Lending criteria, eligibility, and affordability
If you purchase a property to rent it out, you cannot use a traditional residential mortgage. Instead, you will need a specialist buy-to-let mortgage designed for individuals who purchase a property to lease to tenants rather than as a personal residence. Such an investment should be considered medium to long-term.
The rules for buy-to-let mortgages are similar to those for regular mortgages, but there are crucial differences in lending criteria, eligibility, and affordability. Most buy-to-let mortgages are interest-only, meaning monthly payments are generally lower than those for repayment mortgages.
Financial considerations
In the short term, interest-only mortgages can reduce your monthly outgoings; however, in the end, you’ll need to pay off the property’s cost as it was at the time of purchase. Many landlords achieve this by selling their property at a profit, although this may not always be straightforward.
If house prices decline and the property is worth less than what you paid, you must use personal funds to settle the remaining debt. Therefore, it is essential to have a long-term strategy to either pay off the loan or refinance it at the end of your mortgage term.
Minimum deposits
The minimum deposit for a buy-to-let mortgage can vary. It is typically 25% of the property’s value, but it could range from 20% to 40%. For example, for a property valued at £250,000, you would need to put down between £50,000 (20%), £62,500 (25%), and £100,000 (40%).
Borrowing limits and rental income
The maximum amount you can borrow depends on the anticipated rental income. Lenders will assess how much rental income the property will generate and compare this to your monthly mortgage repayments. Generally, the rental income must be at least 125% of your mortgage repayment.
For instance, if your monthly interest payments are £600, you must charge at least £750 per month in rent. The higher the rent you can charge, the larger the loan you could potentially qualify for. For first-time buyers priced out of the market in their local or desired area, purchasing a property elsewhere and renting it out could be a pathway to entering the property market.
Application requirements
Similar documentation will be required for a residential mortgage when applying for a buy-to-let mortgage. This includes:
- Proof of identity such as a passport or driving licence
- Your last three payslips
- Proof of monthly outgoings
- Existing mortgage statement (if applicable)
- Utility bill statements
- P60
We can ensure you have the appropriate documents ready, enhancing your chances of a successful mortgage application.
Looking to access the right finance you need?
For further information or assistance with finding the right buy-to-let mortgage for your requirements, to learn more, contact our specialist team buy-to-let team here.
Please note: this is a long term investment which you hope will generate rental income along the way and a profit when you sell the property, but bear in mind that if you need access to some cash, a property can take time to sell or remortgage. If house prices fall, you might not be able to sell for as much as you had hoped. You would have to make up the difference if the property sold for less than you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up. This would eat into, or even wipe out, your income and profit. It is recommended that you also maintain access to emergency funds to cover your mortgage payments during ‘void periods’ that may arise whilst you have no tenant and the property is not let. Please also note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
