A buy-to-let mortgage works differently to a residential mortgage on a property you’re planning to live in. You’ll need a bigger deposit, you’ll face higher fees and you’ll pay a higher rate of interest.
Buy-to-let mortgages are usually offered on an interest-only basis, which means the capital debt – the amount you’ve borrowed as a mortgage – will only be cleared at the end of the term. Most residential mortgages are capital and interest loans, where your monthly payments cover the interest and a portion of the debt, and the value of the loan plus interest is gradually paid back over the deal period.
So a buy-to-let mortgage is then seen as a higher risk from the lender’s point of view, and a buy-to-let borrower then has to pay higher costs.
All mortgages have a loan-to-value – LTV – figure, which is the size of the mortgage as a percentage of the value of the property.
With a normal residential mortgage, the LTV can be up to 100% – but a LTV of 90% or 95% is more common – and then the difference between the LTV and the asking price of the property and the total loan is made up of your deposit. So the deposit size could be as little as 5%.
But with a buy-to-let mortgage deal, most lenders will say you’ll need at least a 25% deposit to get a mortgage.
This means the difference they loan you is less, so your LTV is less, and it protects the lender in case you default on your mortgage repayments because of problems with collecting rent.
The greater the deposit you can put towards the purchase, the lower your monthly mortgage repayments are likely to be.
Although the average loan-to-value ratio is lower for a buy-to-let purchase than a residential mortgage, you’ll need to factor in the larger capital cost at the end of the mortgage to pay off the value of the house.