Buy To Let Mortgages


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Buy To Let Mortgages

As a general guide a buy to let mortgage is a sum of money that your bank lends you to purchase a property that you will use for rental purposes.

The main difference over a standard mortgage is that the lender will take into account the rental income that will be generated from the property as the main way of paying the mortgage loan, and in some cases the borrower may also be able to factor in other income.

Rental and additional income will normally be independently assessed on an ability to pay basis.

Minimum rental income again will differ from one lender to the next but 140% of rental cover is often required. Many buy to let mortgage lenders have tightened up their lending criteria making it difficult for first time landlords to get onto the market.

The minimum deposit levels are typically 25% and those lenders that require less down payment will charge in interest for taking on this increased “risk”. There are a few lenders that work on a 20% buy to let mortgage deposit basis and one or two that will go as high as 85% LTV.

Some buy to let mortgage lenders will have a maximum property portfolio and all will have a maximum total advance e.g. £2 million. It is important to note that product fees on buy to let mortgages are often higher than residential mortgages so getting a specialist buy to let broker to help can can save both time and money.

Buy to let mortgage lending criteria will differ from lender to lender but generally speaking most lenders will provide mortgages on the following basis:

  • Typically loans up to 75% loan to value. A few lenders will go as high as 85% LTV but the rates will be very high.
  • Interest rates on btl mortgages are higher than residential rates. For expats and foreign nationals the rates will be even higher.
  • Lender arrangement fees also tend to be higher
  • Some lenders will only lend to experienced landlords
  • Lenders will typically have a maximum number of properties that they are prepared to lend on. Lenders may also have conditions for maximum number of properties in the same area or block of flats
  • All BTL lenders will have minimum and maximum lending limits
  • There may be geographical restrictions imposed by a lender e.g. some lenders may not lend in Scotland or Northern Ireland

Typically the maximum you can borrow is linked to the level of rental income you can expect to receive from your property and the ability to repay the interest on the mortgage.

A stress test is used by lenders when assessing whether they are happy to lend.

Two factors used are:

  1. Rental income
  2. Ability to repay interest on the mortgage loan. This is known as the interest cover ratio (ICR)

Example of how the buy to let mortgage stress test works:

An investor wants to buy a £250,000 property and has a £75,000 deposit. The buy to let mortgage required is £175,000. Using the standard 5.5% interest cover rate (ICR) the monthly mortgage payments can be calculated: £175,000 x 5.50% = £9,625. Over 12 months = £802.08 pm. Applying a stress test rate of 145% results in a real monthly cost of £1163.01 pm. So in this example a lender would require you to be able to rent out the property at £1163.01 pm.

The stress test was previously 125% but since 2017 the Prudential Regulation Authority has increased it for all regulated buy to let mortgage lenders. To avoid mortgage “prisoners” for borrowers with existing mortgages, the PRA have stated that for “like for like” remortgages the new rules will be waived.

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