“Buy to Let” is a phrase that refers to a residential property (house/flat) that the owner (landlord) rents out to long term tenants. This style of property investment is not new of course, but the creation of the ‘buy to let mortgage’ in 1996 quickly made it accessible to ordinary investors.
If you’re thinking of taking out a buy-to-let mortgage, there are a few things you need to know before getting started.
In this guide, we’ll cover all of the essential facts about buy-to-let mortgages including how they work, the lending criteria, where to get them and more.
What is a buy to let mortgage?
A buy-to-let mortgage is a loan that is specifically for people who are looking to purchase a property in order to rent it out over the long term. This type of mortgage usually has different criteria than a standard mortgage, and often requires a larger deposit.
Importantly, the loan is granted on the basis that the property will be let out on an Assured Shorthold Tenancy (AST). This means that a BTL mortgage is not suitable for a property that you will be using or living in yourself, or one that will be let out for just short periods such as an Airbnb or holiday let.
Mortgages are based on the rental income, with a safety margin built in and not your personal income. Even so, you will need a minimum income of £20-25,000pa and a good credit profile.
Our free buy-to-let rent calculator will work out how much you need in rent to qualify for a certain buy-to-let mortgage.
Buy to let mortgages are not normally regulated by the Financial Conduct Authority (FCA).
Short Term Lets
Serviced accommodation, airbnb, short lets and holiday lets will need a different type of mortgage due to how the property is being used. A holiday let mortgage is usually the best solution.
How do they work?
A buy to let mortgage is designed to be used on a residential property that will be let out to tenants on a long term basis.
The basic elements of the mortgage are the same as for other mortgages:
REPAYMENT METHOD – Normal choice between repayment or interest only.
MORTGAGE TERM – Choice of term.
INTEREST RATES – Fixed, tracker and variable are normally available.
One of the biggest differences is how you qualify for a certain loan size. While you need to earn a minimum level of income this is not used to justify the loan amount.
This is worked out using the gross rental income with the additional of a ‘stress test’ (we cover this a bit further down).
Like a standard mortgage, each month you need to pay the mortgage payment, usually by direct debit. This needs to be paid regardless of the rent you may or may not have received. It is therefore a good idea to keep a buffer in your account to help with any void periods or unexpected bills.
You will find that the interest rates and fees are a little bit higher than for residential mortgages but the BTL market is very mature so there’s lot of competition and choice.
Criteria Explained
Before you apply for a BTL mortgage it’s a good idea to see what the lenders are looking for. The criteria is relatively straightforward and mostly revolves around the property and the income it can generate.
PERSONAL INCOME – Even though a BTL is an investment, all lenders will need you to be able to prove a certain level of income. Generally, the minimum is £20-25,000pa. Acceptable proof will be; payslips, P60, sole trader accounts, self-assessment, tax returns, SA302.
YOUR AGE – 21-65 is the range where you will have the biggest choice of lenders. Mortgages are available to borrowers over 65, we suggest contacting a mortgage broker who will be able to research your best options.
DEPOSIT – Usually a minimum of 25%, we cover this in more detail below.
RENTAL INCOME – This is the important one. The lender will use the gross rental income to work out the maximum loan they will provide for a given property. So being able to achieve a decent amount in rent is crucial to getting a mortgage.
Mortgage Stress Test
All lenders will use a calculation to work out what they can lend you.
There are two elements to this:
NOMINAL INTEREST RATE
This is not the rate you will be paying but one used purely for this calculation. Most lenders use 5% while others may use 5.5%.
INTEREST COVERAGE RATIO (ICR)
This helps to assess affordability, all buy to let lenders require that the rental income covers the mortgage payment plus a margin to cover other costs.
A lender’s ICR is the ratio to which the rental income must cover the interest only payments at the nominal interest rate! The minimum ICR is 125% with some lenders using 145%.
Here’s a very simple example:
| Buy to let stress test | |
|---|---|
| Purchase price | £300,000 |
| Cash deposit | £100,000 |
| Mortgage needed | £200,000 |
| Interest at 5% | £10,000pa |
| x 1.25% ICR | £12,500pa |
| Divided by 12 | £1041.67 |
In this example it means that to obtain a mortgage of £200,000 you need a gross rent of £1041 per month. This a best case scenario, if the lender needs a cover ratio of 145% then the loan offered will be lower.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
CALCULATORS
How much can you borrow?
Lenders will use the rental affordability calculation to see how much you can borrow and if it is viable.
The overall maximum loan to value is normally 75%. However, the loan offered to you could be less where the rental yield is quite low when compared to the property value.
Our simple buy to let mortgage calculator will provide an estimate of how much you can borrow from a given monthly rent.
If the mortgage amount is not high enough then with some lenders there is the opportunity to ‘top-up’ the loan amount using personal income. Your broker can explain how this could work for you but we have a brief overview below:
Top Slicing
A few lenders allow ‘top slicing’ for some mortgage applications. This is where a landlord’s personal earned income, excluding property, is assessed more thoroughly. If you have significant earned income in relation to your outgoings then the excess income could form part of the loan calculation.
Essentially it’s an opportunity to borrow a bit more on the right property for the right borrower.
Buy to let deposits
With a residential mortgage the deposits usually start at 5-10%, but with buy to let you generally need at least 25%.
Don’t forget that if the rental calculation determines that a loan equal to only 70% is the highest available then you will have to cover the difference by increasing your deposit.
Who needs a Buy to let mortgage?
