With past low borrowing costs, solid rental returns and steady house-price growth, buy-to-let mortgages have historically been among the popular investment choices in Britain.
Despite the regulation changes and ongoing legislation, new and experienced investors continue to enter the buy-to-let property market.
After all, being a landlord can be financially rewarding- the rental income that the landlord receives by letting out their property to a tenant creates a regular flow of income.
Though buy-to-let mortgages are typically easier to obtain in today’s times, the buy to let mortgage criteria are ever-changing.
Formerly, the applications for buy-to-let mortgages were mostly based on the credit history and income of the applicant.
But more recently, lenders’ focus has been shifted to the potential rental revenue that investment properties may generate.
Before you apply for a buy-to-let mortgage, knowing the eligibility criteria is important, and this guide discusses just that.
Table of Contents
What Is Buy-To-Let Mortgage?
A buy-to-let mortgage is a loan you take out to buy a property that you plan to rent out to others. It’s like a regular mortgage, but it’s specifically for properties you don’t intend to live in. The rent you collect helps pay the loan.
This type of property loan allows investors to buy real estate, for example, apartments and houses, and rent them for financial gains.
Buy To Let Mortgage Criteria Assessment
A buy-to-let mortgage is essential for everyone planning to rent out their property unless you have the cash to buy it outright.
Though specifically designed for landlords, many lenders associate buy-to-let mortgages with high risk.
That is why the borrower must meet certain conditions to qualify for a buy-to-let mortgage. However, keep in mind that the criteria differ from lender to lender.
1. Affordability
Generally, lenders assess affordability by calculating your income against your expenses.
But in regard to buy-to-let mortgages, affordability is calculated slightly differently because lenders are anxious to know whether your rental income will be sufficient to pay off the mortgage.
It is important to remember that some lenders still may have a minimum income requirement for earned income.
Though not always the case, some lenders put forth a condition that you may need to own your home, whether outstanding or with an outright mortgage. This just adds extra security that the landlord will not live in the BTL property.
On the other hand, lenders normally want rental revenue to cover the mortgage payment by 125% to 145%.
Bear in mind that the rule of assessing affordability isn’t set in stone, and lenders may use different parameters to assess the amount they can lend on a buy-to-let mortgage.
2. Employment Status
You can borrow up to 125% to 145% of your mortgage repayments based on the monthly rental income you receive or are likely to receive as a very general rule.
Typically, lenders require evidence of earnings from self-employment or employment income besides rental earnings. Your earnings must be close to or above £25,000+ annually.
Lenders may not approve your buy-to-let mortgage if you earn less than the amount mentioned above. If you have income less than this, this is where a specialised mortgage broker can aid you in finding a lender who suits your circumstances.
3. Deposit Amount
When it comes to buy-to-let mortgages, lenders generally ask for higher deposits than they do in residential mortgages.
Typically, you’ll need a minimum of a 25% deposit to qualify for a buy-to-let mortgage. That’s because a good number of buy-to-let mortgages start with a loan-to-value (LTV) ratio of no less than 75%.
However, if you’re an experienced landlord, your lender may agree to a 20% deposit. Once again, a specialised mortgage broker may assist you if you are looking for a buy to let mortgage with a lower deposit.
Another scenario where lenders may require higher deposits is in case of affordability or credit issues. That’s because higher deposits lower their risk of lending.
Additionally, you may be required to pay a high deposit if the property you’re purchasing is of non-standard construction or requires extensive work.
4. Your Credit Score
Your credit score plays an important role in determining whether or not you will secure a buy-to-let mortgage.
A buy-to-let mortgage is different from a residential mortgage. Lenders offering you a residential mortgage may not use the same credit score criteria when offering a buy-to-let mortgage.
So, the options for a buy-to-let mortgage could be reduced if you have a weaker credit score/report.
In most cases to obtain a buy-to-let mortgage, your credit record must be good and shouldn’t be stretched excessively on other borrowings, such as credit cards.
Though difficult, getting a buy-to-let mortgage with a bad credit score isn’t impossible. In general, you’ll have to search for a specialist lender who can lend you the money for a buy-to-let mortgage.
Also, how recently the credit issues occurred will help the lender decide if they should give you a buy-to-let mortgage.
5. Applicant’s Age
18 is the minimum age for purchasing a buy-to-let mortgage but many lenders do not accept their buy-to-let mortgage applications.
Instead, their minimum age requirement is usually 21 years, while others require applicants to be 25 years of age or above.
