Buy-to-Let Mortgages

An AIP indicates the amount you can borrow for the mortgage and if you meet the standard eligibility requirements set by the lender. Anyone who borrows a mortgage – whether buy-to-let or residential – will need an AIP before starting the application process.

There are two ways to get an AIP: from the lender or a broker. You will need to answer a few basic questions, such as whether or not you’re a UK resident, your annual income and whether you already own any buy-to-let properties. An AIP usually takes a few minutes, and most of them can be done online or via the phone if you’re using a broker.

It’s important to remember that an AIP only provides an indication of how much you can borrow. It lets lenders know that you are more likely to pass their lending requirements, but it’s not a guarantee of the loan. For example, if your AIP says you can borrow up to £250,000, you won’t know the actual figure until going through the mortgage application process. The amount could change once an extensive application is completed.

Your credit score is unaffected by an AIP, as it’s just an estimation of how much you can borrow. There’s no commitment involved, and the lender doesn’t need to examine all of your details, including a credit score, to give you an estimation.

Some lenders may perform a soft search, but again, this doesn’t affect your rating. If you decide to apply for a buy-to-let mortgage after receiving an AIP, the lender will then perform a credit check during the process. That’s why it’s important to only apply for one mortgage at once, as too many applications will harm your score.

Again, while an AIP doesn’t provide a definitive answer to how much you can borrow, it does offer a reliable estimation. Of course, the answer depends on your honesty when providing the details required. Because there’s no credit check or any other rigorous checking from the lender, they can only go by the information you’ve provided.

Getting an AIP is the first part of borrowing a mortgage to fund your buy-to-let property. However, there’s no obligation to complete a full application after receiving an AIP. Some people get an AIP because they’re curious about how much they can borrow but don’t get a mortgage right after the decision.

Others get several AIPs with different lenders, as lending requirements vary, and they want to see their options. Regardless of your reason for getting an AIP, doing so gives you more insight into how much you can borrow and is a necessary precursor to beginning the buy-to-let mortgage application process.

Whether it’s the lender or broker, most buy–to–let mortgage websites have an online calculator. This is a stripped-down version of an AIP that gives you an idea of how much you might be able to borrow. You don’t need to submit anything to the lender or broker, and you can enter specific details about the property, such as its value, your deposit and the expected rental income.

Once you get an AIP, the lender will send you a digital certificate via email stating that you’re eligible for a specific amount. You can then use the certificate with estate agents and homeowners to prove you’re a serious buyer. In many circumstances, the estate agent wants to see proof of an AIP before setting up a property viewing.

An interest-only mortgage means you only pay off the interest on the loan. You still owe the initial amount borrowed at the end of the term. So if you borrowed £200,000, you’d still owe that amount when the mortgage finishes. In most cases, an interest-only mortgage isn’t a good investment strategy. For buy-to-let, however, it’s the most popular option.

Only paying the interest significantly reduces your monthly mortgage payments compared to a repayment option. If your interest is 1.5% on £200,000 borrowed, you only pay 1.5% of the mortgage, which is about £3,000 over 12 months (or £250 per month).

And if the monthly rental income for your property is, let’s say, £1,200 per month, you have £950 left after paying the mortgage. Essentially, this increases your short-term profits and allows you to earn more money through rental income. As a result, landlords tend to opt for interest-only mortgages to enjoy passive income and keep mortgage payments lower.

Buy-to-let is a form of investing. As well as earning passive income through the monthly rental, the goal is to see your property’s value increase over the long term. Therefore, if you bought a place for £350,000 with a £200,000 mortgage and its value increases to £500,000 within 15 years, your margins would increase. You go from having £150,000 worth of capital to £300,000.

If you decide to sell the property, you pay the £200,000 back in full and make a profit of £150,000 after the initial deposit, minus capital gains tax (more on that shortly). As most mortgages are at least 25 years, there’s no real pressure to pay back the mortgage, as long as you can prove that you’ll have the means to pay it back in full at the end of the term (usually through the sale of the property).

