Getting to know buy-to-let mortgages

Is investing in rental properties right for you?

06 April 2023

4 minute read

What you may need to consider if you're looking to enter the buy-to-let market.

Mortgage market view

The Bank of England’s monetary policy committee (MPC) increased the Bank of England’s base rate once more by 0.25% in March, taking it to 4.25%. This is the highest base rate we've seen since 2008 and the eleventh consecutive increase since December 2021.

This rate rise will certainly affect the cost of lending, which will include higher mortgage rates. Liam Boardman, Wealth Mortgage Specialist, has been supporting investors who are expecting and planning for an increase to their monthly mortgage payments when the time comes to remortgage.

“Their concerns coincide with the cost-of-living crisis affecting overall household incomes,” says Boardman. “With high inflation and the Bank of England base rate increasing, we strongly suggest talking to your Wealth manager and Barclays Wealth Mortgage specialist about any mortgage borrowing concerns.”

With potential investors often asking about how they enter the buy-to-let market, here are the key things to know when considering an investment property.

What’s a buy-to-let mortgage?

Buy-to-let mortgages are designed to help you buy a property that you intend to rent out to other people, rather than to live in. The amount you can borrow usually depends on the rental income you expect to earn from tenants, although we might consider other income in some circumstances.

Buy-to-let mortgage costs

These mortgages usually require a deposit of at least 25% on a buy-to-let property and typically the interest rates on buy-to-let mortgages are higher than they are for residential mortgages.

Many lenders will also charge a product fee, and you'll also need to factor in the usual property purchase costs, such as surveys, legal fees, and stamp duty1.

Should you choose an interest-only or repayment mortgage?

With an interest-only mortgage, you only pay the mortgage interest each month. This means that at the end of the mortgage term, you’ll still owe the amount you initially borrowed – and you’ll still be charged interest on the full balance of the mortgage each month until it’s repaid.

“Some buy-to-let investors who have elected for interest-only mortgages have done so because the lower monthly payments make it easier to meet the rental income criteria for buy-to-let mortgages, although there are extra conditions for an interest-only deal,” says Boardman.

Boardman adds that many with interest-only mortgages plan to sell the property at the end of the mortgage term to cover the mortgage balance.

“However, there's always a risk that by the end of the term, the property’s value has fallen and they face serious financial loss as they will need to pay back the original amount they borrowed,” says Boardman. “For that reason, most lenders will ask you to explain how you intend to pay back the amount you borrowed when the mortgage ends.”

With a repayment mortgage, your monthly payments will be higher because you’ll be paying both the interest and part of the amount you borrowed. But at the end of the mortgage term, your debt will be fully repaid.

Licensing and permission

If you’re buying a leasehold property, you’ll need the freeholder’s permission to rent it out. And if you’re planning to rent out rooms in England or Wales to three or more individuals who aren’t a single household (like a family), you’ll need a house in multiple occupation licence.

Agent fees and right-to-rent checks

Using an agent to manage a property can be useful, especially if you don’t live near it. According to Which?, agent fees typically range from below 10% of the rent to above 20%2, depending on whether you want a fully managed service.

You can also pay an agent to find and vet prospective tenants, which can be a time-consuming process. A thorough vetting process could save you from inadvertently renting to tenants who can’t afford the rent or who have committed fraud.

Boardman says that many new landlords are often unaware that they're legally required to check tenants’ right to rent in England.

“We often tell clients that it's crucial they ensure this check is included in their vetting process, whether they use an agent or not, as significant fines and prison sentences await those who don’t comply,” says Boardman.

For more information, consult the government’s guidance for what is required from landlords when checking a tenant’s right to rent3.

Income tax and capital gains tax

As soon as you start renting out property, you need to let HM Revenue and Customs (HMRC) know and report your rental income to them each year. You may have to pay tax on the profit you make from renting property after deducting any allowable expenses.

There are now restrictions on the amount of tax relief that landlords get. This means you won’t be able to deduct certain costs from your income when working out your taxable profit.

We strongly recommend you read HMRC’s guide to income tax on rental income4. If you’re planning to profit by the property price increasing (often called ‘capital growth’), then you’ll need to factor in the effect of capital gains tax (CGT) when you sell it. Consult HMRC’s guidance on calculating the CGT when selling a property5.

And as tax laws can change, you should take advice from a qualified tax adviser before making any decisions.

Getting buy-to-let mortgage information

We're here to help guide you through the process of buy-to-let mortgages. Boardman adds: “If you’re uncertain about any aspect of choosing a buy-to-let mortgage, you can get help from one of our Wealth mortgage specialists. Please get in touch with your Wealth Adviser to arrange a meeting.”

Things to consider

Buy-to-let mortgages are subject to application, financial circumstances & borrowing history. Terms and conditions apply.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Where we provide links to third party websites, such links are not an endorsement by us of any products or services in such websites. You use such links entirely at your own risk and we accept no responsibility or liability for the content, use or availability of such websites. We have not verified the truth or accuracy of any content of such websites.

This site may also contain some material provided by third parties and we accept no responsibility or liability for the accuracy of such material.

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