Buy to Let mortgages enable the purchase of property as a long-term investment, with rental income from tenants covering the monthly mortgage payment.

Deposit

Deposits required for Buy to Let property are generally much higher than for residential homes, with minimum deposits ranging from 15% to 25% depending on the lender. Lenders say this is because borrowers need to demonstrate a greater commitment to the property as they will not be living there themselves, while it also helps ensure that borrowers are not faced with too great a hardship should they find the property hard to rent out for any period of time, or if rental income should fall for any reason.

Income

Most, though not all, lenders in the Buy to Let market no longer require the mortgage to fit within traditional income guidelines, although many still require borrowers to demonstrate a minimum income level. Instead they will require the potential rental income on the property to exceed monthly interest payments by a specified amount, usually between 100-125%. This might mean, for example, that if your monthly mortgage interest payment were £500, you would need to demonstrate that the rental income would be 125% of that, or £625 per month. Also, some lenders use a higher interest rate than that actually charged when assessing rental income, to ensure that, should interest rates go up, borrowers will still be able to afford their mortgage payments. Other methods used include requiring that the annual rental income be at least 10% of the amount borrowed, or adding rental income to disposable earned income and applying income multipliers as for residential mortgages.

Interest Rates

While Buy to Let mortgages used to be regarded by most lenders as commercial loans, with interest rates far above those for "normal" residential mortgages, they have now become accepted as an integral part of the mortgage market, and interest rates tend to be only around 1% higher than for residential loans, with a full portfolio of initial offers such as discounts, fixed rates and cashbacks available.

Tenancy Agreements

Most lenders will insist on a property being let via an Assured Shorthold Tenancy, on either a 6-month or 12-month basis. ASTs stipulate the rent payable each month, and will usually also include an agreed formula for rent increases should the tenancy be renewed, usually annually in line with the retail inflation rate.

Letting Agencies

Most lenders will also insist that first-time landlords secure the services of a letting agency to manage the property, find tenants and take care of the legal paperwork and subsequent repairs and tenant issues. More generally, letting agencies offer a wide range of service levels, from the "all-in" service described above to acting simply as a tenant finder, where the agency will advertise for tenants and show them round the property, make credit and reference checks and draw up a tenancy agreement, leaving all management after the tenants have moved in to the landlord. Many letting agents are members of ARLA, the Association of Letting Agents, and should follow the Association's code of practice and complaints procedures.

Insurances

As well as the usual buildings and contents insurances, Buy to Let borrowers should also consider extra insurances to help cover their investment. These include: public liability insurance, to cover against injury claims by tenants and visitors; rental income and/or legal expenses insurance, which help cover against tenants not paying their rent and initiate eviction proceedings; and emergency assistance insurance, to cover the cost of call-outs for repairs to appliances.

Tax

Profits from buy to let property are subject to income tax, and must be included on annual tax returns. The profit is calculated as gross rent received less costs incurred exclusively for the rental property, such as insurance, maintenance and letting agents fees. Mortgage interest payments can also be offset against tax, but capital repayments on the mortgage cannot. Similarly, repairs to the property and furnishings can be offset, but not home improvements. If and when you finally sell the property, any rise in its value since purchase will be subject to Capital Gains Tax, though you can set purchase and sale costs against this.