Buy to Let Mortgages

Buy-to-let (BTL) mortgages have been on offer in the UK since the late nineties; they are specifically designed for investors to borrow money to purchase property in the private rented sector in order to let it out to tenants.

Lenders take different approaches. The amount of money investors can borrow is determined by the rental valuation of the property. Usually the annual rental income has to cover a certain percentage of the mortgage repayments, somewhere between 120% and 150%. This is to allow surplus rent to cover other costs such as property maintenance and void periods (periods when there are no tenants living in the property and therefore no rental income).

Other lenders will offer a three times' salary multiple and half the rental income.

Others base the amount that they will lend on your salary and the existing loan commitments that you have, but then apply the 'deduction rule'. This means that they will lend up to 3.5 times your income (or whatever salary multiple applies), minus a representative figure for annual mortgage payments worked out at a pre-set level of interest. Say you earn £40,000 and have an outstanding mortgage balance on your property of £120,000. Under the rule, the annual mortgage repayments may be calculated as £10,000. This would be deducted from your salary to leave £30,000, which is then multiplied by 3.5 to give £105,000 - the amount that you are able to borrow.

Typically the interest rates that are offered on BTL mortgages are fairly close to residential mortgage rates but will on average be higher and typically charge higher fees. This is due to the perception amongst banks and other lending institutions that BTL mortgages represent a greater risk than residential owner-occupier mortgages.

This type of investment has become very popular in the UK over the last five years or so, as house prices have dramatically increased. Another reason for their popularity is the tax advantages that are available to UK BTL investors. Rental income is considered in the same way as salary, and is therefore often taxed at 22% or even 40%. However, landlords can deduct costs from the taxable portion of their rental income, and these costs can include the interest portion of their BTL mortgage repayments as well as maintenance costs on the property. This tax set-up has made BTL investments more popular over the last few years.

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