Buy-to-Let

What is a buy-to-let mortgage?

A buy-to-let mortgage enables you to buy a property to rent out rather than to live in yourself. It’s common for landlords to use their rental income to cover the mortgage payments. However, this income isn’t guaranteed, making buy-to-let mortgages riskier than standard residential ones. As such, buy-to-let mortgages have higher interest rates, stricter criteria and potentially higher fees. You have to pay a larger deposit and the amount you can borrow is usually based on the potential rental yield. This type of mortgage is available to first-time landlords, accidental landlords and experienced investors.

How does a buy-to-let mortgage work?

Buy-to-let mortgages are usually offered on an interest-only basis. This means that you pay the interest on the mortgage loan each month but you don’t repay any of the capital. The loan itself is repaid at the end of the mortgage term. One way this can be achieved is by selling the property and repaying the loan using the sale proceeds. Another way is by using savings that you’ve accumulated during the mortgage term. Alternatively, it can be repaid by refinancing to a new deal, which preferably has more favourable terms.

Landlords generally prefer an interest-only deal to a repayment mortgage. This is because it keeps the monthly payments lower and improves cash flow. As mentioned earlier, interest rates for buy-to-let mortgages are usually higher than the rates for standard residential mortgages. This is because they’re considered to be more of a risk for lenders. The rate you’re offered will be determined by various factors. For example, the value of the property, how much you want to borrow, the size of your deposit and the anticipated rental income.

Should you choose a fixed or variable rate?

You can choose between a fixed or variable rate for a buy-to-let mortgage. With a fixed rate, your interest rate stays the same, keeping your payments at the same level and making it easier to budget. With a variable rate, your interest rate can fluctuate if rates in general go up or down. Whilst you can benefit from having a lower interest rate and making lower payments if rates drop, you need to be prepared to make higher payments if rates go up.

What deposit do you have to pay?

Lenders require you to pay a higher deposit for a buy-to-let mortgage to counteract the risk. This is typically 25% of the purchase price. Some lenders accept lower deposits of 20% while others may require a higher amount, such as 40%. The more deposit you can put down, the less you’ll need to borrow and this will help to keep your monthly payments lower.

Who can apply for a buy-to-let mortgage?

You can apply for a buy-to-let mortgage whether you’re a new landlord or an experienced one. It’s suitable for you to apply as an individual or a limited company. This type of mortgage is tailored to your needs and, as such, lenders can cater to a complex income structure or setup. For example, you may be self-employed, you may have bad credit, you may wish to apply via a trust or you may wish to rent out multi-unit freehold properties.

If you have four or more rental properties, you’re classed as a portfolio landlord. You can use a standard buy-to-let mortgage for each property if you wish. However, it can make more sense to use a portfolio mortgage. This can cover all of your properties under one policy, helping to save you both time and money.

You can also take advantage of a buy-to-let mortgage if you’re an accidental landlord. For example, you may have inherited a property and have decided to use it as a rental investment rather than live in it or sell it.

Is a buy-to-let mortgage regulated?

Generally, buy-to-let mortgages are unregulated as they’re considered to be business transactions rather than a form of personal lending. This is because properties that are rented out with the aim of earning an income fall under commercial finance. This is different from standard residential mortgages, which are regulated by the Financial Conduct Authority (FCA) and have consumer protection. There are, however, some exceptions to this. The FCA regulates buy-to-let mortgages when:

• You rent out your property to an immediate family member, such as a parent, child, sibling or grandparent. They must occupy at least 40% of the property if not all of it.
• You previously lived in the property and have now moved out.
• You intend to live in the property with a paying tenant.
• You’ve inherited the property.

Regulated buy-to-let mortgages are also known as consumer buy-to-let mortgages. They aren’t offered by all lenders. They have stricter criteria and conditions as they pose more of a risk to borrowers. You’ll be required to pay a higher deposit and the amount you can borrow will be based more on your personal income rather than the anticipated rental income.

Eligibility criteria for a buy-to-let mortgage

Lenders vary with their criteria for buy-to-let mortgages but, generally, the following apply:

• You need to be at least 18 years old, although some lenders specify 21 or above. An upper age limit may also apply for the end of the mortgage term, such as 80 years old.
• Many lenders are happy to lend to new landlords but some prefer you to have experience with renting out a property.
• Some lenders stipulate that you must already own your own home. This can either be with a mortgage or outright.
• A minimum deposit of 25% is usually required. Be aware that some lenders ask for a higher deposit of 40%.
• Minimum income. You may need to earn a minimum salary, such as £25,000 per year. This often applies to first-time landlords. The income requirement is to cover your mortgage payments should there be any issues with the rental income. For example, if there are void periods between tenancies.
• Rental income. The projected rental income usually needs to cover at least 125% of the monthly mortgage interest repayments. This is known as the interest coverage ratio (ICR). Some lenders have a higher ICR requirement, such as 145%.
• Credit history. A good credit history shows lenders that you are capable of managing your finances. There are ways to improve your credit score before applying for a better chance of success.
• Existing debts. Any existing debts have to be taken into account to ensure that your finances aren’t stretched too thinly.
• Property cap. Whilst some lenders don’t have a limit on how many buy-to-let mortgages you can have, others set a cap on how many rental properties can be mortgaged. For example, a lender may allow you to mortgage six rental properties with them or have 10 mortgaged rental properties in total, spread between them and other lenders.
• Property type. Some lenders restrict the types of properties that they will accept for buy-to-let mortgages. For example, they may not approve loans for properties with a non-standard construction.
• Property value. Some lenders insist that the property has a minimum value, such as £50,000.
• Lending limits. Some lenders set minimum borrowing requirements, such as £25,000. Others set limits for how much they’ll lend you overall for multiple buy-to-let properties.