On the other hand, the maximum age requirement is 85 years of age typically, but a few lenders only accept applicants of or below 75 years of age.
Though rare, some lenders have no maximum age limit set when it comes to buy-to-let mortgages. The no maximum age limit is a growing piece of criteria within the BTL space.
Buy-To-Let Mortgage Criteria For Experienced Landlords
What’s lesser known is that many lenders consider your experience level in determining the mortgages that should be offered to you.
Experienced landlords, in comparison to first-time landlords, find it easy to acquire buy-to-let mortgages. Though not all, a few lenders require applicants to be homeowners as well.
In some circumstances, you may have to deal with a few setbacks, even after being an experienced landlord. That’s because some lenders limit the number of buy-to-let mortgages they can offer to an individual.
On that note, we’ve discussed the criteria that experienced landlords must meet in order to obtain buy-to-let mortgages.
1. Landlord Experience
Your property experience will most likely fall into one of the following categories:
- First-time landlord
- First-time buyer
- Landlord who presently owns at least 1 buy-to-let mortgage property
- Experienced landlord with a portfolio of buy-to-let mortgages
2. Property Type
It’s hard to come across lenders who are willing to lend on properties of all types. Many lenders only lend on terraced, semi-detached, or detached properties, i.e., traditional brick-built houses.
Lenders often conduct mortgage surveys to confirm if the property fits their lending requirements.
A mortgage survey may occasionally put forward a number of improvements as a requirement of the financing.
These conditions are generally agreed upon by both the seller and the buyer. Additionally, the surveyors will be trained to estimate whether the property will meet the rental income declared as part of the mortgage application.
3. Property Location
As far as buy-to-let mortgages are concerned, the majority of lenders lend in all locations throughout the U.K. However, a few lenders may restrict lending to Scotland, Wales, Ireland, or England.
So, when you’re looking for a buy-to-let mortgage, make sure that the lender isn’t restricted in your location.
Why Do Lenders Decline Particular Property Types?
More often than not, lenders refuse to lend on properties that require extensive renovations or refurbishment.
As an example, the majority of lenders will turn you down if your property lacks an operational kitchen.
Obtaining a buy-to-let mortgage, in such circumstances, will be out of the question, though you can often acquire finances through other methods.
Besides, the material with which the property has been built will determine whether a mortgage is possible. For instance, getting a buy-to-let mortgage for properties that aren’t built with brick is difficult.
To be specific, your chances of obtaining standard BTL mortgages for old farming barns converted to residential or commercial structures are low. Lenders may also refuse to lend on properties made from concrete and wood.
Can You Purchase A Buy-To-Let With A Limited Company?
Real estate investors with a range of investments or portfolios may benefit from lower taxation by incorporating their holdings into a limited company.
Requesting a buy-to-let mortgage through a limited business may enable you to offset expenditures where you’d struggle otherwise. As always outlined, please speak to a qualified tax advisor regarding this area.
In certain scenarios, directors have a limited company that isn’t used for property investment but they would like to purchase a property through it.
If you’re a director in need of a buy-to-let mortgage, know that it’s possible to obtain it through a trading limited company in certain circumstances however, this will reduce the amount of available lenders.
Also, because of tax reforms, many landlords have created a limited company. Had it not been for tax changes, only a handful of lenders would have considered lending to a limited company because the risk is relatively high.
There may be other benefits/reasons to purchasing through a limited company that landlords may consider.
Frequently Asked Questions
Can expats get a buy-to-let mortgage?
Individuals living overseas may struggle to acquire a buy-to-let mortgage because almost all lenders require applicants from residents of the U.K. Due to the fact that expats reside out of the country, lenders consider them as high risk. However, certain lenders do have specialised products for Expats.
Is there a limit to the number of buy-to-let properties one can own?
You can own as many buy-to-let properties as you can afford but the problem lies with the number of buy-to-let mortgages lenders offer. In regard to buy-to-let mortgages, many mainstream lenders set a limit of 3 to 5 per person, additional properties to this then fall into portfolio landlord criteria.
Do you need a tenancy agreement for a buy-to-let mortgage?
Especially for remortgages, some lenders will want to vet the quality of the tenancy agreement during the mortgage application or through the conveyancing solicitor closer to completion. This is to make sure that it fits within their criteria and can act as evidence of the rental income the property can generate.
**A buy to let mortgage will be secured against your property.
Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
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