Understanding Buy-to-Let Mortgages
Investing in property can be a lucrative business, and buy-to-let mortgages are designed for landlords intending to let their property to rent-paying tenants. Since buy-to-let mortgages are cornerstones for what are essentially business propositions, they differ substantially from regular residential mortgages sought by prospective owner-occupiers.
Buy-to-let mortgages background
The Council of Mortgage Lenders (CML) was renamed UK Finance in 2017. According to UK Finance, specialist buy-to-let mortgages accounted for 15.6% of all new buy-to-let mortgages granted in 2022. This is a significant increase from the 14% figure quoted in the original statistic, which was from 2016.
The growth of the specialist buy-to-let mortgage market is due to a number of factors, including:
- The increasing popularity of buy-to-let investment
- The growing number of complex buy-to-let borrowers, such as those with multiple properties or those who are self-employed
- The willingness of specialist lenders to offer mortgages to borrowers who may not meet the criteria of mainstream lenders
If you are considering a buy-to-let investment, it is important to compare both mainstream and specialist lenders to ensure that you get the best possible mortgage for your needs.
How do buy-to-let mortgages differ from regular residential mortgages?
The main difference between buy-to-let mortgages and regular residential mortgages is that buy-to-let mortgages are designed for landlords who want to rent out their property, while regular residential mortgages are designed for people who want to live in the property themselves. Buy to let mortgages typically have higher interest rates and require larger deposits than regular residential mortgages.
What are the different types of BTL mortgages?
There are a number of different types of buy-to-let (BTL) mortgages available, depending on your individual circ*mstances and needs. Some of the most common types of BTL mortgages include:
- Fixed-rate mortgages: These mortgages offer a fixed interest rate for a set period of time, typically 2, 3, or 5 years. This can provide peace of mind knowing that your monthly repayments will remain the same during this period, even if interest rates rise in general.
- Variable-rate mortgages: These mortgages offer a variable interest rate, which means that your monthly repayments could fluctuate up or down depending on the movement of interest rates. This can be a riskier option, but it could also save you money if interest rates fall.
- Tracker mortgages: These mortgages track a base rateThe interest rate set by the Bank of England, affects the in..., such as the Bank of England base rate. This means that your interest rate will move in line with the base rate. Tracker mortgages can be a good option if you think interest rates are likely to fall in the near future.
- Discounted-rate mortgages: These mortgages offer a discounted interest rate from the lender’s standard variable rateThe interest rate charged by the lender that can vary over t... for a set period of time, typically 2 or 3 years. This can be a good option if you want to save money on your monthly repayments in the short term.
- Interest-only mortgages: These mortgages allow you to repay only the interest on the loan each month. The outstanding capital is then repaid in full at the end of the mortgage term. Interest-only mortgages can be more risky than repayment mortgages, as you need to make sure that you have a plan in place to repay the capital at the end of the term.
In addition to these different types of mortgages, there are also a number of other factors to consider when choosing a BTL mortgage, such as the loan-to-value (LTV) ratio, the interest rate, and the fees. It is important to compare different mortgages from different lenders to find the best deal for your needs.
If you are unsure which type of BTL mortgage is right for you, it is a good idea to speak to a financial advisor. They can help you to assess your needs and circ*mstances and recommend the best mortgage for you.
Eligibility Criteria for BTL Mortgages
Before applying for a buy-to-let mortgage, it’s important to understand the eligibility criteria that lenders will look at.
Minimum age requirements
Most lenders require borrowers to be at least 25 years old to apply for a buy-to-let mortgage. Some lenders may have higher age requirements.
Minimum income requirements
Lenders will typically require borrowers to have a minimum income of around £25,000 per year to be eligible for a buy-to-let mortgage. However, every mortgage lender has different criteria, so we would suggest you contact a specialist mortgage broker for help.
Minimum deposit requirements
Buy-to-let mortgages typically require a larger deposit than regular residential mortgages. Most lenders require a minimum deposit of 25% of the property’s value.
Credit score requirements
Lenders will look at the borrower’s credit score when deciding whether to approve a buy-to-let mortgage. A good credit score is essential to getting approved for a mortgage.
Property eligibility criteria
Lenders will also look at the property itself when deciding whether to approve a buy to let mortgage. They will consider factors such as the property’s location, condition, and potential rental income.
Applying for a Buy-to-Let Mortgage
Once you meet the eligibility criteria, you can start the process of applying for a buy-to-let mortgage.
Choosing the right BTL mortgage lender
There are many buy-to-let mortgage lenders to choose from, including specialist buy-to-let mortgage lenders, consumer buy-to-let mortgage lenders, regulated buy-to-let mortgage lenders, and adverse buy-to-let mortgage lenders. It’s important to compare current mortgage rates and choose a lender that offers the best mortgage deal for your needs.
Documents required for a BTL mortgage application
When applying for a buy-to-let mortgage, you will need to provide documents such as proof of income, bank statementsA record of a borrower's financial transactions often requir..., and details of the property you want to purchase.
The BTL mortgage application process
The application process for a buy-to-let mortgage is similar to that of a standard residential mortgage. You will need to fill out an application form and provide the necessary documentation. The lender will then assess your application and decide whether to approve your mortgage.
What are BTL mortgage affordability tests?
Of course, any BTL mortgage lender is anxious to share your optimism and enthusiasm for the sound business case you make for owning and letting a particular buy-to-let property.
Along with buy-to-let mortgage income requirements, an affordability test for a BTL mortgage enables any potential lender to see just how viable a loan would be based on a number of important things.
Ideally, financial success rests on your generating sufficient rental income not only to cover your buy-to-let mortgage repayments but all the other operating costs faced by any landlord (landlord insurance, maintenance, taxes, etc.), together with the aim of making a profit on your business venture.
The size of any mortgage you secure, therefore, is also directly related to the amount of rental income the property is estimated to achieve.
Lending criteria for BTL
Although the Financial Conduct Authority (FCA) does not regulate buy-to-let mortgages, the Bank of England’s Prudential Regulation Authority (PRU) has, from time to time, sought to impose limits on the lending criteria it expects mortgage companies to follow.
The current standards for buy-to-let (BTL) mortgages are set out in Supervisory Statement SS13/16, published by the Financial Conduct Authority (FCA) in September 2016. This statement suggests that rental income on a BTL property must achieve at least 125% of monthly mortgage repayments.
However, in June 2022, the Prudential Regulation Authority (PRA) published a consultation paper proposing to raise this benchmark to 145%. This consultation is still ongoing, and it is not yet clear when or if the PRA’s proposal will be implemented.
Despite the PRA’s proposal, some BTL mortgage lenders are still offering loans based on the lower target of just 125%. This is because the PRA’s guidelines are not mandatory, and lenders are free to set their own lending criteria.
If you are considering a BTL mortgage, it is important to compare offers from different lenders to find the best deal for your needs. You should also be aware of the risks involved in BTL investment, such as the possibility of rising interest rates and falling property values.
BTL mortgages – next steps
Landlords investing in buy-to-let property are embarking on an undertaking that carries risks associated with any business venture. These risks are reflected in the ways in which applications for buy-to-let mortgages are considered by lenders.
At NeedingAdvice, we work with a number of key BTL mortgage lenders. Our expertise allows us to match you with the most suitable lender, based on the property you are buying, its estimated rental income, and your own unique financial circ*mstances. This gives you a better chance of being approved for a BTL mortgage compared with you approaching the first lender you find whose lending criteria you may not match.
