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Beginner’s guide to buy-to-let mortgage finance

6 April 2022

Nick Joelson

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What is a buy-to-let mortgage?

Buy-to-let (BTL) mortgages are specifically designed to purchase or remortgage property that is used as an investment vehicle for renting out to tenants.

There are two main types:

Unregulated BTL mortgage

BTL mortgages are unregulated by the FCA where tenants have no family ties to the landlord – in the majority of cases.

Regulated BTL mortgage

They are sometimes known as Family Buy-to-Let. The mortgage becomes regulated and subject to the same underwriting as homeowner mortgages when renting a property to a family member.

Why do I need a BTL mortgage when renting out?

A residential mortgage should never be used to buy a property to let. It would breach the agreement with the lender that the borrower is a resident. Lenders may or may not agree to switch an existing mortgage from residential to buy-to-let, where the borrower wishes to move to a new property and let their current property.

What are the differences between BTL and standard residential mortgages?

  • They each serve different markets and cannot be used for any other purpose.
  • BTL mortgage fees and interest rates may be higher to reflect increased potential risk and more complex underwriting requirements.
  • The majority of BTL mortgages are interest only. Capital is repaid on the sale of property or end of the mortgage. Some lenders offer interest-only and capital and interest options.

What deposit is required for a BTL mortgage?

Minimum deposits may vary between 20% and 40% of the purchase price or valuation depending on lender criteria with the property being offered as security and the borrowers’ circumstances.

How much can be borrowed?

Lenders may insist on mortgage applicants demonstrating a separate income stream. As a result, the amount available to borrow is dependent on three main factors:

  • The lender’s maximum allowable LTV
  • The rental income is at least a minimum 125% of the payrate (on a 5 year fixed rate product) of the monthly mortgage payments on an interest-only basis. This may increase to 145%, assuming a notional interest rate of 5.5%. The calculation is the ICR (interest cover ratio) and will vary from lender to lender. In simple terms, the percentage of rental income required will depend on the landlord’s experience and whether the property is being financed in the name of an individual, a limited company, or a limited liability partnership.
  • The lenders list acceptable property types: Single Let, House of Multiple Occupation (HMO) or Multi-Unit Freehold Block (MUFB).

Key points to consider when applying for a buy-to-let mortgage

  • Do you currently own property – residential or BTL or first-time buyer?
  • Age limits – start and end of term? 
  • Income – employed, self-employed, rental?
  • Credit record – credit history covering up to 6 years. 
  • Residency – UK National or Other?

What is a let-to-buy mortgage?

Let to buy means renting out a principal residence and purchasing a new one in which to live. It usually involves having two mortgages at the same time:

  1. The conversion of an existing mortgage to a buy to let mortgage allows the owner to let out that property. 
  2. Then a standard residential mortgage is taken out on the home, which becomes the new principal property. 

When looking at this as an option, you must check Consumer Buy To Let and FCA regulated lending rules with the existing mortgage lender.

At Landbay, you must meet two out of the three following conditions when remortgaging their current residential:

  • Must be buying an onward residential
  • Must have other BTLs in the background
  • Must have let the subject property for 24 months

However, if they purchase it into an SPV, we only expect them to have an onward purchase.

Essential points for advisers to consider when talking to landlord clients about eligibility

  • Age – minimum and maximum ages vary between lenders. 18-85 is typical—no limits in some circumstances.
  • First-time Buyers – Few lenders will consider first-time buyers, so you will need to research well.
  • Minimum income- amounts vary from lender to lender and can be discretionary based on experience.
  • Time in employment/self-employed, and where does the income come from? Is this acceptable or required?
  • Property Type- is it a single let, HMO, MUFB, standard construction?
  • Type of tenant and AST- some lenders don’t accept vulnerable tenants, corporate contracts etc.
  • Flats – how many floors in the block?
  • UK Residency – are they UK based, ex-pat or foreign investors.
  • Credit file – is it clean? Is there any adverse credit? It can affect lending decisions.
  • What kind of valuation does the landlord require? – Investment valuation or bricks and mortar.
  • Licencing or planning – Important that you know whether the property is subject to licensing requirements or local planning rules
  • Other BTL properties – Know many other BTL properties as this will have implications. 

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