What are the usual criteria for a buy to let mortgage?

Whether you're just beginning or increasing your property portfolio, the following should provide some insight as to the market and how to meet the lender’s criteria if you are seeking a buy to let (BTL) mortgage.

What is a buy to let mortgage?

BTL mortgages are for landlords who want to purchase a property and rent it out. They are similar to ordinary residential mortgages, but with some important differences:

  • Fees are generally much higher
  • Interest rates are usually higher
  • The minimum deposit is usually 20 per cent of the value of the property
  • In most cases, interest-only mortgages are provided

Interest rates

Buy to let mortgage rates are usually higher than rates on your personal residence, as they constitute more of a risk for providers. For example, the financial behaviour of the tenant is an unknown quantity.

Deposit

The amount you can borrow as a percentage of the value of the property (the loan-to-value or LTV) is usually lower for BTL mortgages. You would be unlikely to obtain this type of mortgage with just a 10 per cent deposit. Generally, the maximum you could borrow is around 80 per cent of the value of the property, meaning that you will have to find at least a 20 per cent deposit. This contrasts with residential mortgages on which, in some cases, you may be able to borrow 95 per cent.

Interest-only deals

Interest-only mortgages are prevalent in the buy to let market because BTL properties are more easily sold, once tenants leave. Landlords tend to prefer the lower monthly mortgage repayments.

Who can get a buy to let mortgage?

You can obtain a BTL mortgage if:

  • You would like to invest in property
  • You understand the financial risks of property investment and can afford the mortgage
  • You own your own home, outright or with a mortgage
  • Your credit record is good and you are not over-committed on other borrowing, such as credit cards
  • You earn over £25,000 a year
  • You’re under the lender’s age limit.

Assessing your income

A BTL mortgage may relate to a number of properties. The maximum amount you can borrow is determined by the value of the rental income you expect to receive, in addition to LTV as above. For a BTL mortgage, income is usually assessed as a percentage of the mortgage payment - generally required to be anywhere between 125 and 145 per cent of the payment. The rental value of the property must be confirmed by the surveyor who carries out the mortgage valuation.

A lender might require that you need a minimum income amount to guarantee that you have other financial resources to rely upon, should you have problems with income from tenants or gaps in rental.

Other considerations

You should always check the following criteria before proceeding with your application or work with your mortgage adviser to do so.

Minimum valuation

Some lenders will only lend on properties with a valuation above a particular level. While, usually, this is a nominal figure of £40,000 to £50,000, some lenders require minimum valuations starting at £100,000 plus.

Property type

If your property is unusually constructed in terms of materials or design, you may need a specialist lender. New build flats which are over-valued can present difficulties at the valuation stage.

Possible restrictions

Some lenders restrict the number of properties you can have on a single BTL mortgage, in addition to the maximum figure that they will lend. Multiple applications with the same lender may not be possible either. Due to regulatory changes, landlords with over three buy to let properties are treated as 'portfolio landlords'. This means that income from all of their properties will be considered when they apply for a new loan.

Many lenders stipulate that you must have owned and lived in your current property for at least six months and the property may have to be in the UK. The rental property might need to be let under an Assured Shorthold Tenancy or a company let agreement. Some lenders require that the property should not be a House in Multiple Occupancy (HMO) such as a student let.

Age

Your age dictates whether you can have a BTL mortgage, and how long the term can be. Many lenders limit the term to the point at which you reach the age of anywhere between 70 and 90.

Professional and portfolio landlords

Some lenders disqualify professional landlords: this is a person with over £2,000,000 in BTL borrowing across all lenders, or someone for whom over 50 per cent of their total gross yearly income comes from rental income. Similarly, portfolio landlords with four or more buy to let mortgaged properties may be barred.

Capital gains tax

If you sell a buy to let property and make a profit, you will pay Capital Gains Tax (CGT) should your gain be above the threshold of £11,700 (for the 2018/19 tax year). Couples owning assets jointly can combine this allowance.

Time frame

Provided that you have done your homework and your paperwork is complete, you should be able to arrange a BTL mortgage in three to six weeks, similar to a residential deal.

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