How to apply for a buy-to-let mortgage
There are many different types of buy-to-let mortgages available, such as interest-only buy-to-let mortgages to repayment mortgages. You may choose to purchase through a company, in which case you would need to take out a limited company buy-to-let mortgage. Mortgage availability and criteria also differs if you are based overseas, so your location should be considered before applying for certain mortgages.
The first thing you may be wondering though, is what is a buy-to-let mortgage, and what is the difference between a buy-to-let mortgage and a residential mortgage?
Buy-to-let mortgages vs. residential mortgages
In truth, buy-to-let mortgages are not really that different from residential mortgages, but there are a few important things you would need to be aware of. When we talk about residential mortgages, we mean mortgages people take out if they wish to live in the property themselves. Buy-to-let mortgages are taken out if you wish to rent out the property to people outside of close family members.
Buy-to-let mortgages require you to have a larger deposit, usually at least 25% of the property’s value. Interest rates and other fees associated with buy to let mortgages also tend to be higher.
Most buy-to-let mortgages are available on an interest-only basis, where you would only be paying off the interest for the duration of the term, and then the full amount is payable afterwards. They are also not regulated by the Financial Conduct Authority unless you wish to let the property to a close family member.
How to qualify for a buy-to-let mortgage
With a normal residential mortgage, lenders would assess your salary and outgoings before deciding upon the amount you can borrow. This differs from a buy-to-let mortgage, which hinges on different factors such as the rental income you expect to generate from the property.
It is a bit more difficult to qualify for a buy-to-let mortgage as the Bank of England tries to cool the buy to let market. This means that potential landlords will be subject to strict affordability tests. How much you can borrow through a buy to let mortgage is based on the Interest Cover Ratio (ICR). This is how much rental income you expect to receive and how this will cover mortgage repayments. You will typically need to be receiving around 125 – 145% of your mortgage costs in rental payments.
Lenders will also consider how many properties you have in your portfolio, as the more properties you own the more difficult it is to obtain finance. If you own over 4 properties, you are considered a “portfolio landlord” and you will be subject to stricter regulations.
Some lenders will stipulate that you can only have a certain number of properties in your portfolio. Others base their decision on the loan to value ratio, and others demand that the ICR for every property be above a certain percentage.
Most buy to let mortgage lenders would require you to be earning your own income too, this minimises their risk as you still have a possible way to afford mortgage repayments.
Buy to let mortgages for first time buyers
It is possible for first-time buyers to obtain a buy to let mortgage, but you may need a larger deposit. There may also be fewer mortgage options available to you. With regards to stamp duty, you will not benefit from first-time buyer’s stamp duty relief, but you will avoid paying the additional 3% surcharge levied on buy to let investors.
You may find it difficult to obtain another mortgage as lenders will examine the debt owed on your existing buy to let mortgage, and you will have to pay a surcharge for any other property you end up buying.
How to get a buy to let mortgage through a company
If you set up a company for the sole purpose of owning property, the company is sometimes referred to as a Special Purpose Vehicle (SPV). When financial institutions look at lending, they would generally take into consideration the financial standing of the company.
When buying a property through a limited company you generally need to provide two years of profitable trading history and a good balance sheet to be given a mortgage.
That can be a problem for SPVs as they have no financial history at all. What frequently happens is that a lender would require a personal guarantee from each company director. This means that if the company is unable to honour its debts, the company directors are personally liable and can be chased for payment.
The lender will assess the company directors and their own ability to pay the mortgage, so the affordability will be dependent on your personal financial standing.
Depending on what you want to use the money for, there can be some tax benefits of investing in property through a limited company.
Can an overseas investor get a buy to let mortgage?
The UK property market performs well, and property is one of the strongest asset classes. It is not surprising that many people from all over the world are wanting to invest.
Perhaps you are living overseas and want to invest in the UK property market but are unsure how to obtain a mortgage. The truth is, there are UK buy to let mortgages available to non-UK residents. Generally, the mortgage availability for non-UK residents is more restricted and more stringent checks are put in place to ensure that the rental coverage is 125% of the mortgage payment.
As property is something people put a large amount of money into, identity checks are needed, as are checked to see where the money is coming from. If you are a non-EU citizen looking to invest in UK property, these checks are even more thorough to minimise lender risk.
Available buy-to-let mortgage options
Most high street banks will offer buy-to-let mortgages. You can also use the service of a mortgage broker who will help you arrange a mortgage that will meet your requirements.
There are websites such as Compare the Market which will compare various mortgage options, although there may be hidden charges or caveats that are not immediately obvious on first sight.
Arranging a mortgage can take a lot of work so it is good to know the basics of what a buy to let mortgage would entail and how to qualify for one. How you purchase your property will also impact mortgage availability, as there are different mortgage options available for limited companies compared to an individual. Our guide gives an outline as to what to expect when applying for a buy-to-let mortgage, but it is also worthwhile exploring these options further. There are other commercial property investments that do not require a mortgage. Care home investments come with a long-term commercial lease between 10 – 25 years so rental insurance is not required. Read the in depth buy to let mortgage guide here to find out more about the types of mortgages available and what interest-only mortgages are.