A Comprehensive Guide to Buy-to-Let Mortgages
By Raheel Butt, Head of Underwriting – Buy-to-Let, MT Finance
What is a Buy-to-Let Mortgage?
A buy-to-let (BTL) is a mortgage taken out when an individual purchases a residential property specifically to rent it out to tenants rather than live in it themselves. Unlike a residential mortgage, a BTL is specifically designed for investment purposes, offering investors the potential for both rental income and capital appreciation over time. Types of BTL properties include standard residential properties, houses in multiple occupations (HMOs), student lets, and holiday lets.
How does it work?
A BTL operates similarly to a standard residential mortgage with key distinctions in how they are financed, taxed, and regulated. A BTL application will often follow a standard fundamental process – an investor purchases a property using a combination of their own capital (the deposit) and borrowed funds (the mortgage), then lets the property to tenants who pay rent. The rent should ideally cover the mortgage repayments, associated costs, and potentially provide additional profit. A successful BTL is largely dependent on positive cash flow, where rental income exceeds expenses, and the potential for capital growth as property values increase over time.
Features of a Buy-to-Let
When considering a BTL mortgage, it is essential to understand how it differs from a standard residential mortgage. Key features of a BTL include:
- Rental income focus: lenders primarily assess affordability based on the potential rental income of the property, not solely on the borrower’s personal income. The rental income must typically cover a certain percentage of the monthly mortgage repayments (Interest Coverage Ratio – ICR) often 125-145%.
- Larger deposits: BTL mortgages generally require a larger deposit compared to residential mortgages, often ranging from 25% to 40% of the property’s value.
- Higher interest rates: interest rates on BTL mortgages tend to be higher than those on standard residential mortgages, reflecting the perceived higher risk.
- Interest-only options: many BTL are offered on an interest-only basis, meaning that monthly payments cover only the interest, with the capital repaid at the end of the mortgage term.
- Specialised lending criteria: different rules apply for different property types like HMOs, multi-unit properties, limited company purchases, and other specialised BTL investments.
- Affordability calculations: lenders use specific calculations, such as the Interest Coverage Ratio (ICR), to determine affordability. This ensures that the rental income is sufficient to cover mortgage repayments.
Affordability assessment
BTL affordability assessment differs significantly from residential mortgages. While residential mortgages focus on the applicant’s personal income and expenses, BTL primarily assesses the property’s ability to generate sufficient rental income. Lenders use the ‘rental coverage ratio’ or ‘interest coverage ratio’ (ICR) to determine affordability. This calculation typically requires the expected monthly rental income to cover 125-145% of the monthly mortgage payment, depending on the lender’s criteria and the borrower’s tax status.
Factors influencing affordability assessment includes:
- Rental income verification: lenders require a realistic rental valuation, often obtained through a surveyor or letting agent.
- Stress testing: lenders apply a ‘stress test’ by calculating affordability based on a hypothetical higher interest rate (typically 5.5-7%) to ensure the investment remains viable if rates increase.
- Personal income considerations: while the primary focus is on rental income, many lenders also require borrowers to have a minimum personal income (often £25,000-£30,000) to demonstrate financial stability.
- Background portfolio assessment: for portfolio landlords (those with four or more mortgaged BTL properties), lenders will review the performance of the entire portfolio.
- Tax implications: following tax changes in recent years, lenders now factor in the impact of reduced tax relief on mortgage interest for higher-rate taxpayers.
Eligibility criteria – who can get one?
With BTL mortgages becoming increasingly popular, anyone can theoretically apply for one. However, many lenders have specific eligibility criteria which may include:
- Age requirements: most lenders require borrowers to be at least 21 years old, with maximum age limits at application or the end of the mortgage term varying between 70-85 years.
- Credit history: strong credit history is essential; however, some lenders may take a view on cases with adverse credit issues.
- Income thresholds: most lenders set minimum income requirements, typically £25,000-£30,000 annually, regardless of expected rental income.
- Existing property portfolio: lenders may assess your experience and track record as a landlord.
How specialist lenders can help
Specialist lenders play a crucial role in providing specialised BTL mortgages for a diverse range of borrowers’ needs that may be overlooked by traditional lenders. Many specialist lenders offer:
- Tailored products: many lenders offer a wider range of specialised products, catering to specific needs and circumstances including foreign nationals, portfolio landlords and complex property types
- Flexible criteria: most specialist lenders have more flexible lending criteria than traditional lenders, particularly for challenging borrower circumstances.
- Expertise: they possess in-depth knowledge of the BTL market, offering expert advice and guidance. Typically employing manual underwriting to assess each case on its individual merits.
- Complex property types: specialist lenders often finance non-standard properties that traditional lenders avoid, such as refurb developments, HMOs, multi-unit blocks, semi-commercial premises, or non-standard construction.
- Higher LTV options: while mainstream lenders typically cap at 75% loan-to-value, some specialists offer higher LTV ratios for the right applicants.
How MT Finance can help
At MT Finance, we recently launched a brand-new tier 2 product to cater to a wider range of customer profiles. Additionally, we provide specialised BTL mortgages for standard residential properties, HMOs, MUFBs and semi-commercial properties. Guided by a streamlined process, a hands-on service, and a flexible approach to underwriting, our BTL products are designed to deliver tailored solutions with ease. Key features include:
- Up to 80% LTV
- ICR from 125%
- Minimum value £100,000 (outside of London)
- England & Wales only
- Individuals and limited companies
- Adverse credit considered
- 10 beds maximum
- 12 months experience as a landlord
Find out more
If you would like to find out more about our buy-to-let products then we’d love to hear from you. Simply contact us via our online form and a member of our team will get back to you shortly.