Buy-to-let mortgages are popular in the UK and allow investors to purchase residential property, but lenders require higher down payments and consider rental income when approving loans. Fixed and adjustable-rate options are available, but lenders are cautious in areas with depreciating home prices.
Buy-to-let mortgages are home purchase loans that investors typically use to purchase residential property. The type of mortgage is the most widely used by lenders in the United Kingdom (UK), but similar investment property mortgages are available in other countries. Lenders require higher down payments for purchase-to-let mortgages than loans secured on primary residences, because borrowers are more likely to default on loans than mortgages attached to their primary residence.
In the UK, lenders generally approve mortgage loan applicants by basing the approved loan amount on a multiple of the borrower’s salary. Lenders allow people to buy homes that cost up to three times their annual salary. Underwriters who review buy-to-let mortgage applications also take into account the amount of rental income the borrower expects to receive. The projected rental income must exceed the monthly amount of the mortgage so that the borrower has excess funds available to make regular payments if there are months in which no rental income is received.
Buy-to-let mortgages are available as fixed or adjustable rate loans. Fixed loans are generally amortized over 20 or 30 years, with the borrower’s payments applied toward principal and interest. Adjustable-rate mortgages often require interest-only payments, and rates can change on a monthly or yearly basis. People often get buy-to-let mortgages if home prices are rising, and anticipate making a profit by eventually selling the home.
Historically, lenders in the UK were wary of financing investment properties because tenant rights meant that it often took long periods of time for a landlord to evict a tenant who had not paid rent. The 1988 Housing Act, and its 1997 amendments, mandated that most residential leases be classified as secured leases. Under these leases, landlords can evict tenants who are eight weeks late in paying their rent. This means that homeowners are less likely to have extended periods when no rental income is received.
The lender has the right to foreclose on a property purchased with a buy-to-let mortgage if the borrower defaults. After a home is foreclosed, the lender can sell the property at auction or through a private sale, using the proceeds to pay off any outstanding taxes, insurance costs, and the loan balance. Due to the risk of borrower default, most lenders are reluctant to offer buy-to-let mortgages in locations experiencing depreciation in home prices because the loan amount may exceed the mortgage amount if the borrower defaults. .
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