Buy to let mortgage information for rates and criteria - Commercial Trust

Buy to let mortgage interest rates and lender criteria

A buy to let mortgage is different from a standard residential mortgage for your own home. Buy to let refers to buying a residential property so that it can be rented to paying tenants.

Additional lending criteria and rules will apply to a buy-to-let mortgage. The most obvious difference between a residential mortgage and one for BTL is how affordability is calculated.

A rental income and interest rate stress test helps to determine how much you can borrow for buy to let. For residential mortgages the applicant status and personal income is key to lender decisions on how much you can borrow.

Useful links:

What HMO mortgages are available?

Limited company mortgages

Buy to let mortgage calculator

Mortgage Club awards winner 2018

Buy-to-let mortgages are based on rental income, rather than personal income

Buy-to-let borrowing is based on the rental income-generating potential of a property.

Even with low personal income, as long as the rental income sufficiently covers your mortgage interest payments, there are lenders who will consider your mortgage application.

Compare buy to let mortgages

  • Compare mortgage rates and deals from a large range of lenders 
  • Compare deals for your requirements
  • You can check buy to let remortgages

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. 

Rental income and mortgage affordability checks

This is a very important part of mortgage lending for buy-to-let. If the rental income will not cover mortgage repayments, a lender is unlikely to offer you a loan.

To show that you can afford a mortgage, the rent must exceed the monthly mortgage repayment, by a given percentage.

This is because lenders must loan money with due care to the borrower.

To do this, lenders look at a hypothetical scenario, where the repayment is higher. If it is still affordable to the borrower, the deal will pass the affordability check.

Rental cover / initial coverage rate

Lenders calculate how much the rent must exceed the repayment. This is the “rental cover” or “initial coverage rate”.

Calculating rental cover for a buy to let mortgage

If your monthly repayment was £448, your rental income would need to be at least £650 to meet rental coverage of 145%:

  • £448 x 145% = £650

Which lenders offer mortgages for buy-to-let borrowers?

Over 45 lenders provide buy-to-let mortgage finance, some of the more well known ones are;

High Street Banks

Building Societies

Specialist Lenders

Barclays

Leeds

Aldermore

Santander

Skipton

The Mortgage Works (TMW)

NatWest

Cambridge

Precise Mortgages

Virgin

Buckinghamshire

Kent Reliance

Halifax

Accord

Mercantile Trust

Buy-to-let stress rate lender test

Mortgage lenders also use a “stress rate” for buy-to-let affordability calculations.

This means replacing the real rate of repayment with a more expensive one in the calculation.

This gives lenders a formula to help ensure they are responsible with their lending.

The PRA set this rate for the lenders they regulate at 5.5% in a wide range of circumstances. It may be lower if the deal is for a like-for-like remortgage, or if the mortgage is a 5-year fixed rate.

Additionally, buy-to-let lenders who are not PRA regulated are not bound by this rule.

Calculating your maximum borrowing

Calculating the greatest amount you can borrow can be tricky. The following calculation will give a basic idea:

  • (Annual rent ÷ 145%) ÷ 5.5% = most you can borrow

This may look very confusing.

To break this down with an illustrative example; if the monthly rent for your property is £650, the total annual rent is £7,800:

  • Divide this by 145% rental coverage to get £5,379
  • Divide this by 5.5% ‘stress rate’ to get £97,806
  • So, based on a rent of £650, using this calculation, the most you could borrow is £97,806

Comparing different rates for a buy-to-let mortgage

When you are compare buy-to-let mortgage rates you can consider the following:

The initial rate and period

APRC (Annual Percentage Rate of Charge)

The reverting rate (rate of repayment after any initial period)

The LTV required for the mortgage

The lender fee

Early repayment charges (ERC’s)

Buy-to-let deposits need to be at least 15% of the property value

Buy-to let mortgages need larger cash deposits than owner-occupiers. The most any lender will agree to lend is 85%, leaving the borrower to cover the remaining 15%. (This is an 85% loan to value, or LTV, mortgage.)

Not all lenders allow borrowing up to 85% LTV. Most lend 70–75% of the property value. And if you want to qualify for mortgages with the lowest interest rates, you will need to borrow no more than 60%.

60% LTV mortgages are more suitable for risk-averse investors who prefer a larger equity buffer.

Between the lower interest rate and smaller loan size, they also allow investors to keep their repayment costs down. And if your eventual goal is to have an unencumbered property, 40% of equity gives you a good start.

What is the best mortgage?

People often want to know what the ‘best’ buy-to-let mortgage is. This is often based on the idea that the lowest interest rate equals best buy-to-let mortgage.

It is vital to consider your goals and aims when comparing mortgages. Shopping around for the lowest initial rate rarely identifies the right product.

Low rate deals may come with expensive lender fees that may not make them cheaper in the long run. Low rate deals often come with strict mortgage criteria which may not be a good fit.

Finding the best buy-to-let mortgage for you actually means establishing:

  • What you want from renting property

(e.g. An investment that will become a career? A supplementary income? An investment for your savings? )

And then how the following affects achieving that goal:

  • Your personal circumstances
  • Your financial circumstances
  • The property(ies) you will invest in