Here at Just Mortgage Brokers, we have years of experience in helping landlords secure mortgages for their buy-to-let properties. Whether you run your buy-to-let business in your personal name or via a limited company, we have access to the right lenders and deals to help you secure the lending you need for your property investments.
If you intend to buy a property to let out for rental income then, unless you have the funds to make an outright cash purchase, you will need to apply for a buy-to-let mortgage. While residential mortgages usually include clauses in the terms and conditions forbidding the borrower from letting the property to a third party under normal circumstances, buy-to-let mortgages are specifically designed for landlords who want to take advantage of the rental income and potential capital appreciation that come with property investment.
How to get a buy-to-let mortgage
One of the main differences between standard residential mortgages and buy-to-let borrowing is in how affordability is calculated. In short, while residential mortgage applications are assessed based on the borrower’s income and expenditure, buy-to-let mortgage applications focus on the profitability of the property in terms of rental income, in comparison with the ongoing mortgage costs.
Buy-to-let lenders will look for the projected rental income to exceed the mortgage repayments by a minimum percentage – this is sometimes referred to as the “interest cover ratio”. Following tougher new assessment rules that took effect in 2017, it’s common for lenders to look for a minimum interest cover ratio of 145%. That means that, for example, if the monthly payment on the mortgage (with interest calculated either at the actual mortgage product rate, or at a nominal “stress-testing” rate) was £1,000, then the lender would be looking for the projected monthly rental income from the property to be at least £1,450.
The interest cover ratio can vary. Some lenders may apply a lower ratio of 125% in certain cases, for example if the applicant is a basic rate taxpayer or if there are other sources of income in addition to the rent. On certain types of property – for example, houses in multiple occupation (HMOs) – a higher rate of up to 170% might be applied. It’s also worth bearing in mind that for “portfolio landlords” (defined as borrowers with four or more distinct mortgaged buy-to-let properties), tougher assessment criteria apply, in which the lender will assess affordability and exposure to risk across the entire portfolio of properties.
Some lenders are also now looking at “top slicing”. This is a term used to describe where a lender will look at the overall financial situation of the borrower(s) and if there is any shortfall in the rental calculation a view can be taken to offset this with other income received.
How much will it cost?
Lenders consider buy-to-let lending to be inherently riskier than standard residential lending, and they mitigate this risk in a number of ways. First, the maximum loan-to-value ratio is often lower, so you will usually have to put down a bigger deposit than on an equivalent residential mortgage. Interest rates (and mortgage fees) are also usually higher on buy-to-let mortgages – although the bigger the deposit you are able to pay or the greater equity you have, the more likely it is that you will be able to access more favourable mortgage deals.
If you run your letting business as a limited company – for example, for reasons of tax efficiency – then the range of lenders and mortgage products available is more limited, and this currently means that you will generally pay higher interest rates than if you were looking for a mortgage in your personal name. However, it’s possible that this might shift slightly in the coming years as more landlords go down the limited company route and competition for business increases in this segment of the mortgage market.
How Just Mortgage Brokers can help
Whether you are a first-time buy-to-let investor or an experienced landlord with a large portfolio of properties, we can help connect you with the right lender and mortgage product to match your unique circumstances. Call us today, or use our online contact form, to discuss how we can help you.