You can also extend your mortgage term when you remortgage, which, again, removes the pressure of having to pay the mortgage off in full. There’s an element of risk involved, but that’s the case for all types of investing. Unlike stocks and bonds and the markets, buy-to-let is generally safer because house prices usually always increase in value in the long term.

There are three ways to search for the best interest rates. These include looking at the lender’s rates directly, using a search comparison website and instructing a broker to find the best deals on your behalf.

Lenders will display rates on their website, so you can see them directly. This is helpful if you know which lender you want to get a mortgage with. If, however, you’re like most people and don’t know which lender to use, finding and searching through each lender’s website can be time-consuming.

Using a search comparison website is one of the best ways to check interest rates. It works the same as if you’re using a website to check broadband or electric deals. You enter the property’s value, the amount of deposit and how much you need for a mortgage. There’s also an option to display interest-only results. Once you’ve entered the relevant criteria, the search engine will come back with all of the available results so you can easily compare lenders.

Many buy-to-let investors use a broker because it saves time. A broker will take your details and requirements and then search the market for the best results. It’s not too dissimilar to a search comparison website, only the service is more personal, and brokers often have access to interest rates and lenders not on the high street or comparison websites. Some brokers charge a fee for their service if you get a mortgage with them, while others are entirely free.

It’s important to find the best mortgage deal with favourable interest rates, but you can also take action to lower the rates associated with a mortgage. For example, the higher your deposit amount, the lower the interest rate. While many lenders ask for a minimum deposit of 15%, it’s worth going higher if you can, as you will be eligible for better interest rates and lower monthly repayments.

Lenders will want you to pass the ICR. This determines if your monthly rental property can cover a certain percentage of the mortgage payments. The figure varies between lenders, but most ask for rental payments to cover 125% of the mortgage repayments.

• Already own your home with or without a mortgage (although there are some exceptions where you don’t need to be a homeowner)
• Aren’t bankrupt or have had CCJs
• Have good credit
• Earn £25,000 or more per year
• Are within the lender’s age limit (usually between 21 and 80)
• Have a minimum deposit of 15% (although many lenders ask for 25%)
• Own fewer than four buy-to-let properties (if you have more, you will need a portfolio mortgage)
• Have a UK address
• The property’s projected rental income should be 125% of the mortgage repayments.

Lenders will typically ask more specific questions about the type of buy-to-let you want, e.g. will you use it for long-term lets, short-term holiday lets, HMO etcetera. They will also ask if you’re going to purchase it as an individual or a limited company. Your answers will determine the type of buy-to-let mortgage you’re eligible for.

There are many different types of buy-to-lets, such as individual, HMO and SPV. The latter involves buying a property as a company rather than an individual. To do this, you will need to set up a limited company known as a Special Purchase Vehicle (SPV). For more info on SPVs, jump to our “different types of buy-to-lets section”.

A portfolio landlord is classed as someone who has four or more properties. It’s at this point that you’ll need to get a unique buy-to-let mortgage based on all of your properties. The lender will assess the existing portfolio to ensure the overall loan to value (LTV) and the interest coverage ratio (ICR) is sustainable. It’s possible to bring all your properties into one portfolio mortgage, so you only have one lender and make one monthly payment.

It’s hard to achieve your buy-to-let dreams if you don’t have the right finances in place. Therefore, you need to know how much you can borrow and the deposit amount necessary before embarking on your buy-to-let journey.

The maximum amount you can borrow essentially depends on the predicted rental income of the property. Lenders usually ask for rental income between 20 to 30% higher than your mortgage payment. If you’re unsure about the property’s projected rent, you can ask a local agent or look on property portals like Rightmove and Zoopla.

For example, if you want to borrow £250,000 at 1.5% on an interest-only costing you about £250, and the lender asks for a rental income of at least 30%, the property needs to achieve at least £325 per month in rental income.

Once you have the rental figure – even if it’s only an estimate – you can enter the details into a mortgage calculator, which should give you a better idea of the amount you can borrow.

