Understanding how buy-to-let mortgages work is important if you are planning to rent out a property or have recently become a landlord. Whether you are investing intentionally or have found yourself with a property you no longer live in, knowing the rules, risks and responsibilities will help you make informed decisions. This guide explains what a buy-to-let mortgage is, how it works, and the key considerations to keep in mind when managing a rental property.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a type of loan designed for people who want to purchase or retain a property with the intention of renting it out. It differs from a standard residential mortgage, which is only suitable if you plan to live in the property yourself. If you want to let out a home you do not own outright, you will normally need a buy-to-let mortgage.
Lenders view buy-to-let mortgages as higher risk because rental income is not guaranteed. For that reason, eligibility criteria can be stricter than for residential loans. Some of the key features and conditions include:
Good credit history and manageable existing borrowing
A requirement to already own a residential home
Evidence of stable employment income or business earnings
A minimum income level, often around £25,000 per year
Age limits, which are typically capped around 75 at the end of the term
A larger deposit or equity requirement, usually around 25 per cent
In addition, lenders assess your application by looking at the rental income the property can generate. As a rough guide, your rent usually needs to cover at least 125 per cent of the monthly mortgage payment.
How do buy-to-let mortgages work?
Most buy-to-let mortgages are interest-only. This means you pay only the interest each month rather than reducing the original loan balance. Your monthly payments will generally be lower than with a repayment mortgage. However, the full loan amount remains outstanding and will need to be repaid at the end of the mortgage term.
Some landlords choose repayment mortgages, but interest-only remains common because it keeps monthly outgoings down and helps with cash flow.
Rental income calculations also play an important part in how these products work. For example, if your mortgage is £800 per month, a lender is likely to expect rental income of around £1,000 a month to meet their coverage ratio. This helps ensure the mortgage can be maintained even if costs rise.
I’m an accidental landlord – how do I switch to a buy-to-let mortgage?
Not all landlords start out with the intention of renting out property. You may become an accidental landlord by inheriting a home, moving in with a partner, relocating temporarily, or returning to rented accommodation. In all of these situations, you must inform your current lender if you plan to let the property.
Your lender may offer consent to let, which allows you to rent out the home for a limited period under your existing mortgage. If they do not agree, they might require you to switch to a buy-to-let mortgage instead. If they are unable to offer one, remortgaging to another lender may be necessary.
It is important not to ignore this requirement. Renting out a property without permission can breach your mortgage terms and may invalidate your agreement. Always check your options before advertising the property.
Where to get a buy-to-let mortgage
Many high street lenders and specialist providers offer buy-to-let mortgages. The market can be more complex than standard residential lending, so getting support can be helpful. A mortgage adviser can guide you through affordability checks, deposit requirements, lender criteria and available deals.
Comparison websites can also be useful, but they will not always show the full market. Different sites may list different lenders or filter results in various ways. It is sensible to look at more than one source and understand the type of product you need before making an application.
Plan for times without rent coming in
Rental properties do not always stay occupied. There will likely be periods when tenants move out, rent is late, or maintenance issues delay new tenancies. These are known as void periods and they can place financial pressure on landlords.
To manage this risk, it is important to have savings set aside to cover your mortgage repayments when there is no rental income. A buffer can also help with unexpected repair costs such as boiler faults, plumbing issues or damaged interiors. Setting aside some of your rental income each month can make these periods easier to handle.
Don’t rely on selling the property to repay the mortgage
If you have an interest-only buy-to-let mortgage, the loan balance needs to be repaid at the end of the term. While selling the property is one option, it is not guaranteed that market conditions will allow you to repay the mortgage in full. If house prices fall or the market slows, you may need to make up the difference yourself.
Alongside this, rental income is taxable. As a landlord, you may need to complete a Self Assessment tax return and declare your rental earnings. Allowable expenses, such as maintenance and agent fees, can reduce your tax bill, but it is important to keep clear records.
You may also need to pay Capital Gains Tax if you sell the property for more than you paid for it, unless it has always been your main residence. Understanding how tax affects your investment will help you plan more effectively.
Conclusion
A buy-to-let mortgage can be a useful financial tool if you plan to rent out property, whether as an investor or an accidental landlord. However, it comes with responsibilities. From eligibility requirements and rental income calculations to the risks of void periods and long-term repayment planning, it is important to understand how these products work before making a commitment.
Taking time to assess your finances, tax obligations and long-term plans will help you make confident decisions about becoming a landlord. If you are unsure which route is best for you, getting professional advice can provide clarity and support.
FAQs
Do I always need a buy-to-let mortgage to rent out a property?
If you are renting out a property you do not own outright, you will usually need permission from your lender or a buy-to-let mortgage. Always check your current mortgage terms.
How much deposit do I need for a buy-to-let mortgage?
Most lenders require at least 25 per cent of the property’s value as a deposit or equity, although some may ask for more.
Can I get a buy-to-let mortgage with bad credit?
Criteria vary between lenders, but a good credit record is normally needed. A specialist adviser can help explore your options.
What happens if my rental income does not cover the mortgage?
You will still be responsible for making payments. Lenders expect rental income to cover at least 125 per cent of the mortgage, so planning a buffer is essential.
Can I live in a buy-to-let property?
No. A buy-to-let mortgage is designed for rental properties. Living in it yourself would breach the mortgage conditions.
