6 Things Lenders Look For When You’re Applying For a Buy-to-Let Mortgage
Whilst buy-to-let mortgages are similar to residential mortgages, it’s important to know what to expect when making an application to a lender.
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You’ll need a buy-to-let mortgage if you want to buy a home with the intention of renting it out. And to make yourself appear uber-attractive to a potential lender, we’ve put these six steps together that you should consider when getting a buy-to-let mortgage.
But first… what is a buy-to-let mortgage?
We’ve written a more in depth guide on buy-to-let mortgages, but we’ll give you a quick summary. A buy-to-let mortgage is a mortgage for a property you’re not living in but are letting to another person — it’s for anyone who wants to become a landlord and earn regular income through rental payments.
Buy-to-let mortgages are similar to residential mortgages, but with a few key differences.
With buy-to-let mortgages :
- you’ll need to have a larger deposit
- your mortgage will usually be interest-only rather than repayment
- and borrowing is primarily decided on the rental income rather than your regular earnings
As a landlord, you can still choose a repayment buy-to-let mortgage, although most people opt for an interest only one, which means your payments will be lower but won’t impact the loan itself, so you’ll owe the same amount at the end of your loan term.
For this reason, buy-to-let landlords usually sell their property at the end of their term (or remortgage), with the hope that the value of the property will have gone up significantly, paying off the loan and making a profit – though landlords who sell will likely need to pay capital gains tax on those profits.
What are the types of buy-to-let mortgages?
There are a few kinds of buy-to-let mortgages available, and the type you get will depend on what kind of landlord you are.
- If you bought your property specifically to rent it out, your mortgage will be a business loan, without regulation from the FCA (financial regulatory body in the United Kingdom) because it’s a professional transaction and won’t need protecting.
- If you own more than four properties, you’ll be classed as a portfolio landlord.
- If you are letting your property due to unforeseen circumstances, like moving in with someone, moving location or inheriting, you’ll be classed as an accidental landlord, and your mortgage application will be protected by the FCA and treated like a regular mortgage.
- Buy-to-let mortgages are often pricier than normal loans, and fewer lenders offer this type of loan. You can search what’s available yourself or find a broker to help you. Getting a broker is often the best way to find a better value loan, though you should always check that they’re free beforehand as some do charge a fee.
What do lenders look at when applying for a buy-to-let mortgage?
The price of the property you want to buy
Property price matters — some lenders are only interested in homes above £40,000, and some even set this higher, at £100,000.
With high house prices in areas like London, this is unlikely to be an issue for some landlords, but can cause problems in cheaper areas such as the North East, where lower average property prices can limit your choice of lenders.
The size of your deposit
In general, you’ll need at least a 25% deposit for a buy-to-let mortgage in order to access the full choice of lenders and better value fees.
This is compared with deposits for standard mortgages, which are only around 5-10% minimum.
This higher deposit is due to increased risk and unpredictability for lenders; they aren’t just relying on you, but also on your tenants’ ability to pay their rent.
A bigger deposit will benefit you in the long run — 15% is the absolute minimum to get a loan, but it’ll give you a limited choice of lenders and rates, and you may be turned down completely.
Your property’s rental income potential
With a buy-to-rent mortgage, lenders are far more interested in your property’s rental income potential than your salary.
Some lenders may still be influenced by your salary if you’re a high earner, as this will help you to cover rent shortfalls from your own income. At the very least, you’ll need to earn more than £25,000 a year, so that you can still make your payments if interest rates go up.
It’s a good idea to do some market research before talking to a lender to find out how much similar properties are being let for. Your lender will be doing the exact same thing, checking properties in the area for prices and demand.
If there are lots of similar properties stagnating on the market, the valuation of your property might be damaged. The lender will also check that the rent you’re charging will cover at least 125-145% of the insurance you pay.
Your property type and materials
The type of property you’re letting will have a huge impact on your buy-to-let mortgage application. Lenders generally look for :
- detached properties
As these type of properties will be more likely to get approved, as well as purpose-built flats.
Unique, unusual or specialist properties may cause more difficulty — for example, barn conversions, high rises and ex council properties, as well as blocks of flats with no lifts, will be less popular with lenders, as they tend to be harder to resell.
The good news is that any legitimate, structurally sound property will eventually win a lender who’s up for the challenge; make sure to work with a mortgage broker for help finding more specialist lenders.
Your existing property portfolio
If you’re a portfolio landlord with four or more existing buy-to-let properties, then it’s important to make sure your finances are in order. Lenders will scrutinise your existing properties to see how they’re performing.
You might also be more limited in your choice of mortgages; to lenders, more properties equal more financial risk.
How old you are
To apply for any buy-to-let mortgage, you need to be at least 18 years old, although some lenders won’t work with anyone under 25.
Unlike a regular mortgage, there isn’t an upper age limit here, because your repayments aren’t based on your salary.
Ultimately, as long as you take a sensible, realistic approach to your loan application and stay mindful of these crucial factors, you’ll be sure to find a lender that works for you.