You will need a buy to let mortgage if you intend to rent out a residential property, such as a house or flat, to tenants for the long term. Normally this would be done with an AST.
Holiday lets and serviced accommodation, including airbnb, need their own specific holiday let mortgage.
Specialist solutions for landlords
First-time Buyer?
Mortgage options are available for first-time buyers. However, lenders view this as a bit more risky and so may lower the LTV on offer. You also need sufficient savings or income to cover any periods where the property is not let.
Portfolio Landlord?
If you own 4 or more let properties then you are classed as a ‘portfolio landlord‘ in the eyes of the lender. There’s no limit to the number you can own but lenders will want to understand your current portfolio.
Limited Company?
To purchase properties in a limited company it must be set-up as an SPV, or Special Purpose Vehicle. This is quite straightforward to do and many lenders are now accepting limited company mortgage applications.
Speak to a buy to let expert
Limited Company Buy to Let
A lot of property investors now want to own their properties from within a limited company. This is a bit more expensive to do but it comes with it’s own advantages.
The company must be set up as an SPV, and all lenders will check that this is satisfactory at the outset.
Mortgages are available to existing companies and to brand new SPV’s, without any accounts or records. This can happen because the lenders take a Personal Guarantee (PG) from the company directors, to cover the mortgage debt should the company fail, enabling them to take on a bit more risk.
In our opinion it is essential that you work with an independent mortgage broker for buy to let mortgages or limited company mortgages. This gives you access to all of the specialist lenders plus the experience of the adviser.
Multi Unit Freehold Blocks (MUFB)
This is advanced buy to let. A multi unit freehold block, or multi-unit property, is one freehold property that is split into separate residential dwellings. None of the dwellings will have their own separate lease.
An MUFB could be:
- Purpose built block of flats
- Converted house
- Multiple houses held under a single freehold title
Each dwelling should be completely self-contained and can be rented out to different tenants, all having their own Assured Shorthold Tenancy (AST).
Multi-Unit Freehold Blocks are often referred to as a complex buy to let and are popular with experienced property investors as they generate high yields and help to diversify existing portfolios.
Mortgages for MUFB’s that have upto 4 dwellings are available to 75% LTV. For properties that have 5 or more dwellings there are specialist lenders who understand the multi-unit property model.
how do Portfolio Mortgages work?
A portfolio mortgage could be worth considering if you own four or more investment properties. By placing all of your properties under one mortgage facility you will streamline your finances and admin time. Read on to discover how portfolio mortgages work and how they can benefit landlords.
Can you change a normal mortgage into a buy to let?
Yes this is possible and there are two options:
Consent to let
A consent to let is essentially asking your current lender if it’s OK to rent out your property. They may say no, but if they do say yes it can be put in place quite quickly.
They might increase your interest rate a bit and also limit the permission to 6-12 months.
Remortgage
By remortgaging over to a buy to let mortgage you will be changing lender and applying for a new interest rate deal. It may also be possible to borrow against some of the equity.
Once this is in place you can let out the property for the long-term.
Read more about switching to a buy to let mortgage.
Can I live in my own buy to let?
Unfortunately not.
Buy to let mortgage lenders will be expecting the property to be let out to tenants on an AST. Should you wish to live there you will need to change the mortgage type.
What’s the difference between a normal mortgage and a buy to let?
There are a lot of similarities between the two. Such as; repayment methods, interest rates, early repayment charges and monthly payments. But there are 2 aspects where a btl is very different:
MORTGAGE AMOUNT – This is not determined by your income but from the rental income that the property can generate.
PROPERTY USAGE – The property must be occupied by long-term tenants who use the property as their main residence. This excludes HMO and holiday let/airbnb.
What’s the difference between a holiday let mortgage and a buy to let mortgage?
Speak to a buy to let expert
ADVICE
Why Use A Mortgage Broker?
You need a mortgage but you’re not sure whether to use a broker. Aren’t they expensive? I can just apply direct?
Mortgage brokers certainly aren’t expensive and many of them do charge a fee for their advice. That’s fair enough isn’t it? They have spent time helping you and so need to be paid for that time.
CHOICE
This is one of the main advantages. An independent mortgage broker will have access to thousands of different mortgage options. Many of these are just reserved for brokers.
ADVICE
A broker has to be qualified and approved by the FCA before they are able to give you advice. They can provide specialised guidance which is not available from lenders.
TIME
Having a mortgage broker will save you lots of time. Researching and arranging a mortgage literally takes hours and hours. Let your broker take some of the strain.
SAVE
Extensive research by your broker can potentially save you thousands. 0.50% reduction in interest for a 250K loan saves £1250 each year!
SOLUTIONS
Some situations aren’t straightforward. Issues with proof of income, deposits or perhaps just an unusual property. A day in the life of a mortgage broker.
FAQ
Frequently Asked Questions
What is a stress test?
This is how the lender calculates the size of mortgage for a given rent. Learn more.
How much do I need to earn?
Most will need to see income proof that shows £20-25,000 per annum.
How much deposit will I need?
The minimum deposit amount will be 25%. This could go up depending on the rental cover calculation.
Can first time buyers get a buy to let?
Yes there are a few lenders that will consider applications from a first time buyer.
Do I have to use a mortgage broker?
No, not at all. There are many lenders that are happy to deal direct.
However, this will make us sad.
I already have 5 let properties, can you still help me?
Yes we can. Our brokers are experts at helping portfolio landlords like yourself.
