How Do You Get Approved For A Buy-To-Let Mortgage?

Nikka Sulton

How Do You Get Approved For A Buy-To-Let Mortgage?

As 2023 ends, reviewing a year with the highest mortgage rates in 15 years, falling house prices, and decreased property transactions. Despite challenges, portfolio landlords held onto their buy-to-lets, and market confidence slowly recovered with the stable base rate from the Bank of England. As the year closes and the new one begins, let’s analyze why the upcoming year presents a chance for property investment, providing a strategy to build wealth in a buyer’s market.

Who can get a buy-to-let mortgage?

Getting a buy-to-let mortgage is within reach for anyone interested, but certain prerequisites must be met. These include having a deposit on hand, formulating a plan to settle the remaining loan or refinance at the mortgage term’s conclusion, and possessing a fundamental understanding of how mortgages operate.

Buy-to-let mortgages cater to individuals aspiring to invest in properties and become landlords without the immediate financial capacity to purchase a property outright. Therefore, obtaining a buy-to-let mortgage becomes a crucial step in realizing this investment goal. The initial phase involves confirming eligibility by aligning with the lender’s criteria. One can independently research mortgage lenders or enlist the assistance of a mortgage broker, who will assess your details and seek out a mortgage that suits your specific requirements.

Once a suitable mortgage lender is identified, the subsequent step is to initiate the mortgage application process. This involves various elements, including the critical affordability check. It’s important to note that each lender employs a distinct affordability model, which evaluates your ability to manage the costs associated with obtaining a mortgage. Generally, these tests take into account your income, credit data, and existing financial commitments. This meticulous approach ensures that your financial standing aligns with the lender’s requirements, increasing the likelihood of a successful application.

How do Buy-to-let mortgages work?

The majority of mortgages operate on an interest-only basis, where each monthly payment covers only the interest, leaving the capital untouched. For example, with a £200k loan on an interest-only basis, the full £200k capital is due at the term’s end.

Interest-only mortgages help keep monthly payments low, maximizing rental income. However, a clear plan to repay the full loan or remortgage at the term’s end is essential.

Alternatively, capital repayment involves monthly payments covering both interest and the borrowed amount. While this reduces the owed sum, repayment mortgage payments are noticeably higher than those for interest-only mortgages.

What is mortgage affordability?

The amount you can borrow is tied to the property’s rental income. Lenders employ an interest cover ratio (ICR) to determine borrowing capacity based on the buy-to-let’s rental income.

ICR is a ratio that ensures rental income covers monthly mortgage payments, typically assessed at around 5.5%. Higher fixed-rate products, like a five-year fix, may have a lower assessment rate.

The minimum ICR lenders use is 125%, and for certain property types, like houses of multiple occupation (HMO), a higher ICR may apply. In essence, the expected monthly rental income must be at least 125% of the monthly mortgage payment.

Can a first-time buyer get a buy-to-let mortgage?

For a first-time buyer venturing into the buy-to-let property market, unique challenges arise. Buy-to-let mortgages, designed for property investment rather than residential living, present a distinctive set of considerations.

First-time buyers are perceived as unknown entities by lenders, lacking a history as homeowners or landlords. This perception translates into an elevated risk profile, making it more difficult to secure a desired mortgage within budget constraints.

Providers offering buy-to-let mortgages to first-time buyers often impose specific conditions, including a larger-than-average deposit requirement, higher interest rates, stringent criteria for projected rental income covering mortgage repayments, and scrutiny of age, credit score, employment type, and income.

Navigating these complexities can pose challenges for first-time buyers entering the buy-to-let market.

Available lenders and eligibility criteria

As of August 2022, around 30 lenders are open to reviewing buy-to-let mortgage applications from first-time buyers. This list includes major high street banks such as NatWest and Barclays, as well as specialized mortgage lenders.

However, it’s crucial to recognize that the eligibility criteria can be strict. Some lenders limit buy-to-let mortgages for first-time buyers to those residing in employer-provided accommodation. Alternatively, certain lenders require at least one applicant to be a property owner, allowing a first-time buyer to act as the second or subsequent applicant.

1. Deposit

Buy-to-let mortgages require larger deposits, especially for first-time buyers. To qualify, you need a minimum deposit of 20% to 25% of the property’s value.

2. Rental Income

When seeking a buy-to-let mortgage, it’s crucial to understand that lenders usually require rental income to cover 125% to 145% of monthly mortgage repayments. First-time buyers may encounter requirements towards the higher end of this range.

3. Applicant Income

For first-time landlords lacking prior experience, lenders may scrutinize your ability to maintain a steady rental income. Some lenders might assess other income sources, with a potential additional requirement falling within the range of £25,000 to £40,000.

4. Applicant Age

Residential mortgages typically require a minimum age of 18, whereas buy-to-let mortgages commonly stipulate a higher minimum age of 21 or 25. This holds true for first-time landlords as well.

5. Credit History

Buy-to-let mortgages usually prioritize rental income over the applicant’s credit history. However, first-time buyers, especially those with bad credit, might encounter concerns from lenders due to perceived higher risks.

Are Rental Properties a Good Investment in 2024?

Investing in rental properties can be profitable, considering factors like property type, location, condition, and market dynamics. Profitability depends on careful consideration of costs, including mortgage payments, property taxes, insurance, and maintenance expenses.

Data from the National Association of Realtors reveals the US average rent is $2,508, with 35% of households choosing rentals. However, average rent is 12.95% lower than monthly mortgage payments. This emphasizes the need for prudence in selecting the right rental property for a favorable financial outcome.

The key to a profitable investment is a thorough evaluation of expenses and projected cash flow—earnings after covering all costs. This assessment is crucial before committing to a property, ensuring positive monthly returns and avoiding financial losses.