Last updated: 30th January 2019
The ability to borrow money to invest with is one of the best things about property – because using leverage compounds the benefits of capital growth when the market is rising.
By the end of this article, you’ll have all the knowledge you need to speak to a mortgage broker confidently about your options – and at the end, we’ll give you some more resources to check out.
Buy-to-let mortgages are available to most people who want to invest in property and are in a secure financial position.
There are hundreds of buy-to-let products available, and a good broker should almost always be able to place you with something.
However, you’ll have a wider selection of the market available to you – which will mean more choice, better rates, higher loan-to-value ratios, and so on – if your broker is able to tick certain boxes for you.
The first box to tick is having a non-property income of at least £25,000 – which can be a joint income if, for example, you and your spouse are buying the property together.
Your income isn’t a factor in how much you can borrow (like it is with a mortgage on your own home), but having this minimum level gives the lender confidence that you can keep up repayments even if there’s a problem with the property itself.
Different lenders have different “minimum income” requirements, but £25,000 is fairly typical.
The next box to tick is owning your own residential home. This is less to do with financial security (although it helps) than avoiding fraud: because buy-to-let lending criteria are more relaxed than residential, it’s not uncommon for people to get a buy-to-let mortgage on a property they actually want to live in themselves. Having your own home already reduces that risk in the eyes of the lender.
And the last major box is having experience as a landlord. Getting a mortgage for your first investment property is always the most challenging – especially if you’re trying to finance a more “advanced” investment like an HMO. But once you’ve owned an investment property for a year or so, you’ll be considered an “experienced landlord” and more of the mortgage world will open up to you.
Does that mean you can’t get a mortgage if you rent your home, or it’s your first investment, or you don’t have much in the way of earnings? Not necessarily – you’ll just have less choice, and the costs will likely be higher to reflect the higher risk to the lender.
Some lenders won’t lend to companies at all. Those that do have their own limited company range of products, all with their own rates and terms.
When it comes to qualifying for one of these products though, the lender will be looking at the same things as they would if you were borrowing personally. Typically, as long as the borrowing company isn’t a trading company (it exists purely to hold property), the lender recognises that the company is just a “wrapper” and will assess the circumstances of the directors when deciding whether to lend.
For typical mortgage products, lenders require the borrower to be a UK resident – which makes life tricky for expats.
More lenders are opening up to lending to expats than has been the case in recent years. Even so, the process can be lengthy, and fees tend to be higher because there’s so much more administration involved in verifying what you’ve told them and ruling out fraud.
And as always, criteria vary: some will only lend to expats who are resident in certain countries or who work for recognised global employers, while others will require accounts to be certified by specific firms of accountants.
The minimum loan size can also be higher for expats than UK residents, because mortgage companies want to lend a reasonably sized amount to justify the time put into processing the application.
So if you’re an expat, getting a mortgage is by no means impossible – but working with a specialist broker is essential.
The amount you can borrow on a buy-to-let property is determined by both its value and the rental income it brings in:
The maximum loan-to-value (the proportion of a property’s value that you can borrow) on a buy-to-let loan at the moment is 85%, and the most typical level is 75%.
So if you want to buy a property for £100,000, you’ll need to put down a £25,000 deposit from your own funds and they’ll lend you the rest. Of course, you can always borrow lower amounts – and as you get down to 60% loan-to-value and below, the interest rates often decrease.
Lenders use something they call “rental cover” to assess whether the investment is self-financing. Most buy-to-let lenders are regulated by the Bank of England’s Prudential Regulation Authority (PRA), who (as of January 2017) insist that the rent must cover at least 125% of the mortgage payment – assuming that the interest rate is at least 5.5%.
In other words:
The rental income must therefore be at least £429.68, or you’ll only be able to borrow a lower amount.
Different lenders vary in their criteria. While the regulations dictate that they need at least 125% rental cover, some lenders will go further and require 135% or 145%. The 5.5% interest rate may be lower, or higher. Sometimes they’ll tweak the tests based on your tax position and your other liabilities.
As you can tell, knowing how much you can borrow for any given property is far from straightforward – but a good broker will be able to help you.
When you take out a mortgage on a buy-to-let property, you can choose between repaying a small amount of the loan each month until you owe nothing at the end of the mortgage term (a “capital repayment” loan), or just paying off the interest each month so that at the end of the term you still owe exactly as much as you borrowed in the first place (an “interest only” loan).
Going “interest only” sounds risky, at first. After all, at the end of the loan term you somehow need to find the cash to pay the entire loan back – what if you can’t?
In fact though, most investors choose the interest-only option. Because you’re not paying off part of the capital too, your monthly payments are lower. That gives you more cashflow, which you can either re-invest in further properties or keep aside as an emergency fund.
Importantly, having an interest-only mortgage doesn’t mean you can’t pay off the capital: most mortgages allow over-payments, and you can always pay off chunks when you re-finance. Having an interest-only loan just means you’re not locked into a repayment schedule.
And at the end of the loan? Well, if you’re keeping the property for multiple decades, inflation will mean that the loan will be a much smaller proportion of the property’s value by the time you need to pay it back. You can easily sell the property, or sell some other investment you hold, to repay the loan.
There’s a huge amount to think about when deciding which mortgage payment to take out:
And they’re just the main considerations: there will be plenty more to think about depending on the specific circumstances of what you’re buying, and what you plan to do with it.
Some buy-to-let lenders allow you to approach them directly, while others insist you go through a broker.
However, we recommend you always use a mortgage broker. Now you’ve seen the range of different things you need to be thinking about, you’ll appreciate the specialist knowledge it takes to find the right product.
If you try to do it yourself, you could easily lose a deal by accidentally applying for an inappropriate product then being rejected – causing a delay that makes the seller pull out. There are normally non-refundable application fees, so it will cost you money too.
It’s also highly unlikely that even if you get accepted, you’ll have identified the product that works out the cheapest over the course of the loan, after taking all fees and charges into account.
And finally, a broker is immensely helpful when it comes to actually getting the loan through. Lenders are asking for more paperwork than ever, and a broker will help you through this process – saving your time and sanity – and be able to call the lender to iron out the inevitable challenges that come up.
When you’re looking at taking out a debt of tens of thousands of pounds, paying a few hundred pounds to a broker is nothing – and chances are it’ll actually save you money anyway.
Now you know the basics, extend your knowledge by checking out our best podcasts, videos and articles about mortgages.
And if you need specific advice, ask for help in the Property Hub forum – where several mortgage brokers regularly contribute.