What Is The Criteria For A Buy-To-Let?

Nikka Sulton

What Is The Criteria For A Buy-To-Let?

If you’re contemplating entering the rental market as an investor, delving into the realm of buy-to-let mortgages could offer a promising start. However, navigating the nuances of these financial products demands a thorough understanding, preferably with the guidance of an expert well-versed in the intricacies of property financing.

Buy-to-let mortgages come with their own set of complexities, from eligibility criteria to interest rates and repayment terms. Understanding the diverse requirements and offerings of different lenders is crucial for making informed decisions tailored to your investment goals and financial circumstances. Therefore, it’s essential to delve into the specifics of lender criteria, exploring how they vary and what implications they carry for your investment strategy.

In this article, we’ll delve into the multifaceted landscape of buy-to-let mortgages, shedding light on the intricacies of lender criteria, variations in product offerings, and strategies for identifying the most suitable lender to align with your investment objectives. By gaining insights into these essential aspects, you can embark on your investment journey with confidence, equipped to navigate the complexities of the rental property market effectively.

What is the eligibility criteria for a buy-to-let mortgage?

Lenders assess various criteria when considering buy-to-let mortgage applications, although specific requirements may differ among different financial institutions. These criteria typically encompass the following key factors:

Minimum rental yield: The rental potential of the property being purchased is a pivotal aspect influencing mortgage approval. Lenders often expect that the rental income will cover the mortgage repayments. As such, they may require a rental income forecast, typically obtained from an ARLA (Association of Residential Letting Agents) registered letting agent. For a more detailed understanding of how affordability is evaluated by lenders, refer to our guide.

When considering buy-to-let mortgages, certain factors come into play:

Minimum income: While personal affordability isn’t as crucial as with residential mortgages, some lenders set a minimum income threshold, usually between £25,000 and £30,000.

Employment status: Lenders generally focus on income verification rather than employment type, making self-employed individuals eligible for many mortgage products. Being a landlord is akin to self-employment.

Age requirements: Most lenders stipulate a minimum age of 21 to 25 for applicants. Additionally, there are often maximum age limits, typically requiring mortgage repayment by age 75 to 86. However, some lenders have no upper age limit, particularly for mortgages obtained through limited companies.

Credit history: While adverse credit can pose challenges, lenders consider factors like the age, severity, and extent of any credit issues. Less severe issues might not hinder your application. Specialist buy-to-let mortgages for bad credit exist for those worried about their credit history.

Property type: Lenders have preferences regarding the properties they finance. Many avoid non-standard construction properties for investment purposes, but flexibility exists with some lenders.

Property use: The lender’s emphasis on location depends on your intended rental property use. For properties under Assured Shorthold Tenancy (AST), location may not be a significant factor as long as the property’s value aligns with the area.

Tenant type: Lenders may have reservations about properties intended for student or holiday rentals due to perceived higher risk. Despite the potential for increased return on investment (ROI), these arrangements are viewed as riskier. Holiday lets, in particular, are seasonal, making location crucial to ensure demand aligns with the property’s location.

How affordability is assessed by lenders

Buy-to-let mortgages are assessed based on the rental income potential of the property you intend to purchase, rather than your personal earnings. Here’s how it operates:

Interest Cover Ratio (ICR): Most buy-to-let mortgages operate on an interest-only basis, meaning an additional assessment called the ICR test is crucial for affordability. Typically, lenders aim for the property’s rental income to cover 125-145% of the loan repayments. They also ensure you can afford mortgage payments even when the property is vacant by stress-testing with a higher interest rate.
Top slicing: Some lenders may consider your personal income alongside the property’s rental potential in the affordability assessment, not just for stress testing. This applies mainly to those with substantial personal income, offering them a chance to increase borrowing. Although this approach is niche and only a few lenders adopt it, brokers can assist in finding suitable options if applicable.

Summary of lending criteria

Applicants:

Up to two individuals per application.
First-time landlords are welcome.
First-time buyers are accepted if accompanied by an existing property owner.

Residency:

Must be a UK resident with at least three years of UK address history.

Age:

Minimum age requirement: 21 years old.
There is no maximum age limit for experienced landlords with a minimum deposit of 35%. Otherwise, the maximum age at application is 70.

Income:

No minimum income requirement. The maximum borrowing amount depends on the property’s rental income.
Self-employed applicants are accepted.
Cannot be bankrupt or have been in the last four years, or have had a property repossessed in the last six years.

Portfolio landlord applicants: