The Process of Applying for a Buy-to-Let Mortgage
Buy-to-let mortgage deals are designed to finance any rental or residential property that you intend to let to a tenant for a profit – or currently rent out and wish to refinance. The vast majority are buy-to-let mortgage interest-only products, which reduce the cost of monthly repayments funded by the rental income you receive from your tenants.
Interest-only deals can be advantageous, but a lender will need to verify whether the projected income from the rent will be sufficient. They will also look at your exit strategy, which shows how you intend to pay the original capital borrowed on the buy-to-let mortgage at the end of the term.
Borrowing Caps on Buy-to-Let Mortgage Deals
Buy-to-let mortgage lending is pretty flexible, so you may be able to borrow as much as you require to purchase or refinance a buy-to-let property, provided you can show that the rental income will comfortably cover the interest. There is no general limit on the amount you can apply to borrow.
However, buy-to-let mortgage lenders will need to consider your circumstances and eligibility before they can make an offer to lend.
The norm is to require the anticipated rental income to be at least 125% to 140% of the buy-to-let mortgage interest-only monthly payments as a minimum, giving the lender assurance that there is little likelihood of being unable to keep up with the mortgage payment schedule.
Pros and Cons of Using a Buy-to-Let Mortgage
Any buy-to-let mortgage agreement has potential positives and negatives to bear in mind, particularly if you are comparing alternative forms of financing or deciding whether to invest in a rental property. As a brief summary of the incentives to consider buy-to-let property investment:
- Good quality rental properties can command excellent returns far in excess of your buy-to-let mortgage payments. The right rental property can generate a monthly profit, easily cover the mortgage costs, and appreciate in value, making it worth more on the open market should you decide to sell in the future, especially when house prices fall.
- Demand for premium rental properties and other subsections, such as student lets, are consistently high demand, making a buy-to-let property a suitable asset for a property or investment portfolio with a low-risk exposure.
- Buy-to-let mortgage businesses benefit from tax treatments, which allow landlords to deduct most of their running expenses from their rental income before declaring the taxable profit.
Alongside these plus points, there are also some pitfalls we'd ensure every buy-to-let mortgage applicant is aware of. These include the risks of tenants being late with rental mortgage payments or falling into arrears. Vacant periods can also be a financial challenge where the mortgage remains payable regardless of whether you have a tenant at the time.
Stamp duty is an additional cost to factor into your budgeting for a buy-to-let mortgage, with an additional 3% levy against second homes which applies to rental property investments. Landlords investing for long-term capital growth should also consider the potential for the property to drop in value – however unlikely that may be.
Working with an experienced broker with the skill necessary to negotiate buy-to-let mortgage deals is essential, with additional guidance available around insurance policies to protect your interests as a landlord.
Eligibility Criteria for the Best Buy-to-Let Mortgage Deals
Every buy-to-let mortgage lender has a set of policies and eligibility criteria which influence the applicants they are prepared to lend to. There are also niche buy-to-let mortgage lenders who specialise in landlords who fall outside of the standard criteria.
The below inclusions are based on standard criteria, but it is important to note that no two buy-to-let mortgage lenders are the same, and their specific rules may vary.
Minimum Deposits for a Buy-to-Let Mortgage
Most lenders will expect any buy-to-let mortgage applicant to have a deposit – or equity in the property for a remortgage – of at least 25%, although some will offer financing of up to 80% as a maximum. Buy-to-let mortgage deals need a higher deposit than a residential mortgage.
Prospective landlords with a lower budget are advised to consult with the Revolution team to explore whether they may qualify for specialist lending, with some restricted access lenders able to consider deposits from 15% and upward, depending on the circumstances.
Proving Rental Income for a Buy-to-Let Mortgage Interest-Only Deal
The next area to consider is the anticipated rental income you will generate through your buy-to-let property. Lenders will also need to know if you have a separate revenue stream, with some imposing a minimum annual earnings limit of £25,000 outside of rental property earnings.
Some lenders will not expect all buy-to-let mortgage applicants to have a separate income, and we can advise on those mortgage providers who may be able to help if this applies to you.
General Lending Criteria on Buy-to-Let Mortgage Products
Alongside the above policies, some lenders will also evaluate buy-to-let mortgage applicants against:
- Their age: lenders can have limitations on applicant ages, often lending to any buy-to-let mortgage applicant from 21 to 75. In contrast, others will lend to anybody who can demonstrate sufficient income and has a stable credit history.
- The property they wish to buy: rental properties that are considered non-standard, such as semi-commercial buildings and high-rise flats, are less straightforward to finance and often best-suited to a niche buy-to-let mortgage lender.
- Previous landlord expertise: some buy-to-let mortgage providers expect all applicants to have a minimum number of years of experience as a professional landlord. Other lenders have no such policy, so your choice of lender is key.
It is also worth noting that a buy-to-let mortgage provider might expect applicants to have an existing residential mortgage if they do not already own their own primary home outright. If you have a mortgage that has been ongoing for at least six months, you should be able to comply with this requirement.
Understanding Buy-to-Let Mortgage Rates and Costs
The buy-to-let mortgage market is not regulated in the same way as residential mortgages, which means there are often greater variances between the highest and lowest buy-to-let mortgage rates and other costs, such as product and application fees.
It is impossible to publish average buy-to-let mortgage interest rates since these vary considerably depending on the amount you wish to borrow, the value of the property, the forecast rental income, your age and credit score, and varied other criteria, many of which we have explored above.
Next, we summarise some of the potential buy-to-let mortgage interest-only costs to indicate which expenses to look out for and how to get an accurate overall picture of what comparable buy-to-let mortgage deals may cost.
Application Costs for a Buy-to-Let Mortgage
Buy-to-let mortgage deals can carry an upfront cost called an application fee. This expense can be roughly £500, depending on the lender, although it isn't universal, and some products may be fee-free. It is well worth consulting an independent buy-to-let mortgage adviser to ensure you have clear oversight of all the additional costs and work these into your comparisons.
Valuation Charges Linked to a Buy-to-Let Mortgage
In some cases, a lender won't need a fresh valuation, although this is a standard requirement. The valuation shows what the property is worth as a bricks-and-mortar asset on the open market. It is necessary for the lender to evaluate what it is worth as security against the buy-to-let mortgage.
You may find that some buy-to-let mortgage deals include the valuation fee. However, these are worth evaluating carefully since 'no fees' buy-to-let mortgage deals are often more expensive elsewhere.
Buy-to-Let Mortgage Product Fees
In addition to application fees, some buy-to-let mortgage deals have a 'product fee' attached. This charge may be based on a percentage of the borrowing or a fixed payment. The latter may be preferable, depending on the amount you'd like to borrow through a buy-to-let mortgage.
Exit Fees on Buy-to-Let Mortgage Deals
Just as exit fees can make it very expensive to remortgage a residential loan before a fixed term ends, this can impact the viability of a buy-to-let mortgage. The early settlement charge can be significant if you decide the option of mortgage repayments or refinancing the loan early.
An early repayment mortgage charge differs slightly from an exit fee. Still, either should be fully disclosed in the buy-to-let mortgage offer to ensure you fully understand the potential costs should your circumstances change or more competitive buy-to-let mortgage deals come onto the market.
The Legal Costs of Taking Out a Buy-to-let Mortgage
Most mortgages require a legal professional – either a solicitor or conveyancer – to deal with the particulars. Solicitors might charge a fixed, not a variable rate mortgage or bill based on the hours or days they spend managing your mortgage process. As with valuation fees, caution is advisable if you are considering buy-to-let mortgage deals with free legals included, as this may not be in your best interests.
Buy-to-Let Stamp Duty
When you purchase a rental property for the first time, you may be subject to stamp duty in addition to the cost of your buy-to-let mortgage – depending on whether you're a first-time buyer and how much the property is worth.
These rates which may include a fixed rate mortgage option, vary depending on the property value and your circumstances, but it's worth budgeting carefully to include all the relevant fees.
For more information about applying for a buy-to-let mortgage, assessing your eligibility, or calculating the total cost of borrowing to compare buy-to-let mortgage deals accurately, please get in touch with the Revolution Finance Brokers team at any time. Alternatively, you are welcome to browse our free resources through our buy-to-let sitemap for further guidance about any specific queries you have.
