Buy-to-let mortgages are purchase home loans commonly used by investors to buy residential property. The type of mortgage is most commonly used by lenders in the United Kingdom (UK), but similar investment property mortgages are available in other countries. Lenders require larger down payments for buy-to-let mortgages than loans secured on primary residences, because borrowers are more likely to default on the loans than on mortgages tied to their primary home.
In the United Kingdom, lenders usually approve loan applicants for mortgages by basing the approved loan amount on a multiple of the borrower’s salary. Lenders enable people to buy homes that cost up to three times their annual salary. Underwriters assessing applications for buy-to-let mortgages also take into account the amount of rental income the borrower expects to receive. The projected rental income must exceed the monthly mortgage amount so that the borrower has excess funds on hand to make regular payments if there are months when no rental income is received.
Buy-to-let mortgages are available as fixed or adjustable rate loans. Fixed loans generally amortize over 20 or 30 years, and the borrower’s payments are applied to principal and interest. Adjustable rate mortgages often require interest-only payments, and rates can change on a monthly or annual basis. People usually take out buy-to-let mortgages if home prices are rising, and they anticipate making a profit by eventually selling the house.
Historically, lenders in the UK were wary of financing investment properties because renter’s rights meant that it often took extended periods of time for a landlord to evict a renter who had failed to pay rent. The Housing Act of 1988, and amendments to it in 1997, dictated that most residential leases be classified as assured shorthold tenancy agreements. Under these contracts, landlords can evict renters who are eight weeks behind on rent payments. This means landlords are less likely to have extended periods when rental income is not received.
The lender has a right to foreclose on a property bought with a buy-to-let mortgage if the borrower defaults on the payments. After foreclosing on a home, the lender can sell the property at auction or through a private sale, and use the funds raised to settle 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 places experiencing home price depreciation because the loan amount may exceed the mortgage amount if the borrower defaults.