How Buy-to-Let Mortgages Work and How to Get One

How buy-to-let mortgages work is a mystery to many potential landlords – and how to get one is even less understood. If you are a landlord looking for a buy-to-let mortgage, you need to know if a property you fancy meets the terms and conditions laid down by lenders. 

But don't worry too much. If you struggle to land a deal, you are among the thousands in the same position. To help you navigate those sometimes impenetrable mortgage rules, here are some tips and answers about how buy to let mortgages work and how to get one.

How much can I borrow on a buy-to-let loan?

The amount you can borrow on a buy-to-let mortgage depends on several factors:

  • Expect to pay at least a 20 per cent deposit – calculated as 20 per cent of the price you pay for the property. This deposit makes the maximum amount you can borrow 80 per cent of the property's value or purchase price, whichever is the lowest.
  • Some buy to let lenders have a minimum income requirement
  • Your borrowing will depend on the property's income stress test. The income stress test or ICR is the critical calculation when working out how much you can borrow.

What is the income stress test?

Often, a buy-to-let lender returns with a lower mortgage offer than expected, even though the property's value could achieve a higher loan amount. This anomaly is because of the income stress test. 

The income stress test ensures you can pay your buy-to-let mortgage if interest rates rise. The lender must run the test, and any borrowing decision will depend on the result. The small print of your application will have a clause that says, ' the loan amount is based on the value of the property or the income stress test, whichever is the lowest'. 

This clause means that regardless of what 80 per cent of the property values, if the stress test gives a lower amount, that will be the most you can borrow.

How the income stress test works

Every lender has their stress test formula, but this is how they generally work: A lender will say a buy-to-let property’s rent needs to cover the mortgage interest repayment of 5.5% by 145 per cent to qualify for a loan at 80 per cent loan-to-value (LTV). 

If the test shows the deal supports more than 80 per cent borrowing, the maximum loan is still 80 per cent LTV. If the test returns a figure of less than 80 per cent LTV, the loan will be set at that level. 

For example, a landlord wants a loan of £144,000 on a property valued at £180,000. The stress rate figures are a 5.5 per cent interest rate and 145 per cent rent cover. Monthly interest payments at 5.5 per cent come to £792 a month. Rent cover at 145 per cent means the monthly rent must exceed the loan repayment by 45 per cent, which means the rent must be a minimum of £1,148 a month to borrow £144,000. The expected rent is £800 monthly, covering a mortgage repayment of £551. With that result, the maximum borrowing is £100,000.

How to compare mortgages

What’s cheaper? Borrowing £100,000 on a two-year 1.19 per cent fix with a 2 per cent fee that reverts to 4.74 per cent or a 1.65 per cent five-year fix with a £995 fee? The way to find out is some arithmetic with a pencil, paper and calculator. The 1.19 per cent deal works out at £119 for 24 months plus the £2,000 fee – a total of £4,856. Add to this the remaining 36 months at 4.74 per cent – another £17,064, totalling over five years of £21,920. 

The second option costs £165 a month for 60 months plus the £995 fee - £10,895, which is less than half the cost of the other deal.

Can I rent out a home on a standard residential mortgage?

No. You cannot rent out your home on a standard mortgage without written permission from your lender. Many lenders adjust the standard rate to a higher buy-to-let rate if you want to let out your home.

Can I get pre-approved for a buy-to-let mortgage?

Some lenders and brokers will pre-approve your application but don’t forget the stress test relates to a specific property. This process can make pre-approval a waste of time.

Don't give up if a lender turns you down

Not all lenders apply the same rules to granting a buy-to-let mortgage, so if your application to a mainstream lender fails, speak to a broker who may have the knowledge and contacts to push the deal over the line with another lender. Lenders will have rules about stress tests, loan-to-values and other factors that go into an application mix. 

What passes underwriting for one lender is often a problem for another.

Go to a broker or arrange your mortgage?

There’s nothing stopping landlords from going directly to a lender to arrange their buy-to-let mortgages. The rates and costs are generally the same, although some brokers have special rates or cashback deals. However, check the broker’s fees because they can sometimes outweigh any potential savings. Although brokers charge fees, their job is to find the best mortgage that suits your circumstances. A broker is helpful if you are self-employed or draw income from several sources. 

Subscribers to the Guild can access buy-to-let mortgages here

Some comparison websites can provide initial buy-to-let mortgage introductions.

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