Why are buy-to-let mortgages more expensive?

When you apply for a mortgage, there are strict checks that lenders run through to ensure that borrowers are in a position to comfortably repay the money they’ve borrowed.

This goes for any mortgage – whether your plan is to live in the property that you’ve taken the mortgage out on, or you intend to rent it out.

With a buy-to-let mortgage, borrowers will find that the checks that lenders put them through are even more substantial than for an ordinary mortgage, and that the actual mortgage will cost them more too.

In this blog, we explain why this is the case.

Risky business

If you buy a property with the intention of renting it out, quite simply, lenders see you as more of a risk as a borrower.

There are a number of reasons for this. The main one is that the lender has no control over who you let out the property to, so they cannot vet them first in the same way that they can vet you as a borrower.

As a landlord, you will never pass on any of your tenant’s information to the lender, so the lender will never learn any financial information or behaviour about the person you rent your property to. This means they have no way of knowing whether the tenant can be trusted to make their rent payments.

With most buy-to-let lenders relying on the income from the let to cover the mortgage, if the tenant has a problem paying their rent, it could potentially have a knock-on affect for you making the monthly mortgage repayments.

For this reason, lenders see you as the risk.

Higher interest

In the world of borrowing, the higher risk you present is reflected in the interest rate you’re offered and the amount you can expect to borrow.

The same goes for buy-to-let borrowers, which is why you’ll find that the APR is generally higher than on a normal mortgage.

The amount can vary, but it’s normally anywhere between around 1% and 3% more expensive. As well as paying higher APR, you should also expect to pay higher arrangement fees to get the mortgage set up too. And you’ll need a hefty deposit – normally 25% - so you’ll have to have a spare stack of cash to invest first.

Is it really a good way of making money then?

Lenders would normally suggest charging rent at 125% of the monthly mortgage repayment, which allows you to make a 25% profit. So when you do the quick short-term maths, yes it could make you money.

But you must consider that as a landlord, you’ll need to factor in maintenance and anything that could go wrong with the house. A further risk is something going wrong with the tenant, or the property being unoccupied for periods between tenants – could you still afford the mortgage?

Buy-to-let mortgages can work well for property developers who want to extend their portfolios, if you live abroad and have no need to live in the property, or if you’ve bought a second property as a way of boosting your income.

Weigh it up

Although the interest rate, arrangement fees and deposit are all higher with buy-to-let mortgages, being a landlord can still be a good way of boosting your income.

But you need to do your research. There are plenty of products available and you need to make sure that you choose the best one for you.

There are also plenty of resources available so do your reading before you apply.