Buy-To-Let vs Residential Mortgage: What To Know

Understanding the difference between buy-to-let (BTL) and residential mortgages is something that can trip up first-time property investors, and it’s easy to see why.

On the face of it, the two are pretty similar. Both let you borrow money from a mortgage lender to fund a property purchase. 

However, you can’t buy a property to rent out to tenants using a residential mortgage, and you can’t buy a home to live in with a buy-to-let mortgage. 

And the differences don’t end there. The required deposits, eligibility criteria, interest rates, and fees also vary between the two mortgage types.   

Here, we help you get to grips with these different home loans by explaining how buy-to-let mortgages work, who can get one, and what happens if you try to rent out a property with a residential mortgage. 

How do buy-to-let mortgages work vs standard mortgages?

They work in a similar way. You borrow money from a mortgage lender to buy a property and pay the loan back (plus interest) over several years. 

The main difference between the two is how the property is used once it’s been purchased:

• A BTL mortgage is a type of loan you’d get from a mortgage lender if you wanted to buy a property to rent out to tenants. 

• A residential mortgage is a home loan you’d take out to buy a property to live in.

There are also some key differences to consider when it comes to the application process, borrowing criteria, and how the loan is repaid.  

1. Buy-to-let mortgages require larger deposits and higher interest rates & fees

Mortgage lenders typically view BTL mortgages as a higher risk than residential mortgages, mainly because rental properties can sit empty for long periods, which could have a knock-on effect on repayments being made on time.

With this in mind, lenders will ask for a larger deposit and charge higher interest rates and arrangement fees to offset this risk. While there’s no standard minimum BTL deposit, it typically ranges anywhere between 15% and 40%, depending on the lender.

On the other hand, the minimum deposit for a residential mortgage tends to be around 10% of the property’s value. Some lenders also offer 95% mortgages, which only require a 5% deposit. 

2. Buy-to-let borrowing is mainly based on rental income 

When you’re borrowing money to buy a house to live in, mortgage lenders will base their calculations on your earnings. As a rule of thumb, you’ll generally be able to borrow around 4 to 4.5 times your household income.

For BTL mortgages, the focus is less on your earnings and more on what you’re likely to bring in from rental payments. 

Typically, lenders want your rent to cover 125% to 145% of your monthly mortgage payments. This is to help minimise the risk of void periods where the property is unoccupied, and you’re not earning any rental income. Before they approve your application, lenders will check similar rental properties in your area to make sure there’s enough demand. 

However, this doesn’t mean lenders won’t check your salary as part of your application. You’ll probably need to earn at least £25,000 a year and show that you can make up any shortfall if the property sits empty for a while or interest rates rise.

3. Buy-to-let mortgages tend to be interest-only  

Most BTL mortgages are interest-only, meaning you pay the interest on the loan each month, but you don’t repay the loan itself. You only need to repay the original loan in full at the end of the mortgage term. 

Usually, buy-to-let landlords will sell their property to pay off their BTL mortgage. The idea is that the property will have increased in value over the mortgage term, allowing them to clear their debt and pocket the profit. 

In contrast, the most common type of residential mortgage is a repayment mortgage. This means the monthly payments are made up of the capital (the amount borrowed) and the interest. At the end of the mortgage term, the buyer will own the property outright.  

Note: Buy-to-let mortgages are also available as repayment mortgages. 

Who can get a buy-to-let mortgage?

Anyone who meets a lender’s criteria and passes the affordability checks can get a buy-to-let mortgage. However, your age and credit score will probably impact your chances.

• Your age: Many lenders set an upper age limit for buy-to-let mortgages (usually around 70 to 75, although some lenders have increased this to 85, and others don’t have any upper age limits). This means if you’re in your 50s or older, it could be harder to qualify for a BTL mortgage. For example, if you’re 55 and you want to take out a buy-to-let mortgage over 25 years, you’d be 80 when it was paid off. If the lender has an upper age limit of 75, you may need to look elsewhere.

• Your credit score: Unlike with a residential mortgage, where there’s no minimum credit score required to buy a house, you’ll typically need a good credit score to qualify for a buy-to-let mortgage. Due to the higher-risk nature of BTL mortgages, lenders want to know that you have a track record of reliable borrowing and that you’re not overstretching yourself financially. 

Before you apply for a buy-to-let mortgage, try Checkmyfile (free for 30 days, then £14.99 a month. Cancel anytime). We give you access to the UK’s most detailed credit report based on information from all three credit reference agencies, so you’ll know where you stand.

Review your credit history as reported to Experian, Equifax, and TransUnion to find out what BTL mortgage lenders might see when they check your details. Spot differences in what’s been reported, identify potential problem accounts, errors, or missing information, and take steps to grow your score. 

Can you rent out a property with a residential mortgage?

Technically, yes, you can rent out a property with a residential mortgage — but you’ll need permission from your lender.

For example, perhaps you want to let your home for a short period while you travel or move elsewhere for work. To do this, you’ll need to ask your lender for consent to let. This means you’ll have your lender’s approval to rent out your property without changing your mortgage type or breaching your contract.

Keep in mind, if you rent out your house without a buy-to-let mortgage or consent, you’d be breaking the law – so be sure to get the green light from your lender to avoid any penalties.  

While some landlords might try to use a residential mortgage for a rental property because it’s cheaper, it could cost them a lot of money in the long run. If your lender finds out, they’ll probably ask you to repay the loan in full and may also fine you for a breach of contract. 

Can you change a residential mortgage to a buy-to-let?

You can. If you’ve moved out of your property permanently (perhaps to move in with a partner) and want to rent out your home instead of selling it, you’ll need to convert your residential mortgage to a buy-to-let mortgage to avoid financial penalties. 

To do this, you’ll need to remortgage to a buy-to-let deal, either with your existing lender or a new one.

Can you change a buy-to-let mortgage to a residential one?

Yes. If you own a rental property and want to live there permanently, you’ll need to switch from a BTL to a residential mortgage. Again, you’ll need to remortgage with your existing lender or a new one. 

To recap:

Should you choose a buy-to-let or residential mortgage? Well, it depends on your plans for the property. The main difference between the two is whether you plan to live in it yourself or rent it out. 

A BTL mortgage should only be used to buy a property to rent out to tenants, while a residential mortgage should only be used to buy a property to live in. If you rent out your home using a residential mortgage without prior permission, your lender could impose hefty penalties and potentially get you in trouble with the law. 

Whether you want to buy-to-let from the start or you need to rent your property out later, with the right advice from a mortgage broker or lender, you can pick the best type of mortgage for your situation, without worrying about fines or legal issues. 

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