If you want to engage in the rental market, a buy-to-let mortgage could be the best place to start; nevertheless, these products are very complex and should be tackled with the assistance of a professional.
This article will examine the lender requirements for this type of mortgage, how they differ, and how to find a lender who meets your needs.
What are the qualifications for a buy-to-let mortgage?
The criteria for buy-to-let mortgages vary by lender. However, most will consider the following aspects. The majority of them fall into the following categories:
Minimal rental income –
The rental potential of the property you’re purchasing will play a significant role in your mortgage approval. Lenders may require a rental revenue projection from an ARLA (Association of Residential Letting Agents)-registered letting agent, as it is commonly believed that rental income will be utilized to make mortgage payments. See How lenders assess affordability for additional information.
Minimum income –
Because it is not used to decide how much you can borrow, personal affordability does not play as important a part as it does with residential mortgages. However, many lenders in this category have a minimum income criterion of between £25,000 and £30,000.
Employment status –
Most lenders do not place great importance on how you make your money so long as you can provide proof of income. Being a landlord, in and of itself, is a sort of self-employment; hence many lenders are willing to accept self-employed candidates.
The majority of lenders have an age requirement between 21 and 25. Learn more about buy-to-let age limits in our guide.
Of course, there are also age restrictions on many plans, so you will generally need to have paid off your mortgage between the ages of 75 and 86. However, not all lenders have an upper age limit, and lenders are typically less concerned with age if the mortgage is obtained through a limited liability company.
Credit report –
However, any credit concerns’ age, severity, and quantity will play a significant role in the financing decision, and less severe credit issues may be overlooked. Specialized BTL bad credit mortgages are available if you’re concerned about your credit history’s influence on your application.
Type of property –
Each lender has preferences on the kind of homes they will fund. Many lenders avoid non-standard-built properties, especially investment buildings, but some are more accommodating.
How do creditors evaluate affordability?
Buy-to-let loans and the amount you can borrow are determined by the rental revenue potential of the property you wish to purchase, not your income. Here is how it operates:
ICR (Interest Cover Ratio)
Since most buy-to-let mortgages are issued as interest-only contracts, an additional ICR test will factor into the affordability evaluation.
In general, lenders will want to see that your property generates 125-145% of the loan repayments and that you would still be able to cover mortgage payments in the absence of tenants. To further “stress test” this, they will base their estimates on a higher interest rate (typically 2% over the real rate or 5.5%, whichever is greater).
Some lenders may be ready to evaluate your income with the property’s rental potential as part of the affordability evaluation, as opposed to only as a backup for stress testing. This will often only apply to people with significant personal incomes, although some candidates may be able to borrow more.
If you believe this approach to affordability may apply to you, however, a broker will be able to assist you in locating a lender that will accept it.
How much of a deposit is required?
It is rare to find a minimum deposit requirement of less than 25% for a buy-to-let property; however, this will vary somewhat based on the lender, your circumstances, and the property type. A few are available but expect to pay a high price for them.
What are the minimum and maximum loan amounts available?
Most mortgage programs have a minimum loan amount, which varies from lender to lender but is typically between £50,000 and £75,000 for buy-to-let products.
On the opposite end of the spectrum, there is often no maximum monetary value; instead, it is based on maximum LTVs (loan to value), typically 75%; therefore, the 25% down payment is required.