You will need a deposit if you’re purchasing a property with a buy-to-let mortgage. This is the amount you pay for with your own money, and deposits for buy-to-let mortgages are usually considerably higher than residential ones.

You will need to meet the lender’s loan-to-value (LTV) requirements. The LTV is how much the lender will provide compared to the amount you pay from your pocket. LTVs vary between lenders, with some asking for 85% (you pay a 15% deposit, and they lend you 85% of the property’s value). Others only offer 65% LTV. However, the most common figure is 75%, meaning you pay 25% of the property’s value, and the lender covers the remaining 75%.

How does that look in real life? If you’re buying a property for £300,000 with a 25% deposit, you would need to pay £75,000 of your own money, and the lender would cover the remaining amount of £225,000.

Your credit score will also play a role in the amount you can borrow, as well as the interest rates you’ll be charged. Generally speaking, the higher your credit score, the lower the interest rates. When you go through the full application, the lender will perform a hard search on your credit report to determine if you are eligible. A hard search is a check on your report visible to other lenders.

If you want to improve your credit, consider the following:

• Joining the electoral roll
• Ensure you don’t miss credit payments
• Don’t have any CCJs or bankruptcy
• Don’t apply for credit just before applying for a mortgage
• Don’t use too much of the credit
• Don’t falsify information on your application

When getting a buy-to-let mortgage, lenders don’t consider personal income the primary factor. That’s because the calculations are largely based on the projected rental income of the property, although lenders will still consider your personal circumstances to some extent.

Most lenders expect you to have your own income through employment or self-employment. The range for what you earn varies from lender to lender, but you can expect requirements to sit somewhere between £20,000 and £25,000. If you’re self-employed, you will need to provide at least two previous tax returns.

Many lenders require you to own a property before purchasing a buy-to-let – preferably one you live in as your home. They will see you as less of a risk if you’re currently paying for a mortgage you can comfortably afford. There are some exceptions, however. You might not need to live in your own home if you already have another buy-to-let property. In this scenario, some lenders will see you as an experienced landlord and feel more comfortable giving you a mortgage even if you don’t own the home you live in.

Lenders won’t give you a buy-to-let mortgage if you plan on living in the property. If that’s your primary aim, you will need to get a residential mortgage. This is because the projected rental income is the driving factor in the lender giving you a mortgage. If there’s no rental income because you live in the property, they will see you as high risk. However, if you currently live in a property with a residential mortgage and wish to rent it out, the lender may give you special permission to do so.

Buy-to-let lenders typically won’t give you a mortgage if you plan on renting it out to a family member. This is because you’re likely to treat loved ones differently from non-related tenants, such as charging them rent below the market rate. Essentially, it becomes less about the business side of letting and more about helping out a family member.

You’re considered a portfolio landlord when you have more than four properties. You also won’t be able to get a conventional buy-to-let mortgage as an individual and will need to borrow based on all of your assets combined.

Most lenders are happy to give you a mortgage for a new home, but they may have some restrictions in place. For example, you will likely need a higher deposit, as the majority of lenders offer lower LTVs on their mortgage products for brand new properties. In most cases, you will need a deposit of 35%, with the lender covering the remaining 65%. New homes are usually classed as two years old or less since construction. Some lenders don’t offer any type of buy-to-let mortgages on new homes.

First, you will need to provide your documents. These include your bank statements, payslips, proof of ID, address and other information related to purchasing a property. The lender will also perform a hard credit check to better understand your affordability and credit history.

You will need to appoint a solicitor for the conveyancing process. Conveyancing is part of the legal work involved and sees the solicitor making sure the property you purchase is a good investment. They do this by performing a survey on the property to make sure there are no underlying issues. They also arrange the contracts and take the deposit from you. The solicitor is involved throughout the entire process and will be in direct contact with you during the application. Average solicitor costs are around £1,000.