How much can you borrow?

The amount you can borrow for a buy-to-let mortgage depends on various factors. These include the property value, expected rental income, how much deposit you can pay and your personal circumstances. Lenders also set different borrowing limits and loan-to-value (LTV) ratios.

For example, a lender may have a borrowing limit of up to £2 million for a single buy-to-let property. For multiple buy-to-let mortgages held with them, they may offer up to £3 million in total. For multiple buy-to-let mortgages held with them and other lenders, they may set a limit of £4.5 million across all of the lenders, including them. Some lenders also set minimum borrowing requirements, such as £25,000 or £30,000. For the LTV, most lenders allow you to borrow up to 75% of the property’s value. Others offer higher LTVs of 80% but some offer much lower LTVs of 60% so you’ll need a bigger deposit.

Your deposit

Lenders expect you to pay a higher deposit for this type of mortgage compared with a standard residential mortgage. Generally, 25% of the property value is the minimum requirement, although some lenders are willing to accept a lower deposit of 20%. There are lenders, however, who only accept higher deposits of 40% for buy-to-let mortgages. As with any mortgage, the more deposit you can pay, the better the rates will be. If you can pay a deposit of 40%, you’ll be offered more deals and benefit from the best rates.

The rental income

Unlike a standard residential mortgage, where the affordability is based on your income and expenses, the affordability requirement for a buy-to-let mortgage takes the anticipated rental income into account. Lenders usually expect this to be at least 25% higher than the monthly payment for your mortgage. This is called the interest coverage ratio (ICR). For example, if your mortgage payment is £800, you need to multiply this by 125%. This means that your monthly rental income must be at least £1,000. Some lenders, however, insist on an ICR of 145%. This means that the rental income must be at least 45% higher than the amount you pay for your mortgage.

To ascertain the rental income you expect to receive for the property, you can check with a letting agent, make comparisons with similar rental properties in the area or ask a surveyor to carry out an assessment. If the anticipated rental income isn’t high enough, you may have to pay a bigger deposit to lower the amount you need to borrow. Alternatively, the lender may agree to assess other income you receive to cover the shortfall, which is known as top slicing. This can include your salary, pension income, rental income received for other properties you own, investments or savings accounts.  

Your personal circumstances

Some lenders require evidence of your earnings as well as the profitability of renting out the property. This is often defined as a minimum annual salary requirement, such as £25,000. This is especially the case if you’re a first-time landlord. You also need to have a good credit rating and usually need to own your own home, although some lenders will agree to buy-to-let mortgages for first-time buyers.

As well as these factors, most lenders also set an upper age limit for buy-to-let mortgages, such as 70 or 75 years old. This is the maximum age you can be at the end of the mortgage term rather than when you apply for the mortgage. There are lenders who don’t have maximum age requirements, provided that you meet their criteria. For example, you need to have a larger deposit, such as 35%, and have already been a landlord for a minimum term, such as 6 months.

A portfolio landlord

If you’re already a portfolio landlord – meaning you own four properties or more as a landlord – the affordability checks are different. When applying for additional finance, you need to provide the lender with the mortgage information, business models and cash flow projections for each of the properties you own. Some lenders also set restrictions, such as the maximum number of properties that you can have in your portfolio. Typically, this maximum is set at 10 properties. Another restriction that can be set is the loan-to-value (LTV) ratio, which can apply across your entire portfolio. As an example, the lender may state that your whole property portfolio has a maximum LTV ratio of 65%.

How to apply for a buy-to-let mortgage

To apply for a buy-to-let mortgage, you need to check that you meet the eligibility criteria and ascertain how much you can borrow. Our mortgage brokers can do this for you and quickly arrange your mortgage in principle. This indicates how much you can borrow, giving you a clear idea of your budget when viewing properties. Having a mortgage in principle also shows estate agents and sellers that you’re a serious buyer and it puts you in a better position when offering on a property.

Once an offer has been accepted, the formal mortgage application can begin. For this, you’ll need to provide various documents. These usually include:

• Proof of identity, such as your driving licence or passport
• Your address details for the last 3 years
• Proof of your current address, such as utility bills or bank statements
• A mortgage statement for your existing property
• Details of the property you’re buying
• Proof of the deposit, such as a bank statement or a signed letter from the relevant party if you have a gifted deposit
• Proof of the anticipated rental income, such as a confirmation letter from a letting agent
• Proof of your earnings, such as your last P60, 3 months of payslips and bank statements as well as tax returns if you’re self-employed
• Details of any outstanding financial commitments
• Your solicitor’s details

Our mortgage brokers can guide you on ways to improve your chances of having a successful application. For example, they can advise you on ways to improve your credit score if it is low. Your application will be tailored and our brokers will use their expertise to match you with the best lender for your circumstances.

