Buy to let vs residential mortgage: What's the difference?

What’s the difference between a buy-to-let and residential mortgage? 

A residential mortgage, or buy-to-live mortgage, is a loan you get from a mortgage lender to buy a home which you are going to live in. A buy-to-let mortgage is a loan you get from a mortgage lender to purchase a property which you are going to let, or rent out, to other people to live there. 

There are also some other significant differences between them that have an impact on mortgage eligibility. Let’s run through them.

Lenders use your predicated rental yield to calculate affordability

With a residential mortgage, lenders calculate how much you can borrow for a mortgage based on your income. Typically you’ll be able to borrow between 4-4.5x your household income (learn more about affordability in this guide). 

When it comes to a buy-to-let, the amount you can borrow is based less on what you earn and more on the amount you’re likely to earn from your tenant’s rent. 

Lenders will research average rents in your chosen area before deciding whether to approve your application. Most of the time, they’ll want your rental income to cover 125% of your mortgage payments.

To minimise the risk of void periods (when the property is unoccupied), lenders will also look at how much demand there is for similar properties in your area. 

This doesn’t mean your salary isn’t important, though. You’ll usually need to earn at least £25,000 a year to get a buy-to-let mortgage. Lenders will also want reassurance that if interest rates were to rise, you’d still be able to afford the repayments. 

If you have a higher salary, some landlords will lower their expectations when it comes to rental income. A higher salary can give them confidence that you can make up the shortfall even if the property is unoccupied. 

If you’re struggling to afford the buy-to-let based on the projected rental yield, you can ask a mortgage broker to look at your options if you were to use top-slicing. Top-slicing is where a buy-to-let lender uses your personal income to ‘top-up’ any shortfall in borrowing - say, if the rental yield isn’t high enough.

Interest-only mortgages are very common in buy-to-let 

When looking for a buy-to-let mortgage, you can choose between interest-only and repayment mortgages. 

If you choose a repayment mortgage, you’ll have paid the property off in full by the end of the term. The property will be yours to keep or sell. 

If you choose an interest-only mortgage, however, you’ll only pay the interest throughout the mortgage duration. Once the mortgage term comes to an end, you’ll need to pay back the actual loan. 

Interest-only mortgages tend to be more popular among landlords and buy-to-let mortgage providers. At the end of the mortgage term, most landlords choose to sell the property, but it’s not always this straightforward. 

With a buy-to-let, you’ll need a higher deposit

Lenders will often restrict buy-to-let mortgages to a loan to value (LTV) of around 75%, meaning you’ll usually need a deposit of at least 25%. 

This is more than you’d typically need for a residential property, where deposits of 10% are more common. Although you can get a mortgage with a 5% deposit through schemes such as Deposit Unlock, or a 0% deposit mortgage through a Savings as Security mortgage.

Are buy-to-let mortgages expensive?

Buy-to-let mortgages can be more expensive than residential mortgages. This is for a number of reasons:

• You’ll need a bigger deposit
• You’ll usually pay a higher interest rate
• You’ll often pay more fees

On top of this, you’ll also face a number of additional costs that come with being a landlord, such as:

• Letting agent fees
• Legal and administration costs 
• Maintenance fees
• Tax (both income tax and stamp duty)

Who can get a buy-to-let mortgage?

Anyone can get a buy-to-let mortgage, as long as they can pass a lender’s affordability checks and criteria.

Lenders tend to see buy-to-let mortgages as higher risk than residential mortgages, so you may need to jump through additional hoops that you wouldn’t face if buying a home to live in yourself. 

Some lenders will only offer buy-to-let mortgages to investors who already own their home, whether outright or through a residential mortgage. But as we’ll explain, this doesn’t mean it’s impossible to get a buy-to-let mortgage as a first-time buyer.

What impacts your ability to get a buy to let mortgage?

1. Your credit rating

You’ll usually need a good credit rating to get a buy-to-let mortgage. Lenders will also want to see that you’re not overstretching yourself financially. If you have a lot of outstanding debt, whether it’s through other mortgages, personal loans, or credit cards, you might have fewer lenders to choose from. 

2. Age limits

You might find it harder to get a buy-to-let mortgage if you’re in your 50s or above, though this doesn’t mean it’s impossible. 

Many lenders set upper age limits, usually around 70 to 75-years-old. This is the age you must be when the mortgage term ends, not when you apply for the mortgage. So if you choose a lender with an upper age limit of 75 and you want a 25-year mortgage term, you’ll need to be 50 or younger for your mortgage application to be approved.

Thankfully, some lenders have much higher age limits and others have no age limit at all. 

If you’re worried that your age could limit your options, speak to a mortgage broker. Here at Tembo, we can compare hundreds of mortgages from across the market to find the right one for you. We even have access to mortgage deals that you won’t be able to access through lenders directly, meaning we may be able to find you a better deal.

Can first time buyers get a buy-to-let?

It is possible to get a buy-to-let mortgage as a first-time buyer, but that doesn’t mean it’s easy. Here are a few things you’ll need to consider…

1. You’ll need a bigger deposit

You’ll usually need a bigger house deposit for a buy to let mortgage than if you were buying a property to live in yourself. And with house prices rising so steeply, it can be a struggle to save even a small deposit. 

2. Stamp duty complications

Buying a buy-to-let property will also mean you’ll miss out on some first-time buyer benefits such as stamp duty first-time buyer relief. This means you’ll have to pay stamp duty on your investment property, but you won’t have to pay as much stamp duty as a non-first time buyer purchasing a buy-to-let property. Instead, you’ll be charged the ‘home mover rate’, which is the same rate that non-first time buyers pay when buying a home to live in. 

If you eventually decide to buy a property to live in yourself and you’d like to keep renting out your investment property, you’ll have to pay the full buy-to-let/second home surcharge.

We warned you it wasn’t easy! 😅 Luckily, we’re here to help you work out if now is the right time to buy and how much you can afford.

Take a look at our guide to stamp duty for first-time buyers to learn more.

3. You can’t use your Lifetime ISA

If you’ve been saving for your first home in a Lifetime ISA, you unfortunately won’t be able to use the bonus towards an investment property. And if you remove your savings from your LISA for something other than your first (residential) home or retirement, you’ll also be charged a small fee on the amount you withdraw, leaving you with less money than you put in. 

Now we’ve covered what you need to consider, let’s dive into the pros and cons of buying a buy-to-let property as a first time buyer:

Do you need a buy-to-let mortgage to rent?

Yes. Unless you own the property outright, you need a buy-to-let mortgage to rent it out. 

If you’d like to rent out your home, you’ll need to switch to a buy-to-let deal before you let tenants move into the property. 

Is a buy-to-let worth it?

Buy-to-let properties can be really lucrative. You’ll earn a regular income and hopefully benefit from capital growth as your property value increases over time. 

However, property investment isn’t without its risks and some people find it hard to generate a good return. Your tenants’ rent not only has to cover the property’s mortgage payments, it’ll also need to cover legal costs, maintenance fees, insurance and tax. If you hire a letting agent to manage the property, you’ll need to factor their fees into your budget too. All these costs can eat into your profits over time. 

If you’re wondering if buy-to-let is worth it for you, it may be a good idea to speak to a financial advisor first. If you’d like help finding one, talk to Tembo. We can refer you to one of our panel of five leading financial advisors, depending on what your needs are.