Buy-to-let mortgages

So, you’re interested in property investment? Awesome. Are you looking for short-term rental income or long-term capital appreciation? Perhaps even a top-up for your pension?

Thousands of UK investors are turning to buy-to-let as a viable income stream. In response, mortgage lenders now offer a plethora of mortgages to accommodate the trend.

Before you dive in head first, you face a critical decision: what do you want from your investment property? The buy-to-let mortgage you choose must match that goal!

Pay too high an interest rate and your investment could soon become a millstone, not a stepping stone. If you don’t put the correct repayment vehicle in place, you could be landed with a debt for life. We’re here to help you avoid those pitfalls.

First, there’s the Buy-to-Let Stamp Duty calculator:

How much can I borrow to buy my buy-to-let property?

Before we get to the calculator itself, it’s worth taking a moment to explain how it works. The amount you can borrow is directly linked to:

• a rental margin (buffer) is the amount you need to achieve on top of the proposed monthly interest payment
• how well that rent will stand up to fluctuations in interest rates (stress test)

There’s no ‘one-size-fits-all’ calculation. Stress tests and minimum buffer thresholds vary widely from lender to lender.

Given those variations, our calculator’s output will give you a rough guide only. To give you an idea of the scope, here’s a brief explanation of the range and reason behind those factors:

Buy-to-let rental margin (buffer) thresholds for proposed rent

Lenders impose a minimum threshold, or buffer, on top of your interest payment. This ensures that your rental income covers your mortgage payments, plus shows a margin for you.

The absolute minimum buffer is 125% of the interest payments. Even though this is often the ‘default’ amount lenders charge, some lenders can ask up to 145% of your interest payment.

Stress test variations

Lenders must also test your ability to repay should interest rates spike, such as after the September 2022 mini-budget. Lenders impose stress test lenders from 5% to 7%, increasing in 0.5% increments in between.

By all means, enter as many permutations into our calculator to give yourself best- and worst-case scenarios. Start by inputting your proposed monthly rent. Then work on the variations, including:

• best-case scenario would be a 125% buffer, with a 5% stress test;
• worst-case, 145% buffer, with 7% stress test.

They’ll give you a guide to your prospective borrowing. If you need to know exactly what you can borrow for your buy-to-let, talk to one of our advisors. You can then begin your search for your rental property in earnest.

Key lending criteria for a buy-to-let mortgage

The criteria lenders set for potential landlords vary from one lender to the next. That said, the cornerstone points remain similar:

Borrower’s age (minimum and maximum)

Most lenders specify that buy-to-let borrowers are at least 21 years old. Don’t let that put you off if you’re 18-20, though. Amongst the 100+ lenders we use, a select few will consider applications from aged 18+.

Maximum age also varies between lenders; pleasingly, attitudes have changed somewhat in recent years. Several lenders are now offering buy-to-let mortgages up to age 85. That’s where 85 is the oldest a borrower can be when the mortgage ends, not when it starts.

If you’re close to retirement age, take advice about the term before you sign on the dotted line.

Credit history

Adverse credit history can make it hard to get a buy-to-let mortgage from mainstream lenders. However, there are specialist lenders who excel in mortgages for people with impaired credit.

These specialists tend to assess each application on merit. Your specific circumstances will determine the details of any mortgage offer they make.

Property and location

The suitability of the mortgaged property for letting purposes is key to any offer. The property needs to come equipped with all essential amenities and be in a good state of repair.

Lenders will carry out a survey to value the rental yield as well as its value. It’s imperative that the rental potential exceeds the mortgage repayments.

And don’t forget: location, location, location! Choosing the right region for your property is essential to achieving those rental yields.

Minimum borrower income

The least amount lenders expect buy-to-let borrowers to earn is typically £25,000. This is particularly pertinent if you’re a first-time landlord. There are exceptions, though. Some of our lenders will consider an application and specify no minimum income.

Minimum deposit and repayment

The typical deposit you need for a buy-to-let property is 25% (of the property’s value). Again, some specialist lenders will consider deposits as low as 20%.

With regard to repayment, most BTL mortgages are interest-only.

Buy-to-let rental calculator

We often have to “reverse engineer” our clients’ buy-to-let figures. This is when they already know what they can borrow; they just want to know what rent they need to charge to cover the mortgage repayments.

This is exactly what the below calculator is for. You will need to know three things before you use it:

• how much your lender is willing to lend you;
• the stress test rate they set;
• and the rental margin they expect you to bring in from your tenant.

Once you have those figures to hand, enter them here and the calculator will show you what rent you need to charge to achieve those figures.

Next steps

When you set out to become a landlord, it’s not only the mortgage you need to consider. You’ll also have to decide how to operate your investment properties as a business:

• On a personal basis;
• Through a Special Purpose Vehicle (SPV) limited company.

Which you choose will depend on multiple factors, specifically any tax implications. It’s essential you choose a product that reflects your circumstances and long-term goals.

Here at Mortgage Quest, we can give you relevant, correct and up-to-date advice to help you choose wisely.

Work with an experienced mortgage broker

We know how difficult and challenging landlords find securing the perfect mortgage. Whether you’re experienced or this is your first investment, get the right advice.

Since 2004, we’ve been helping landlords manage their property portfolios. With 11,000 mortgages available from over 100 lenders, we’re sure we can help you, too.

Mortgage Quest is a wholly independent, reputable FCA-accredited broker. Our portfolio of mortgages includes exclusive deals you won’t find on the High Street.

Your journey starts with a chat with one of our team of experts. We get to know you, what you need and why you’re looking to invest.

Only when we build up a picture will we scour our lenders for your perfect buy-to-let mortgage. If you’re ready to take that first step on the investment ladder, we’re here to give you a leg up.