Many people dream of owning a property to let out to help boost their retirement income – but being a landlord has become much tougher in recent years.

A series of tax and regulatory changes have had a big impact on buy to let property owners, adding substantially to their costs. Despite this, rental properties continue to appeal to those looking for a tangible investment with the potential to provide both income and capital gains.

Finding the right buy to let mortgage is vital for landlords, as keeping outgoings to a minimum can help ensure they hang on to as much of their income as possible. Here, we explain everything landlords need to know about buy to let mortgages.

How do buy to let mortgages work?

There are several differences between residential and buy to let mortgages – here are some of the main ones. If you want to find out more about all the different mortgage options that may be available to you, read our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.

How affordability is assessed and how much can you borrow

When you take out a normal residential mortgage, lenders will look at your income and outgoings to help them work out how much you can afford to borrow. With a buy to let mortgage, however, your lender will usually want to know how much rental income the property is likely to generate. Some will look at any other sources of income you have too. Lenders typically look for rental income to be equivalent to at least 125% of your mortgage payments, or sometimes more than this.

If you’d like to see how much you might be able to borrow for a buy to let property, simply enter your expected rental income in our buy to let mortgage calculator to get an estimate.

The criteria for a buy to let mortgage

You may be able to apply for a residential mortgage with just a 5% or 10% deposit but if you want to take out a buy to let mortgage, you’ll usually need a deposit equivalent to at least 20% or 25% of the property value.

How the mortgage is repaid

Buy to let mortgages are usually arranged on an interest-only basis, which means you only pay back part of the interest you owe each month and none of the capital. At the end of the mortgage term, the property must either be remortgaged again, sold so the capital can be repaid, or you’ll need to have built up enough savings to clear your mortgage.

Most residential mortgages, however, are arranged on a repayment basis, which means you pay back some of the interest and some of the capital each month, so that by the end of the mortgage term there’s nothing left to pay. You can also arrange your buy to let mortgage on a repayment basis in a similar way if you want. This means your monthly payments will be higher, but you will be paying some of the money off your mortgage each month.

Buy to let mortgage rates and arrangement fees are often higher

Buy to let mortgage rates are usually slightly higher than standard residential mortgage rates. This is because lenders consider this type of mortgage a higher risk than a standard residential mortgage as you might not always be able to find tenants, or your tenants could fail to pay their rent on time.

The specific rates you’ll be eligible for will depend on the size of the deposit you’ve got to put down. As a general rule, the bigger your deposit, the better the buy to let mortgage rates you’ll have access to.

Arrangement fees for buy to let mortgages also tend to be higher than on residential mortgages and are often expressed as a percentage of the mortgage value rather than a flat fee. When choosing a mortgage, make sure you factor arrangement fees into your sums rather than focusing purely on the headline mortgage rate alone, as they can substantially bump up the overall cost. For example, if you wanted to take out a £150,000 buy to let mortgage with a 1.5% arrangement fee, the fee would set you back £2,250.

Can I remortgage my buy to let property?

Yes, if you already have a buy to let mortgage, but haven’t reviewed it for a while, it’s well worth seeing if you can remortgage to a cheaper deal.

Doing so could help you reduce your outgoings and might enable you to free up extra funds so that you can improve your property or add to your portfolio. Savings from remortgaging can be substantial.

For example, according to Moneyfacts, the average two-year buy to let mortgage rate is 4.1%, whereas the standard variable rate will typically be at least a percentage point higher than this, if not more. The standard variable rate (SVR) is the rate you usually roll onto automatically when your mortgage deal finishes.

Someone with an £150,000 buy to let interest-only mortgage with 15 years left to run would currently be paying £1,156 a month on a 4.61% SVR, but if they were to remortgage to a 3% mortgage deal, these payments would fall to £1,036 a month, a saving of £120 a month or £1,440 a year. Bear in mind that this example does not factor in mortgage arrangement or legal fees which will eat into these savings.

How do I get a buy to let mortgage or remortgage?

You can either approach lenders directly to see which buy to let mortgage deals they can offer you, or use a mortgage broker to help you find the best deal.

