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Buy-to-let mortgages are used by investors to purchase residential properties, with lenders requiring larger upfront payments than secured loans on primary residences. In the UK, lenders base approved loan amounts on a multiple of the borrower’s salary and expected rental income must exceed the monthly mortgage amount. Buy-to-let mortgages are available as fixed or floating rate loans, and lenders have the right to foreclose on a property if the borrower defaults on payments.
Buy-to-let mortgages are home purchase loans commonly used by investors to purchase residential properties. The type of mortgage is most commonly used by lenders in the United Kingdom (UK), but similar mortgages for investment property are available in other countries. Lenders require larger upfront payments for buy-to-let mortgages than secured loans on primary residences, because borrowers are more likely to default on loans than mortgages tied to their primary home.
In the UK, lenders usually approve mortgage 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 evaluating buy-to-let mortgage applications also consider the amount of rental income the borrower expects to receive. Expected rental income must exceed the monthly mortgage amount so that the borrower has excess funds available to make regular payments if there are months when no rental income is received.
Buy-to-let mortgages are available as fixed or floating rate loans. Fixed loans generally amortize over 20 to 30 years and the borrower’s payments are applied to the principal and interest. Adjustable rate mortgages often require interest-only payments, and rates can change on a monthly or yearly basis. People usually take out buy-to-let mortgages if home prices are rising and expect to make a profit by eventually selling the home.
Historically, lenders in the UK were wary of financing investment property because tenant rights meant that it often took a landlord long periods of time to evict a tenant who had failed to pay the rent. The Housing Act 1988, and amendments to it in 1997, stipulated that most residential leases be classified as secured short-term leases. Under these contracts, landlords can evict tenants who are eight weeks late on paying their rent. This means landlords are less likely to have extended periods where rental income is not received.
The lender has the right to foreclose on a property purchased with a buy-to-let mortgage if the borrower defaults on payments. After foreclosing on a home, the lender can sell the property at an auction or through a private sale and use the funds raised to pay off taxes, insurance costs, and the loan balance. Due to the risk of borrower default, most lenders are reluctant to offer call loans in locations experiencing home price depreciation because the loan amount may exceed the mortgage amount if the borrower is insolvent.
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