Buy-to-Let Mortgages: Requirements and Eligibility Explained

Understanding Buy-to-Let Mortgages

A buy-to-let mortgage is usually offered as an interest-only product. This means that a lender will need to undertake an Interest Cover Ratio (ICR) test. A lender wants to know if the rental income will cover the mortgage payment, plus another amount to cover other costs. This test will look at your property’s rental income, to see if it covers 125-145% of the loan repayments. 

The ICR is a percentage of the predicted monthly rental income, about the monthly interest payment. It also considers possible future interest rate increases, using a "notional" interest rate of between 5% to 8% (or sometimes higher). Lenders want to ensure you are more than comfortable paying the mortgage payments. 

Rental yield is the return you make on your let property. Landlords use rental yield to monitor the value of their property investments and portfolios. To calculate rental yield, you look at the annual rental income from the property as a percentage of the purchase price of the property or a current market value.

For example, if your let property gives you an annual rental income of £9,000 and the purchase price/current value is £200,000 your rental yield would be 4.5%. This gives you what’s called ‘gross’ yield but don’t forget you also need to take into account any other costs you may have such as insurance, mortgage payments or maintenance to give you a ‘net’ yield

Lenders will also require a minimum deposit amount, which ranges from 20% to 40% of the property's value. Typically, this range varies between lenders, a buyer's financial circumstances, and the proposed rental income projections. 

Even more so than with a regular mortgage, a strong financial profile is vital when applying for a buy-to-let mortgage. 

A lender will analyse your:

1. Credit score 
2. Existing debt 
3. Income stability

Buy-to-Let Mortgages Requirements

The requirements for a buy-to-let mortgage are very strict:

• Location, location, location: A property’s location will help dictate if there is going to be a high demand for rentals. Location is also an important factor in relation to what type of rental you are going to offer. For example, renting to holidaymakers or students is considered more risky as it can be seasonal. Plus, there is a higher chance of extra costs for you due to potential damages. 
• Property value/rental income: A lender will consider the Minimum Rental Yield of your property. This is its rental amount potential, which is generally expected to cover mortgage repayments. You can usually get a predicted amount for your property type and location from an Association of Residential Letting Agents registered letting agent. 
• Condition: Most lenders have strict preferences when it comes to the property types they will finance. For example, for buy-to-let mortgages, lenders might not finance non-standard construction properties. 

Unexpected property expenses can pop up all the time. A solution? Having a contingency fund. This allows you to cover repairs or periods of vacancy. This buffer shows a lender you can cover these costs alongside mortgage payments during challenging times. 

Tax implications are something you need to also consider. Capital Gains Tax on buy-to-let second properties is 18%. However, for higher-rate taxpayers, it’s 28%. Whereas the amount of income tax due will depend on your tax bracket. 

Mortgage interest tax relief comes in the form of a tax credit. This is based on 20% of the interest on your loan payments. 

Ensure you take into account how much tax you are going to have to pay when calculating your rental potential profits.

Legal matters when renting is another important consideration. We recommend having a bulletproof tenancy contract to help mitigate the chances of running into legal trouble. A lawyer can help you draft one. 

In addition, be aware of your responsibilities as a landlord. This includes upkeep of the property, and its appliances, as well as listening to your tenants’ concerns. 

Renting can be complicated. That’s why we highly recommend seeking professional legal and financial advice.

Expert Tips for Successful Buy-to-Let Investments:

Following these tips will help ensure you have a successful buy-to-let property investment!

• Ensure you analyse the property’s location. Study the price of other rentals in the area. Visit a nearby letting agency for more information on local rents. Chat to locals and possibly town councillors to see if any upcoming developments could affect your rental. For example, maybe a large multinational company is arriving in the area that could bring more jobs, and with it more demand for rentals. 
• Understanding your target market is important. If you want young professionals, consider buying in a city. However, if you want a family, perhaps a suburb is a good option. 
• Properly screening your tenants is also a good idea. Check their previous landlord and work references, do a background check, and meet them in person if possible. A good tenant equals reliable rental income and reduces the risk of property damage. 
• Consider using a tenant letting agency. While it will eat into your profits, there are tons of benefits. For one, it saves you time as they will find the tenants, ensure they pay their rent on time and help with inspections and upkeep of the property. However, if your goal is to make as much profit as possible, you might want to consider doing it all yourself. 

In conclusion, opting for a buy-to-let investment property is a great idea. It does come with the requirement for lots of research, planning, saving, and sacrifice. It’s vital to consider everything including legal, tax, and financial aspects. 

If you are ready to take the next steps in securing your buy-to-let mortgage, get in touch today to speak to an adviser.

Most Buy to Let mortgages are not regulated by the Financial Conduct Authority.

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

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