April 16, 2024 1:35 pm

Insert Lead Generation
Nikka Sulton

Research conducted by Simply Business suggests that more than half of existing landlords utilize buy-to-let mortgages. This figure underscores the commonality of this financing option within the rental property market. For those embarking on their first foray into property rental, the necessity of securing a buy-to-let mortgage may be even more pronounced. Understanding the prevalence of this financial tool sets the stage for exploring its implications further.

In recent years, there has been a gradual increase in average buy-to-let mortgage interest rates. This upward trend prompts a critical examination of the landscape for prospective borrowers. As rates continue to climb, it becomes imperative for individuals seeking buy-to-let mortgages to assess their affordability and eligibility meticulously. This shift in interest rates necessitates a nuanced understanding of the factors influencing mortgage approval and the strategies to navigate potential hurdles successfully.

Navigating the realm of buy-to-let mortgage affordability entails an understanding of the requirements and criteria set forth by lenders. From creditworthiness assessments to income verification, borrowers must meet specific benchmarks to secure financing. Moreover, the process involves navigating stress tests designed to evaluate an individual’s financial resilience under various scenarios. By delving into the intricacies of buy-to-let mortgage affordability, aspiring landlords can equip themselves with the knowledge needed to navigate the lending landscape effectively.


Buy-to-let mortgage affordability – what do you need to know?

Buy-to-let lenders conduct thorough affordability assessments before approving mortgage applications. They evaluate the potential rental income of the property and assess whether borrowers can sustain mortgage repayments, especially under increased interest rates. Due to perceived higher risk, lenders typically impose stricter affordability criteria on buy-to-let borrowers.

In recent years, both the Bank of England and buy-to-let lenders have reinforced affordability standards. Coupled with rising average interest rates, this tightening may pose challenges for landlords seeking buy-to-let mortgages. As a result, navigating the mortgage market demands careful consideration of affordability criteria and potential hurdles in securing financing.


Explained: buy-to-let mortgage requirements

When applying for a buy-to-let mortgage, various lenders have differing criteria. Common requirements include a minimum age, typically starting at 18 or 21, with some lenders specifying 25. Additionally, lenders may impose a maximum borrower age, varying between 70 and 75, or without restriction.

Income criteria play a significant role, assessing both annual salary and anticipated rental income. Deposits typically hover around 25% of the property’s value. To pass stress and affordability tests, rental income must cover a specific portion of the monthly mortgage, and applicants must demonstrate resilience against substantial interest rate hikes.

Creditworthiness is pivotal, as a poor credit score may hinder approval. Notably, buy-to-let mortgages are exclusively for properties not intended for personal residence. While many lenders entertain applications from first-time buyers, verifying eligibility beforehand is advisable.


Buy-to-let mortgage affordability test

Lenders conduct affordability checks before approving a buy-to-let mortgage. These checks aim to ensure borrowers can comfortably repay their loans.


What is a mortgage affordability test?

One common affordability test is the income cover ratio (ICR). It requires proving that your property’s rental income is 125% to 145% of your mortgage repayments. 

For instance, if you’re purchasing a £310,000 property with a £62,000 deposit and a four per cent interest rate, your monthly repayments would be £827. Based on a 125% affordability check, you’d need monthly rental payments of at least £1,033.75 (£12,405 annually).

Lenders typically adjust ICR based on the borrower’s income tax rate: basic rate taxpayers are usually assessed at 125%, while higher rate taxpayers are at 145%. Additional rate taxpayers might face higher assessments. This additional buffer accounts for other landlord expenses like maintenance and insurance.


Buy-to-let mortgage affordability stress test

A stress test ensures you can still afford your mortgage payments if interest rates rise significantly. With the Bank of England base rate climbing from 0.1% in October 2021 to 5.25% by September 2023, stress tests have gained importance.

Previously, stress tests typically used a rate three per cent above the lender’s standard variable rate. However, with significant interest rate hikes, some lenders now apply stress tests of up to eight per cent for buy-to-let mortgage applications.

For instance, on a £310,000 property with a £62,000 deposit, monthly repayments would reach £1,653 at an eight per cent interest rate. This means rental income must rise to at least £2,066.55 monthly to meet the 125 per cent ICR requirement.

It’s crucial to recognize that lenders employ varying interest rates for stress testing, highlighting the importance of understanding each lender’s approach.


Is there a Bank of England mortgage affordability test?

The Bank of England’s Prudential Regulation Authority (PRA) dictates the rules for stress testing buy-to-let mortgages.

Introduced in 2016, these standards mandate lenders to ensure borrowers can handle an interest rate of 5.5 per cent or two per cent above the product interest rate, whichever is higher.

With average buy-to-let rates surpassing 5.5 per cent since 2022, most lenders are likely to employ a stress test of two per cent above the product rate.


FCA mortgage affordability for buy-to-let

Most buy-to-let lending falls outside the Financial Conduct Authority’s (FCA) regulation. However, if you’re seeking a “consumer” buy-to-let mortgage, intended for accidental landlords or those renting to family, it falls under FCA regulation akin to residential mortgages.


Buy-to-let mortgage affordability calculator

Various lenders and price comparison platforms offer buy-to-let mortgage calculators. These tools aid in determining:

  1. Borrowing potential based on monthly rental income.
  2. Monthly mortgage repayments considering the deposit and interest rate.

Assessing this data can provide insights into affordability before initiating the application process. The outcomes might indicate the necessity to augment projected rental income or bolster savings for the deposit prior to pursuing a buy-to-let mortgage.




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