The lender will need to confirm that the property value matches the sale price. To do this, they will perform a valuation, either by sending a professional to the property or using a desktop valuation. Most property valuations take place digitally, and the lender will do this by looking at past sales data in your local property market. There may, however, be times when a physical valuation is required. There may be a charge for a physical valuation.

Once the lender has all of the details, the underwriter will review everything and make a decision on your suitability for a mortgage. Essentially, the underwriter’s job is to ensure that you can afford the mortgage repayments and that lending you the money isn’t a risk. The underwriter works directly for the mortgage lender.

If you get the green light for a mortgage, the lender will issue you an official offer. If you’re happy with the numbers involved, the solicitor will arrange for the exchange of contracts between yourself and the seller. This is the stage where you legally agree to the purchase and can’t back out. The solicitor will set a date for the exchange, usually within 10 days or two weeks of you accepting the mortgage offer.

Ownership is transferred from the seller to yourself, and you get the keys to your new buy-to-let investment property. Now it’s time to put it on the rental market.

There’s no set amount of time it takes to get a mortgage. It depends on each specific application – some are smooth with few issues, while others take longer if the lender requires more information. As a rule of thumb, the average mortgage takes around three months to complete.

Some mortgages can take as little as a few weeks, but in most cases you will need at least a couple of months. This is due to the conveyancing process, which involves your solicitor performing a thorough check on the property to ensure that you’re making a solid investment. If the property is an apartment, expect checks to take slightly longer as the solicitor will likely need to review the leasehold.

You may find that some lenders charge a booking fee to secure specific buy-to-let mortgage rates. Such a fee is commonly found on fixed-rate buy-to-let mortgage products and should usually be paid when submitting the mortgage application.

Using a buy-to-let mortgage broker can give you access to previously unavailable rates, which usually saves you money in the long term. You may, however, be required to pay a fee for the broker’s services if they find you a suitable and acceptable mortgage. Some brokers also charge just for their advice, although this isn’t common practice. Many brokers are entirely free to use.

Before completion of the mortgage, you may be required to pay lender arrangement fees. These are typically added to the final mortgage amount, although you can pay them separately. Lender fees can be anywhere between a few hundred and a few thousand pounds. For example, if the mortgage is £250,000 and the lender fee is £2,000, your final mortgage amount will be £252,000 if you want them added to the loan.

Expect to pay legal fees to solicitors for conveyancing when you buy a property. The average cost is around £1,000 and covers multiple checks on the property, the mortgage transfer, and the exchange of contracts. Lenders who remortgage their buy-to-let are unlikely likely to pay legal fees.

Expect to pay between £25 and £45 for telegraphic transfer fees, which are needed for the solicitor to transfer money. These fees are often payable to the solicitor.

Some lenders charge a valuation fee, while others do them for free. It mostly depends on the lender, and you can expect to pay between £300 and £900 if you’re required to pay for the valuation. The valuation will determine if the property you’re buying is worth its sale price and take place either via desktop (digital) or visit from the surveyor (physical).

A mortgage exit fee is different from an early repayment charge and comes into effect when you close your mortgage account. The fees are generally inexpensive when compared to other mortgage costs, usually ranging from a few pounds to a few hundred. Not all lenders charge exit fees.

If you’re on a fixed-term rate and leave the mortgage before it expires, you’ll likely need to pay the lender an early repayment charge (ERC). The amount you’ll need to pay depends on the lender but is usually a percentage of the remaining mortgage term. For example, if you have two years left on your fixed rate and you want to leave early, the charge will likely be 2% of the mortgage. If there’s one year left, expect to pay 1%.

You will need to pay for a solicitor to conduct the conveyancing process during the application. This involves the solicitor performing checks on the property and ensuring everything runs smoothly. Prices depend on the solicitor you instruct, but you can expect to pay at least £1,000.

The lender will need to perform a valuation to see if the property’s value is the same as the purchase price. Most valuations are performed via desktop, using previous data from the housing market. Some, however, require a physical valuation, where a professional visits the property. There may be a cost for a physical valuation, usually between £300 and £700.