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Buy-to-Let vs. Residential Mortgage: Homeowner’s Guide

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For homeowners considering renting out their property, understanding the differences between a buy-to-let vs residential mortgage is crucial. It’s important to understand your options and key considerations when choosing between a buy-to-let mortgage and a residential mortgage. In this guide, we highlight their differences, look at eligibility criteria, and how they work.

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Buy-to-Let Mortgage vs. Residential Mortgage: Key Differences

A residential mortgage is designed for homeowners who plan to live in the property they are purchasing. In contrast, a buy-to-let mortgage is specifically for landlords who intend to rent out the property. The primary differences between the two mortgage types are:

Interest Rates

Buy-to-let mortgages often have higher interest rates compared to residential mortgages. This is because lenders perceive them as a higher risk, given that rental income can be unpredictable.

Deposit Requirements

Buy-to-let mortgages typically require a larger deposit (usually at least 25% of the property value) compared to residential mortgages (which can start from as low as 5%).

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Affordability Assessment

Lenders assess residential mortgage applications based on the borrower’s income and expenses, whereas buy-to-let mortgage applications are assessed based on the property’s expected rental income.

Repayment Options

Both mortgage types offer repayment and interest-only options.

However, interest-only mortgages are more common in buy-to-let arrangements, as landlords often aim to pay off the mortgage using the property’s eventual sale proceeds.

Considering a Buy-to-Let Mortgage

Homeowners who plan to rent out their property should explore the option of a buy-to-let mortgage.

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Some key factors to consider are:

Consent to let

If you currently have a residential mortgage and want to rent out your property, you must obtain ‘consent to let’ from your lender. This consent may be subject to additional fees and a possible increase in your interest rate.

Rental income

Lenders typically require that the expected rental income be 125-145% of the mortgage payment. This ensures that the rental income can cover the mortgage payments and any unexpected costs.

Stamp duty

When purchasing a property for buy-to-let purposes, you may be subject to an additional 3% stamp duty surcharge on top of the standard rates.

Who Can Get a Buy-to-Let Mortgage?

To qualify for a buy-to-let mortgage, applicants must meet specific eligibility criteria, which may include:

  • Age: Lenders often require applicants to be at least 25 years old and may impose an upper age limit, typically around 70-75 years.
  • Income: Applicants usually need a minimum annual income, often around £25,000, to qualify for a buy-to-let mortgage.
  • Property Ownership: Some lenders require applicants to already own a residential property before applying for a buy-to-let mortgage.
  • Credit History: A strong credit history is essential for securing a buy-to-let mortgage, as lenders will assess your creditworthiness.

It’s always worth speaking to a mortgage advisor who will be able to guide you through the different criteria required by different lenders

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How do buy-to-let mortgages work?

Buy-to-let mortgages work similarly to residential mortgages but with some key differences in terms of eligibility, interest rates, and deposit requirements.

Once you have secured a buy-to-let mortgage and purchased a property, you become a landlord with key responsibilities for managing the property and tenants. Your rental income should cover the mortgage payments, property maintenance, and any associated costs.

Next steps

Always discuss your options with a mortgage adviser when considering renting out a property, homeowners should weigh the differences between buy-to-let and residential mortgages.

Buy-to-let mortgages are specifically designed for rental properties and come with different interest rates, deposit requirements, and affordability assessments. Homeowners should consider factors such as consent to let, rental income.

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Last Updated: May 22nd, 2023

Phil Spencer

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