Investing in property to rent out to paying tenants has long been a popular investment in the UK. A buy to let mortgage is a loan granted specifically for the purchase of rental property, and whilst it is broadly similar to a residential mortgage, there are some important differences.

How does a BTL mortgage work?

Buy to let mortgages differ from residential mortgages in the following key ways:

• Minimum deposit: The very highest loan to value (LTV) ratio for a buy to let mortgage is 85%, meaning that the borrower must produce a minimum 15% cash deposit. The best deals usually require a 40% deposit.
• Cost: Buy to let mortgages tend to cost slightly more than residential mortgages in terms of interest rates and product fees.
• Regulation: The majority of buy to let mortgages are not regulated by the Financial Conduct Authority (FCA). A mortgage will only be regulated if the borrower or a close relative will occupy at least 40% of the property (source: org.uk.) Buy to let borrowers may therefore need to be more careful about where they receive advice to ensure that they will be treated appropriately and fairly.
• Affordability: Unlike residential mortgages, buy to let mortgages are not typically underwritten according to the borrowers’ income. Though the borrower may still be required to evidence a minimum income, the loan size will usually be determined by ‘rental cover’; the lender will instruct a rental valuation on the property to determine whether the rental income will cover the mortgage interest payments by an appropriate amount.

Who can take out a BTL mortgage?

Most high-street lenders have similar borrowing criteria; typically, they are aiming for borrowers who live in and/or already own property in the UK, have a decent income, a good credit score and haven’t overextended on other credit lines, fall within a certain age range and have a sizeable cash deposit.

But there are exceptions to almost every rule; the wide array of available lenders includes specialists who cater to a variety of borrowers, and many who fall outside the norm may still be able to obtain finance.

Age

Most lenders require a borrower to be at least 21 years of age. Maximum age at application tends to range between 69 and 75.

Some lenders, however, will grant loans to borrowers as young as 18; and subject to other criteria, some do not impose maximum age limits, instead considering each application on its individual merits.

Credit score

Depending on the lender, it might be possible to get a buy to let mortgage even if you have had issues with credit in the past. Issues that are not always accepted but may be considered by lenders include:

• Arrears (secured and unsecured) and defaults: leniency will depend upon age and severity.
• Bankruptcies: so long as the bankruptcy has been discharged for a certain period.
• County court judgements (CCJs) and credit defaults: subject to minimum timeframes and / or maximum amounts. A CCJ need not always be satisfied.
• Debt management plans (DMPs): whether an applicant on a DMP is accepted will depend upon the age of the plan, whether it is settled (and if so, when) and their payment history.
• Individual voluntary arrangements (IVAs): so long as the IVA has been settled for a certain period.
• Repossessions: A small handful of lenders will consider applicants who have had previous properties repossessed, as long as the repossession occurred prior to a certain date and the applicant’s credit record has been strong since.

Employment and income

Borrowers who are employed and earning at least £25,000 should meet the majority of lenders’ employment and income criteria. Self-employed borrowers are also usually accepted, though they may have to evidence a minimum trading history and provide SA302 tax calculations.

Some lenders will accept applicants with lower incomes, and a few do not require a minimum amount at all; the applicant need simply provide evidence of any income and meet the lenders’ other criteria.

A few lenders will consider limited company applicants, and fewer still will consider limited liability partnerships (LLPs).

Property ownership

Many lenders require applicants to either own their own property or have experience managing a rental property. Some, however, will consider first time buyers who fit their other criteria, though they may need to pay a larger deposit or apply jointly with another borrower who already owns their own property.

Residency

As well as UK nationals, some lenders accept EU citizens or non-EU citizens who have lived in the UK for a certain period of time and have permanent right to reside.

A handful of lenders will also accept applications from UK citizens who have moved abroad (foreign expatriates, or ‘expats’). Expat products may be more expensive and / or require a larger deposit, and they may be subject to other criteria, such as a maximum time spent abroad.

UK citizens returning from abroad can also apply with some lenders, though they may be required to have lived in the UK for a period of time before doing so.

How much can you borrow for a BTL mortgage?

Two important ratios determine maximum borrowing for a buy to let mortgage: loan to value (LTV) and debt service coverage ratio (DSCR), more simply referred to as rental cover.

LTV limits how much you can borrow in relation to the property value. For instance, a mortgage with a maximum LTV of 60% would not enable you to borrow more than 60% of the property’s value, which would be determined by a valuation commissioned by the lender.

DSCR refers to the income-generating potential of the property. Lenders apply a stress test by calculating your mortgage interest repayments at a notional rate that usually lies between five and six per cent. The rental income is usually required to be between 25 and 30% higher than this amount.

Bear in mind also that lenders also impose a maximum and minimum loan amount, which will also affect how much you can borrow.

Where can you get a BTL mortgage?

Most high street banks offer buy to let mortgages. There are also a number of specialist buy to let lenders, who have become more widespread in recent years as buy to let has grown in popularity.

To get a buy to let mortgage, you can approach a lender directly. Some lenders have deals that they only offer to direct customers; however, it might still be possible to get a better deal elsewhere.

You can also use a price comparison website. These websites allow you to compare a wider range of deals, but you will not receive advice on the features of the mortgages available or whether they are suitable.

Finally, many experts recommend using a good buy to let mortgage broker. Whilst brokers cannot access direct-only deals, they can advise on a far wider range than will be available from going to a single lender; a good broker will also source a mortgage based on your personal circumstances and preferences, and fully explain the features of any mortgage they recommend.

What else should a first-time BTL borrower bear in mind?

Buy to let landlords need to pay tax

If you invest in property as an individual, any rental income your property generates will be subject to income tax, and sales profits will be subject to capital gains tax (CGT). If, on the other hand, you invest as a limited company, both income and sales profits will be subject to corporation tax.

You might also need to pay council tax if your property is empty, inheritance tax if you bequeath your property to someone, and stamp duty land tax (SDLT) on any new purchases.

Buy to let tax is a complicated area, and all borrowers – whether experts or novices – can benefit from instructing a professional accountant to assist with their tax affairs.

The property may not always generate income

Your property will not always be tenanted. It may be necessary to keep the property empty for a period whilst it is refurbished, and there will naturally be at least a few days, if not weeks, between tenancies when the property is unoccupied.

Furthermore, your tenant might run into financial difficulties and be unable to pay the rent in full.

It is highly advisable to have a contingency fund in place for when this happens, as the buy to let mortgage will still need paying.

Landlords have many legal obligations

Though you own your buy to let property, your tenant has the right to enjoy ‘quiet occupation’ of the property – meaning that you cannot come and go as you please.

You must also keep your property safe and in good repair. This is another situation where a contingency fund is useful, as the rental income may not always cover repair costs and other emergencies.

In addition, your tenant is protected by law from discrimination, harassment and illegal eviction, among many other things. Be sure to read up on landlord law and to stay on top of new developments, and consult a legal professional if in doubt of anything.

Buy to let is not risk-free

Though it is considered quite stable when compared to more volatile assets such as stocks, property is still not without risk. Profit is not guaranteed and property management is typically far from smooth sailing.

Most investments are medium- to long-term, in order to give losses time to correct themselves, to allow inflation to reduce the real value of the mortgage debt and to give the property time to appreciate in value.

But by thoroughly planning and researching an investment, arming yourself with as much knowledge as possible and taking the required steps to protect yourself should you encounter difficulties, you give yourself the greatest chance of running a prosperous and rewarding buy to let business.

Written by Ben Gosling at commercialtrust.co.uk