The property market has reopened after several weeks on hold due to COVID-19, and property sales are starting to look healthy again. This has encouraged some confidence in the market, and there are 280 more buy-to-let mortgages available now than there were at the start of May.
In general, the buy-to-let market has grown significantly in recent years, as renting has become more popular and investors can see the long-term potential of property when it comes to making money.
Below, we’ve summarised everything you need to know about buy-to-let mortgages, including how they work, how much they cost and the benefits of buy-to-let properties.
What is a buy-to-let mortgage?
Buy-to-let mortgages are for people who want to buy property as an investment, rather than as a place to live. If you plan to buy a property and rent it out, you’ll need to get a buy-to-let mortgage instead of a standard residential mortgage.
How do buy-to-let mortgages work?
Most buy-to-let mortgages are interest-only. This means that you only pay the interest on the loan each month, generally from the rent you collect, and none of the capital. At the end of the mortgage term, you repay the original loan in full.
Alternatively, if you aren’t ready to pay off the remaining debt at the end of the mortgage term, you can decide to refinance the property.
Other buy-to-let mortgages work on a capital repayment basis, like a normal residential mortgage. Each month you pay off some of the capital debt, plus the added interest.
How much deposit is needed for a buy-to-let mortgage?
Most lenders will require you to put down a minimum deposit of 25% of the property’s value. You need a larger deposit than if you were taking out a standard residential mortgage because it protects the lender if you miss any payments, which usually happens as a result of problems with collecting rent.
As with standard residential mortgages, a bigger deposit means a better mortgage deal, and the best buy-to-let deals are usually only available to if you have a deposit of 40% or more.
How much can you borrow for a buy-to-let mortgage?
Unlike residential mortgages, the amount you can borrow for a buy-to-let mortgage doesn’t depend on how much you earn. Instead, mortgage lenders will look at how much rent you’ll be able to charge. Rental income should normally be 25-30% higher than your monthly mortgage payments.
To get a good idea of how much rent you’ll be able to charge, talk to a local letting agent and have a look online to see how much similar properties are rented out for in the area.
What costs are involved when purchasing a buy-to-let property?
Interest rates tend to be higher on buy-to-let mortgages, and your interest rate will depend on the total amount you borrow, your general financial situation, how much rental income you’re expecting to get and the type of mortgage you choose to take out.
In March 2020, the average fixed-rate buy-to-let mortgage had a 3% interest rate and the average variable-rate deal had a 3.01% interest rate. 
As well as interest, you’ll also need to pay all the usual fees associated with buying a property, including:
- Stamp duty, surveyors’ fees and other charges when buying
- Tax on rental income
- Building and landlord insurance
- Rent insurance
- Letting agents’ fees
- Maintenance and repairs for the property
It’s worth investigating landlord regulations and responsibilities to find out more about the costs involved in buying a property to let.
Is a buy-to-let property a good investment right now?
The buy-to-let market is generally a resilient and safe space to invest, as there will always be demand for rental property for those who can’t buy their own home.
Even post-credit crunch it was the most resilient market, and compared to that era, coming out of lockdown there are a significantly larger number of lenders in the market still willing to lend.
Lenders are still competing, so landlords investing in buy-to-let properties now can take advantage of this competition as well as increased rental demand, potentially lower prices depending on how the market fluctuates, and the lowest ever interest rates.
What are the benefits of investing in buy-to-let property?
Property is a relatively safe long-term investment
While property prices may rise and fall, over the long term the value of your property should increase and provide you with a profit when you come to sell the property.
You can generate an income
By renting out a property, your tenants will pay your mortgage for you and you should also be left with some extra income each month.
Demand for rental properties is high
Renting is a popular lifestyle trend and a necessity for many people who can’t afford to buy, and the rental market is currently very strong. This means that renting out your property should be relatively easy.
How do I choose a buy-to-let property?
When it comes to choosing a buy-to-let property, there are several things to consider:
Plan your budget
A buy-to-let is a financial investment, so do your calculations to ensure your rental income is greater than the costs you need to cover.
Think about who you’d like to rent to, as students, young professionals and families will all look for slightly different types of property in potentially different areas.
Find the best location
The location of the property will be key to attracting tenants. Think about proximity to schools, supermarkets and public transport links. If you want to rent to students, try to find a property close to a university.
Consider the layout
Different layouts will suit different tenants. For example, house shares might require plenty of communal space, while families might want a garden.
Maintenance costs can quickly add up, so keep an eye out for any damage and look for a property that is in good condition already.
Ready to start looking for your next investment property? Go armed with our house viewing checklist and make sure you’re up to date on the new rules regarding Minimum Energy Efficiency Standards.