is not something you should do on a whim. Buying a Buy to Let property can be a significant investment and not without its risks What’s more, being a landlord carries with it a number of responsibilities that you need to be prepared for.  

Cashflow

When taking on a Buy to Let mortgage you’ll be looking at the monthly mortgage costs and the rental income that your property can earn using our Buy to Let calculator. But remember, you might not   always have a monthly rent coming in – it may take a bit of time to find your first tenant, and you may have gaps, or rental voids, between tenants.  

You’ll probably want the equivalent of 3 to 6 months mortgage payments to ensure you can pay the mortgage if the property’s empty. You should also have a cash buffer or adequate insurance to cover any maintenance costs such as boiler repairs or new appliances.

Management

Owning a Buy to Let property can involve quite a lot of time and management on your part. You can pay an agent to look after a lot of the ongoing management of a property but this will typically cost a percentage of the monthly rent, so you’ll need to factor this into your costs.

You’ll also have specific responsibilities as a landlord such as making sure that gas and electrical appliances are in safe working order.

Tax

As a landlord, any profit you make renting your property will be liable for income tax. If a property is in joint names, then both owners will be liable.  

We recommend you speak to a tax adviser or accountant about how you can reduce your own tax bill.  

Tenancy deposit

If you rent out a property in England and Wales on an Assured Shorthold Tenancy (AST) then you must place your tenants’ deposit in one of the 3 official tenancy deposit protection schemes.

These government-backed schemes will hold on to the deposit on your behalf and if there’s a dispute with your tenants, the deposit will be protected by the scheme until the dispute is settled

You can find out more information on these schemes on the government’s website.  

Eviction

Should you ever need to evict a tenant, there are very strict procedures that you must follow. Hopefully it will never come to this, but if it does, make sure you know your rights in advance and what you need to do.

How to get a Buy to Let mortgage

Buy to Let applicants have different eligibility criteria than someone looking for a residential mortgage.

Make sure your rental income exceeds the cost of repayments

You need to be able to meet your mortgage payments and other costs as well as hopefully turn a profit using the monthly rental payments from your tenant. A good broker will advise which rate is the best option for your particular circumstances, you can also use one of our online mortgage calculators to get an idea of you mortgage repayments.

Think about your target rental demographic

This is one of the most important factors of buying to let. It includes thinking about the best location for the type of tenants that you are trying to attract.

Don’t forget about the extra costs

There are a lot of costs associated with buying a property and a Buy to Let mortgage is no exception. For more information on the additional costs associated with buying property, see our guide on the costs of buying a house.

Shop around for the best deal

There are several specialist Buy to Let lenders who are not on the high street. There are great deals out there, but you may have to look for them! A good broker will be able to help you out there.

Take your time

A Buy to Let mortgage is a big commitment. Any long term commitment should be planned, and a Buy to Let mortgage is no exception.

Don't overstretch yourself

A Buy to Let mortgage needs to be considered as a commitment alongside all your other outgoings. Ask yourself what would happen if you could not rent it out for a few months or the boiler needs changing? It’s important to make sure you have a contingency fund in place to help meet unexpected costs.

Take it one step at a time

If you’re thinking about building a Buy to Let portfolio or even a property empire, it’s important to carefully consider any investment you make and not stretch yourself too thinly.

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