Our free mortgage comparison service allows you to compare buy to let deals from the whole of the market and find out how much they could save you. If you’re looking for a buy to let remortgage deal and are nervous about switching lenders, it is still worth filtering for deals from your existing lender (which you can do easily using our comparison tool) so you can see how much you could save from remortgaging with them.

Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice** on standard, retirement interest-only and buy-to-let mortgages.

What else do I need to consider if I’m thinking of becoming a landlord for the first time?

Remember that you’ll need to have savings available to cover your mortgage costs in the event that you have ‘void periods’ when you don’t have any tenants living in your property.

Bear in mind that there will be maintenance costs to pay too, as landlords are responsible for keeping the property in a good state of repair, and you’ll also have to pay a letting agent to manage the property and advertise it when necessary. Agents typically charge between 10% and 20% of your monthly rent so it’s worth getting a few different quotes and negotiating before you choose one. Find out more about your obligations as a landlord in our article What are my responsibilities as a landlord?

Despite the costs involved, according to Moneyfacts.co.uk demand for rental properties remains high. Eleanor Williams, finance expert at Moneyfacts.co.uk, said: “For investors contemplating an expansion into the buy to let sector, demand from tenants is booming and while it remains difficult to earn a decent return on many forms of investment, it’s understandable why rental property could be a tempting option. Those considering taking the plunge, or those who may wish to discuss how to manage their existing portfolios, would do well to secure the up-to-date market knowledge, advice, and support of a qualified broker, who should be able to take their plans and circumstances into account.”

Learn more about whether investing in a property could be right for you in our guide Is buy to let a good investment?

How much tax do I have to pay on my rental income?

Rental income is taxed in the same way as any other income, so the amount you’ll pay will depend on the level of income you receive (after deductible costs, such as maintenance and repair costs, letting agent fees, council tax and landlords’ insurance) and how much other income you bring from your work or other sources. Depending on which tax band your combined income falls into, you’ll either pay no tax, or you’ll be a basic, higher or additional rate taxpayer and must pay income tax at 20%, 40% or 45% respectively, although the Government has announced plans to cut the basic rate to 19% by 2024.

Will I be eligible for any tax relief on my costs as a landlord?

Landlords have been hard hit by several tax and regulatory changes in recent years which have reduced the financial benefits of owning a rental property.

For example, landlords used to be able to claim full tax relief on mortgage interest payments at their marginal rate of tax, whether that was at the higher, additional or basic rate. They can now only reclaim tax relief at the basic rate, regardless of the rate of tax they pay.

Capital gains tax (CGT) rules have also changed. CGT is payable when a buy to let property is sold and is calculated on any profits made when you sell the property that exceed the CGT allowance, which for the 2022/23 tax year is £12,300. Basic rate taxpayers must pay 18% in capital gains tax on gains above this threshold, whilst higher rate taxpayers must pay 28%.

Homeowners who previously lived in a property but subsequently let it out don’t have to include the years they lived there when working out their capital gains tax bill. Before 6 April 2020, landlords could also claim tax relief on any gains made in the final 18 months of ownership, whether or not they were living at the property, but this has now been reduced to just the final nine months.

Are Stamp Duty costs the same if you’re buying a property to rent out as they are for a property you plan to live in?

Stamp Duty costs are higher if you’re purchasing a property to rent out rather than as a main residence. For example, in England and Northern Ireland, you must pay standard Stamp Duty rates plus a 3% surcharge on top.

This means you’ll pay the following rates of Stamp Duty:

  • £0-£125,000: 3%
  • £125,001-£250,000: 5%
  • £250,001-£925,000: 8%
  • £925,001-£1.5m: 13%
  • Over £1.5m: 15%

Stamp Duty rules are different in Scotland and Wales. Buyers of buy to let properties in Scotland must pay a 4% stamp duty surcharge on top of standard Scottish stamp duty rates. Buy to let property buyers in Wales have to pay an extra 3% surcharge on top of standard Welsh stamp duty rates.

Find out more about how Stamp Duty works in our article Stamp Duty explained.

Have you recently taken out a buy to let mortgage or remortgaged and saved money? Or are you planning to do so in the next few months? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.

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