A buy to let (BTL) mortgage is a specific mortgage for landlords wishing to buy a property for investment, rather than as a place to live. Most people who take out a BTL mortgage rent out the property.
With an 80% LTV Buy to let mortgage, the prospective landlord has saved a 20% deposit and wishes to take out a mortgage for the remaining 80%.
This means they are looking for a mortgage deal with an 80% loan to value ratio (LTV).
The loan to value ratio is calculated as the amount of money you need to borrow, divided by the value of the property you are buying.
So, if you wished to buy a house valued at £250,000 and you had a deposit of £50,000 you would need to borrow the remaining £200,000:
£200,000/£250,000 = 0.8
0.8 x 100 = 80% LTV
In this case, the buyer would need a buy to let mortgage with 80% LTV.
Lenders tend to offer their mortgage rates in LTV bands that range between 95% LTV to 60% LTV.
The lower your LTV band, the more equity you have in the property and the less risky it is for a lender to loan you money. Correspondingly, the cheaper the interest rates you tend to be offered.
The mortgage deals tend to get cheaper as you go down the LTV bands. So, 80% LTV BTL mortgages are cheaper than 95% LTV BTL mortgages.
Indeed, interest rates can drop significantly as you move into lower LTV bands.
If you are looking for a buy to let mortgage with a 20% deposit and an 80% LTV, for example, and are quite close to having a 25% deposit, you may find it is worth adding any savings you have.
Hitting that 25% deposit would mean you can look for a 75% LTV mortgage deal. As these tend to have cheaper rates, you will reduce the interest payable over the term of the mortgage.
While buy to let mortgages are similar to standard residential mortgages, there are some crucial differences.
For a start, most BTL mortgages are interest only, not repayment mortgages. This means you are only repaying the interest accrued on the money borrowed each month and not repaying any part of the capital.
While this will result in lower monthly mortgage payments, at the end of the term this capital must still be repaid.
You could simply sell the property at the end of the term and use the proceeds to pay off the debt.
However, if house prices should fall, you would end up having to make up the difference yourself. Many landlords choose to save a portion of the rent they receive each month for this reason.
Buy to let mortgages cost more as BTL borrowers are more of a risk to lenders than those buying a home to live in themselves. This is because you are relying on a third party (a tenant) to provide the money for the mortgage payments, which can prove problematic.
For this reason, you are likely to need a larger deposit, with most lenders asking for between 20% and 40%. Interest rates offered on BTL mortgages are usually higher than repayment mortgages and the arrangement fees can be more expensive, too.
Buy to let mortgages are also not regulated by the Financial Conduct Authority (FCA) in the same way residential mortgages are, as landlords are considered ‘professionals’ and in less need of protection.
Unlike residential mortgages, the amount you can borrow with a BTL mortgage does not depend on how much you earn. Instead, lenders will consider your potential rental income when deciding how much to lend you.
The rent charged must be at least 25% more than your mortgage, making it 125% of your mortgage payment. This is your rental yield.
So, for example, if your mortgage payments are £400 per month, you will need to be able to charge £500 or more in rent.
You will also need to prove you could cope financially if interest rates should rise, if the house is empty for a period, or should it require significant repairs (such as a new boiler).
If you are buying a property as an investment that you intend to rent out, you will usually need a buy to let mortgage. There are a few exceptions to this rule, such as if you are renting to close family (such as parents or children). In this case, you may be allowed to take out a consumer buy to let mortgage, which is subject to the same affordability rules as residential mortgages.
But of course, not every landlord sets out to be one. Many homeowners who, due to changes of circumstance need to sell their property, struggle to do so. This is particularly true in the current COVID-19 pandemic situation.
One option is to rent out the property and use the rental income to pay the mortgage, as this would at least allow the homeowner to move house. Homeowners who rent out their property due to necessity, rather than choice are termed ‘accidental landlords’.
In this case, many lenders will grant a ‘Consent to let’ allowing homeowners to rent out their property for 12 months with their current mortgage.
In the longer term you would have to switch to a buy to let mortgage, which is likely to be a less attractive deal than the one you are on, and may also involve arrangement fees.
You will also need to inform your mortgage provider if you choose to rent out a room in your home, or let it to holiday makers through sites such as AirBnB.
There are a few other rules that you will need to bear in mind if you are a landlord keen to apply for a buy to let mortgage with 80% LTV, for example.
Many lenders have strict age restrictions for buy to let borrowers, stating that your mortgage term must end by the time you are 70 (although some lenders are less strict)
Most lenders will not allow you to take out a BTL mortgage if you don’t already own a property
A good credit record is essential
You will need to be over 21 or even 25 to qualify for a BTL mortgage
In a similar way to residential mortgages, buy to let mortgages with 80% LTV can be found as fixed rate, variable rate and tracker deals.
Fixed rate Buy to let mortgages mean you make a fixed mortgage payment every month that will not change during the term. While payments can be a bit more expensive, in today’s uncertain economic climate many landlords prefer the security of knowing how much their payments will be.
Variable rate BTL mortgages follow the lender’s Standard Variable Rate (SVR). This means your monthly payments may reduce if the SVR falls. However, it also means should the SVR rise, your payments will too.
Tracker mortgages track the Bank of England Base rate (currently 0.1%). If the base rate rises or falls, so does your mortgage rate.
Standard Variable Rate mortgage is the mortgage lender’s default plan and the product you will be moved onto when your deal expires. The lender’s SVR is usually set at a high value, making a standard variable rate mortgage the most expensive option, although one benefit is, unlike other mortgage deals, you are free to move without exit fees.
For this reason, it is usually wise to look for a new deal a few months before your mortgage expires, to avoid going onto an SVR mortgage.
If you decide to choose a variable rate or tracker mortgage, you could benefit from lower monthly payments if the rates should fall, but be out of pocket should they rise. Make sure you are prepared for this and know you will still be able to make your payments if they should rise by 1%.
If you’re looking for a buy to let with a 20% deposit, the mortgage term you choose will also dictate the interest rates you are offered.
Generally speaking, longer term (such as 5 year) 80% buy to let mortgage deals tend to be cheaper than short term deals (such as 2 years).
What’s more, as buy to let mortgages also tend to have higher arrangement fees, having to remortgage less frequently will save you even more money in the long run.
However, you will be locked in for a longer period, during which time interest rates can change. The plus side of this is that you could find you can save more during this time to put into the mortgage. The property may also appreciate in value, which can push you into a lower LTV band, giving you access to cheaper deals when the time comes to remortgage.
While not all lenders offer buy to let mortgages, the ones that do tend to offer a multitude of BTL products. And the good news is, if you’re looking for an 80% buy to let mortgage, you’re in a strong position.
Finding the best mortgage product for you can take time and consideration, which is where it can be well worth using a comparison site such as Bankrate.
Not only will a comparison site allow you to compare similar 80% LTV buy to let mortgage deals side by side, they usually factor in the fees and other costs in their calculations, giving you a more accurate breakdown on how much a mortgage product will cost you over the term of the deal.
Look for the Annual Percentage Rate of Charge (APRC) which shows the total cost of the loan, including fees and charges, over the term to help you compare.
As always, take some time to do some research into the type of product and features you need before searching for deals.
If your situation is more complicated, you could consider talking to a specialist mortgage broker.
As experts in their field, a good broker can review and recommend the best buy to let mortgages with 80% LTV available to you. What’s more, as a broker can make the applications for you, this can save you time and may even give you access to products only available to professionals.
Of course, the advice is not free, so make sure you are clear regarding the broker’s fees and commission.
You can check that your broker is authorised to advise on the Financial Services Register.