Considerations before applying for a buy-to-let mortgage

Before proceeding with a mortgage for your buy-to-let investment, there are various things to consider. For a start, you’ll need to save a much bigger deposit and pay a higher interest rate than for a standard residential mortgage.

Stamp duty, income tax and insurance

If you already own a home, the property counts as an additional dwelling as far as stamp duty is concerned. This means that a surcharge is payable, which you need to allow for in your budget. Another upfront expense is insurance as lenders generally expect you to have buildings insurance in place before the mortgage process completes. Whilst it’s not mandatory, it’s recommended to take out specific landlord insurance to protect yourself financially when renting out your property. This insurance covers you against a host of issues aside from damage to the building and any contents you’ve left inside it. Income tax is also payable on your rental income so you need to include this in your financial calculations.

Landlord responsibilities

As a landlord, you have numerous responsibilities. These include having the right certificates in place, such as a gas safety certificate and an Energy Performance Certificate. You also need to carry out reference checks on your tenants, draw up the contracts, collect your tenants’ deposits and maintain the property. Another financial consideration is how you’re going to pay for unexpected issues that occur. For example, appliances may stop working and need to be replaced or you may face major repairs.

Void periods

There will be times when your property stands empty, usually between tenancies. During these void periods, no rent is received but you still need to cover your mortgage payments and other expenses. Make sure that you’ve got some kind of financial backup to cover you during these times. Even during tenancies, your tenants may be late paying their rent but you still have to meet your financial commitments on time. You may also experience tenants who leave your property even though the tenancy hasn’t ended.

Exit strategy

If you take out an interest-only buy-to-let mortgage, you’ll only pay off the interest charged on the loan each month. You won’t repay any of the capital, which means that the entire mortgage loan has to be repaid at the end of the term. As such, you need an exit strategy, which is how you intend to repay the loan.

One exit strategy is to sell your rental property at that point. If the market isn’t buoyant, however, and there has been a drop in property prices, there’s a risk of negative equity. This is when your property has a lower value than the outstanding mortgage balance. If your property’s value has increased, though, you should make a profit but capital gains tax may be payable on this.

Another exit strategy is to use savings or other investments to pay off the mortgage loan, while a further option is to refinance. Alternatively, you may have another property or asset that you wish to sell, using the proceeds to repay the loan.

Is a buy-to-let property a good investment?

Whether you’re a first-time landlord, an accidental landlord or want to add to your property portfolio, investing in a buy-to-let property can be an appealing option. It’s a good way to top up your salary with some additional income and invest for the future. It can be a preferred alternative to putting money into a savings account, especially if interest rates are low. There is a high demand for rental properties and with the right property in the right area, you stand to benefit from a lucrative investment.

However, you need to be aware of the extra costs and responsibilities that come with being a landlord. As long as you have budgeted correctly for both upfront and ongoing costs, it can be a worthwhile investment financially. There’s also a lot of work and risk involved so you need to be prepared for these factors. Whilst it’s an additional expense, it may be more cost-effective to use the services of a property management company. They can deal with all of the essentials for you, saving you a lot of time and stress.

Can you change to a buy-to-let mortgage if you’ve become an accidental landlord?

You may not have intended to become a landlord but you have become an accidental landlord instead. You may, for example, have bought your home to live in but now need to relocate for your job and so need to rent it out. You may be moving in with your partner and would rather rent your home out instead of selling it. Or you may have inherited a property and would like to keep it as a rental investment.

If you’re only looking for a short-term solution, you may be able to get a consent to let agreement from your mortgage lender. This allows you to keep your current mortgage while renting out your property. Usually, you can do this for up to a year using a consent to let. If you need a longer-term solution or your lender doesn’t agree to a consent to let, you’ll need to change your current owner-occupier mortgage to a buy-to-let mortgage.

Secure a buy-to-let mortgage for your investment opportunity

The prospect of becoming a landlord may seem daunting despite the appeal of receiving a rental income. However, as long as you’ve chosen a good property in the right area, planned ahead for any maintenance issues or empty periods, complied with all of the legal requirements for rental properties and adequately vetted your prospective tenants, you should benefit from a profitable investment.

At Trinity Finance, we’re here to help you with your buy-to-let mortgage no matter what your circumstances are. You may be looking forward to a new start as a landlord. Or you may be an experienced landlord with a portfolio of properties. You may be a first-time buyer and need guidance on every aspect of buying a property. It could be that you’ve inherited the property and need advice about the inheritance tax. Or you may wish to buy a new home while renting out your existing one via a let-to-buy arrangement.

Whatever your buy-to-let mortgage, tax and insurance needs, our experts – located throughout Kent, London and Edinburgh – are ready to offer you impartial advice and find the best solutions for your circumstances. Just give us a call on 01322 907 000 to speak with a specialist consultant. Alternatively, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our friendly advisers will reply to you as quickly as possible.