Buy to let explained
The mortgaged property (which may be your home) may be repossessed if you do not keep up repayments on your mortgage
What is buy to let?
Buy to let means buying a property to let it out.
Done right, buy to let can be both a great investment and an exciting project. But there’s a lot you need to know, from the specifics of getting a buy to let mortgage to the research you need to do.
In this guide
- Am I eligible for buy to let?
- Buy to let mortgages
- Doing your research
- Upfront costs of buy to let
- Ongoing costs of buy to let
- Buy to let property types and rules
- Buy to let taxes
- Can I have more than one buy to let property?
- Finding tenants and becoming a landlord
Most buy to let lenders will have a list of criteria that borrowers have to meet before they can get a buy to let mortgage. These criteria will vary from lender to lender, but they tend to include:
- Minimum age
- Affordability requirements – including minimum income and rental coverage
- A limit on the maximum amount of money you can borrow – this may be in the millions
- Maximum portfolio size - different lenders will have their own maximum portfolio criteria
You can’t get a residential mortgage for a buy to let property. Instead, you need a buy to let mortgage.
Lenders have different considerations when lending for buy to let, because these mortgages support business investments rather than just helping someone to buy their home.
This also means that buy to let mortgages tend to have higher interest rates than residential mortgages, and they usually require a bigger deposit too.
A typical buy to let mortgage will need a deposit of at least 25%, but 40% or 30% deposits are common too. Like most mortgage products, the general rule of thumb is that the higher the deposit you pay, the lower the interest rate.
There are also different ways of repaying a buy to let mortgage. Although some are paid on a capital and interest basis, many buy to let mortgages are interest only.
Buy to let mortgage applications can be assessed in three different ways:
- Full income affordability, like a residential mortgage
- Income coverage ratio (ICR)
- A combination of the two
The way your buy to let mortgage application is assessed will depend on your lender.
Income coverage ratio (ICR) means the amount by which your rental income exceeds your mortgage interest payments. A 140% ICR means that your rental income is equal to at least 140% of your mortgage interest repayments.
Most lenders will need your rental income to equal between 125% and 145% of the annual mortgage payments (at Leeds Building Society, we ask for 140%). Rent has to cover 100% of the loan payment, and the rest covers property-related costs, tax and void periods.
This percentage can change depending on your tax status, and the type of buy to let mortgage product you choose. To get an exact percentage, you need to speak to your lender.
Just like any property purchase, you need to do careful research before you invest in a property. And there’s plenty that you need to consider, including:
- Property type (some property types tend to have higher rental yield than others. Demand for accommodation in the area affects rental yield, too.)
- Overall return on investment (you’ll need to consider rental yield, property appreciation and the total costs of letting the property out)
- Target customer
- Maintenance costs
- Legal obligations
Buy to let landlords often have to pay a number of costs up front, such as:
- Buying the property
- Tax, including stamp duty (which is paid at a higher rate for additional properties)
- Mortgage deposit
- Legal fees
- Letting agent’s fees
- Product fee – just like with any other mortgage
- Mortgage valuation fee
- Electronic transfer fee
- HMO license, if you’re getting an HMO property
Then there are a number of ongoing costs you have to consider, such as:
- Maintenance and repairs
- Void periods (when one tenant has moved out but you haven’t replaced them yet, and therefore you’re not getting any rental income)
- Capital Gains Tax, when you sell the property
There are several different types of property buy to let landlords can invest in. Although some types of property might sound expensive and difficult to get started with, those properties often have what's called a better "rental yield", which is the income you get from rent each year.
Before you invest in a property, make sure you take the time to do your research and understand the likely rental yield and associated costs.
Standard buy to let: Residential properties rented by one household. Your rental yield for a standard buy to let will depend on the type of property you let out.
Homes in multiple occupation (HMO): Also known as a “house share”, HMOs are properties rented out by at least three people who are not from the same household but share common facilities like bathrooms and kitchens.
Multi-unit freehold blocks: This is when you buy the freehold for a block of multiple flats. Unlike HMOs, where most of the property is shared between residents, each tenant in a multi-unit freehold block rents a separate, private property (usually a flat).
Semi-commercial properties: This is when you buy and let out a building that has both residential and commercial parts, such as a flat above a shop.
Lenders may consider these properties as either commercial or residential properties, depending on how the use of the property is split.
The taxes on buy to let have changed a lot in recent years. Stamp duty has increased for additional properties, and tax relief has been scaled back.
Despite these changes, you can still offset some of the interest on your buy to let mortgage against your income, which means you end up with a lower tax bill.
There's also wear and tear allowance - this means that buy to let landlords don't have to pay tax on expenses incurred due to wear and tear on the property.
When you sell the property, you’ll have to pay Capital Gains Tax.
Yes, but most lenders have limits on how many buy to let mortgages you can have and the total size of your portfolio. It depends on the criteria of the lender.
Since September 2017, landlords with four or more buy to let properties are known as “portfolio landlords”.
So you’ve done your research, identified your target customers and completed your mortgage. The property is yours. Now you have to find people to live in it.
Becoming a landlord costs time and money. You’ll have to spend on:
- Buying the property in the first place
- Fulfilling your legal obligations as a landlord – likely to cost you a few hundred pounds
- Paying the estate agent, if you use a letting agent to find renters (although bear in mind that the government plans to ban letting fees in the near future)
- Paying the management agent, if you use one (this might be the same as your estate agent)
You’ll have to spend your time on everything else, from decorating the property to getting it to market.
There’s a lot to learn about being a landlord - our Knowledge Base has you covered.
This guide is intended as a summary only and does not constitute financial or legal advice given by Leeds Building Society. No reliance should be placed on this guide. We recommend that you seek independent financial/legal advice if you have any questions or queries.
Contains public sector information licensed under the Open Government License v3.0.