How does a buy-to-let mortgage work?

In principle, buy-to-let mortgages work in the same way as a residential mortgage, a lender advances you a sum of money over a fixed period, secured against a property.

However, there are some key differences between residential and buy-to-let mortgages:

• Buy-to-let mortgages are often on an 'interest only' basis whilst most new residential mortgages are arranged on a repayment basis

• The amount you can borrow is typically determined by the rental income the property will generate, not by your own earnings

• You will generally need to put down a larger deposit

Buy-to-let lending is generally considered riskier than residential lending. So, you will normally require to put down a larger deposit than a private mortgage.

Most lenders require a deposit of at least 20-25% of the purchase price, while some will require even more than this. As with most mortgages, you'll generally benefit from a lower interest rate if you put down a larger deposit.

Deposit example: On a property valued at £200,000 you would generally need a deposit of at least £50,000. Many people use equity in other properties to fund the deposit for a buy-to-let purchase

When you take out a residential mortgage, the lender determines how much you can borrow based on your income and outgoings.

With a buy-to-let mortgage, the amount you can borrow is generally worked out based on the anticipated rental income of the property. Lenders will generally need the rental income to be 125% of your 'interest only' mortgage payment although some lenders need the rental income to be 140-145% of your mortgage payment.

Example: You want to borrow £120,000 on a property worth £160,000. The interest rate is say 3%, meaning that your monthly interest only mortgage payment is £360. A lender would normally need the rental income of the property to be 125% of this amount, namely £450.

If you would like to know more about buy-to-let mortgage, please do make contact and one of our advisers will be pleased to assist.