Explained

What is a buy to let mortgage?

If you intend to buy a property for renting then you will need a buy to let mortgage. The buy to let mortgage will normally be secured against the property to be let but on very rare occasions a second charge will be secured on your main residence.

The amount you can borrow is normally dictated by a number of variables but is strongly linked to the amount of rental income you might expect to receive. Buy To Let mortgage lenders differ in approach. For example, one buy to let mortgage lender may require the projected rental income to be 30% higher than your mortgage payment. Another lender may require the projected income to be 10% higher than your mortgage payment. This is to allow surplus rent to cover other costs such as maintenance to the property and periods when there are no tenants living in the property.

Generally there has been a recent relaxation in rental requirements resulting with some buy to let lenders offering mortgages without a need for surplus rental income (rental income equal to the mortgage payment). It is also possible that buy to let mortgages will provide an option to make up any shortfall in rental income by showing surplus personal income (surplus personal income meaning disposable income). For example; ‘a three times salary multiple and half the rental income or base the amount that they will lend on your salary and the existing loan commitments that you have, but then apply the deduction rule. This means that they will lend up to 3.5 times your income (or whatever salary multiple applies), minus a representative figure for annual mortgage payments worked out at a pre-set level of interest.’

Another variable used by Buy To Let mortgage lenders is the amount of deposit. Deposit being the amount of money you personally have to put towards the property value. Typically, you’ll need to pay a deposit of around 15% of the value of the property. Some buy to let mortgages allow you to put in only 10%. No money down buy to let mortgages can be arranged but you will need to have high projected rental income to make the deal stack. The other point to note regarding the amount of deposit relates to the mortgage interest rate charged. The charge rate is likely to be lower with an increased deposit but don’t expect a deposit in excess of 25% to make a dramatic difference to the charge rate.

Its not just the deposit that will effect the maximum borrowing it is also the size of the mortgage. The maximum borrowing per a property ranges from £150,000 to £3 million. Also at the high end of the range the mortgage lender will probably restrict the ‘Loan To Value’, otherwise known as the LTV (LTV meaning the % you can borrow as a proportion of the property value). For example loans up to £1 million tend to be arranged with a Loan To Value of 85%. Loans over £1 million tend to be arranged with a LTV of 75% to 80%.

If you build a portfolio of buy to let properties with a particular mortgage lender then you need to be aware of the lenders overall exposure to anyone client. For example a buy to let mortgage lender may only allow a client to borrow £5 million. Whilst £5 million may not be too restrictive a few lenders set their exposure limit as low as £500,000 (£500,000 may not even allow a landlord to purchase a property in central London).