The number of people purchasing property to let out soared in the last months of 2020. Becoming a landlord can be an attractive way to boost your income or invest. However, there are many things to consider before taking the plunge, starting with whether a Buy to Let mortgage is right for you.

Landlords made up 15% of agreed property purchases in November

Landlords made up 15% of agreed property purchases in England, Wales and Scotland in November 2020, according to estate agent Hamptons. The figure is the highest it has been since December 2016.

The Midlands and the north of England were particular hotspots for landlords. In Blackpool, seven in ten agreed purchases were made by prospective landlords, while in St Helens, half of agreed sales are set to be Buy to Let properties.

One of the key reasons for the Buy to Let property boom is the Stamp Duty holiday brought in by Chancellor Rishi Sunak. Property sales completed before 31 March 2021 will benefit from reduced Stamp Duty. Those purchasing a main home with a value of less than £500,000 won’t have to pay Stamp Duty at all. Those buying a second home, including Buy to Let properties, will need to pay a surcharge, but the savings can still be significant.

Hamptons estimated that landlords will pay £365 million in Stamp Duty on house sales agreed between September and November. However, if those purchases miss the deadline, the figure could rise by £74 million.

Those looking to buy a property now are likely to miss out on the deadline unless the Stamp Duty holiday is extended.

5 things you need to know when applying for a Buy to Let mortgage

Many aspiring landlords will need to take out a Buy to Let mortgage to purchase a property. While they are similar to a mortgage you use to buy your main home, there are some key differences. Keeping these five points in mind can help you understand if you’re in a position to take out a Buy to Let mortgage and help you avoid mistakes.

1. You will usually need a minimum deposit of 25%

When you buy a property to live in, you will usually need to put down a deposit between 5% and 10%. However, with a Buy to Let property, this will be much higher. Expect to put down a minimum of 25% of the property’s value, some lenders may ask for as much as 40%. The more you can put as a deposit the greater choice you’ll have, and it could save you money by accessing lower interest rates.

2. Mortgage fees are likely to be higher

The cost of taking out a mortgage is also likely to be higher, so it’s important to factor this into your budget. This fee may be a set amount or it could be a percentage of the loan amount. Some lenders will allow you to add this fee to the amount borrowed. In some cases, a lender will have no arrangement fee. When searching for the best deal for you, make sure you look beyond the fee. A lender offering no fee, for instance, may have a higher interest rate that ends up costing you more in the long term.

3. Most Buy to Let mortgages are interest only

When you take out a mortgage for your own home, they are usually repayment mortgages. This means you’re paying the interest and a portion of the amount borrowed. In contrast, a Buy to Let mortgage is usually interest-only. This means at the end of the term you will still owe the amount you borrowed. It means your monthly repayments will be lower, but you need to have a long-term plan in place. There are Buy to Let repayments mortgages available if this is your preferred option.

4. The rental yield will affect how much you can borrow

Your income and financial stability do affect whether a lender will approve your application. However, the potential rental yield plays a bigger role. Lenders will want to know what the expected yield is when completing an application. As a result, it’s important to do your research and understand the market. Lenders will usually need the rental yield to be 25%-30% higher than your mortgage repayments.

5. There is a range of providers to choose from

Most high street banks offer Buy to Let mortgages, but there are specialist banks too. You should search the market to find a deal that suits your needs. A mortgage broker will have knowledge of lenders that may not have a high street presence and be able to offer advice on which providers are likely to accept your application, as well as offering support throughout the process.

A Buy to Let mortgage is just the first step to consider

Becoming a landlord can seem attractive but there’s a lot to think about first. As well as whether a mortgage application will be approved, you should think about what you’d do if the property was empty for an extended period, how you’ll cover maintenance work, and review the regulations you’ll need to adhere to. You should also consider how becoming a landlord will affect your tax liability.

If you’re considering purchasing a second property, we’re here to help. Please get in touch to discuss your needs and the next steps to take.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate Buy to Let mortgages.