What is a buy-to-let mortgage?

THOSE looking to invest in property might consider taking out a buy-to-let mortgage.

These are typically available to those looking to purchase a property they want to rent out.

Your income, expenses and financial history will all determine exactly how much you can borrow.

But not everyone will be eligible for a buy-to-let mortgage.

The rules around eligibility are strict and banks and building societies consider the products financially risky.

Here we explain what a buy-to-let mortgage is, who's eligible and how they work.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a loan used by landlords to purchase a property as an investment that they will then rent to tenants.

You don't need to worry about a buy-to-let mortgage if you're looking to buy a house for yourself that you are going to live in.

The benefits for those with a buy-to-let mortgage are the stable income the property provides as well as the further accumulation of wealth if house prices continue to rise.

How does a buy-to-let mortgage work?

With a buy-to-let mortgage, the idea is that the rent paid by tenants covers the mortgage and often provides some profit for the landlord.

The landlord takes on the risk of the loan in the hope that when they come to sell the property it'll be worth more than it was purchased for.

Most buy-to-let mortgages are offered on an interest-only basis.

This means the landlord doesn't have to worry about repaying the whole loan until the end of the mortgage and only pays interest each month, which is usually covered by the rent.

The fees tend to be much higher too and borrowers are usually expected to put down a minimum 25% deposit - although it can vary between 20-40% depending on the lender.

A landlord will often remortgage to a new deal once their current buy-to-let loan comes to an end.

Who is eligible for a buy-to-let mortgage?

The application process is slightly different for a buy-to-let mortgage.

Many lenders consider a buy-to-let mortgage as higher risk so you may need to need certain conditions to be eligible for one. 

A lender may look at a landlord's income and credit report.

You'll be expected to earn £25,000 a year and if you earn less than this you might struggle to get some lenders to approve your buy-to-let mortgage.

But a more important factor is the rent you'll charge on the property.

The bank or building society will want to ensure the rent covers the mortgage repayments.

Lenders have different requirements but will often want the rent to be worth up to 125% of the monthly mortgage payments.

Landlords can also do a buy-to-let mortgage comparison online using a comparison website or through a broker.

Many lenders will also have an online mortgage calculator that shows how much rent needs to be charged to cover a buy-to-let loan.