A guide to buy to let mortgage requirements

Categories: buy to let mortgages | guides | buy to let mortgage guides

Buy to let mortgages are essential for UK landlords who either don’t have the full cash sum to cover a property purchase, or who want to make their cash lump sum work harder, by investing their money across multiple properties. 

These loans are accessible to a wide range of investors, but each lender applies their own “criteria” (rules) around the type of investor and property they will accept. 

The criteria is not a judgement of which applicant or property type is ‘good’ or ‘bad’, its more comparable to a business model each lender has. 

There are a huge number of lenders in the UK buy to let marketplace. With lists of criteria than run over a number of pages per lender, as a landlord or property investor you will be hard pushed to successfully identify which mortgage is right for you. That’s where a specialist broker like Commercial Trust comes in, we will can do all the necessary due diligence for you, as well as taking the work of applying off your shoulders.

This guide explains the criteria lenders use, including borrower eligibility, deposits/loan to values, affordability assessments, property types and documents that you may have to provide. It will give you an understanding of what you need to think about when you come to apply for a buy to let mortgage. 

Once you have put an offer on a property and are ready to find a mortgage, give our team a call on the Freephone number above, or enquire online.

Borrower eligibility

Across the buy to let mortgage lending industry, the following factors relating to a mortgage applicant can be considerations for lenders:

Minimum age

Technically you can get a buy to let mortgage from the age of 18 years, but, when you are a first time buyer landlord, lenders will look at your personal income and apply rules around affordability that are similar to a residential mortgage application – i.e. the mortgage loan you can get will be restricted to 4-5 times your salary. 

Given the cost of property in the UK, and the salary amount typical of someone age 18, this will often put applicants outside lender criteria.

There are lenders that don’t place these restrictions, so it’s not a complete deal-breaker, but those options are far fewer and outside the norm.

If you think you may struggle to get a buy to let mortgage due to your age and income, a possible solution would be to make a joint application with someone willing to be a party to the mortgage who is older with an income, or who has experience as a landlord.

Maximum age at mortgage term end

We receive many enquiries from older applicants, expressing concern about their ability to get a buy to let mortgage, due to their age. 

With a residential mortgage you may struggle to borrow if you are heading towards retirement as your income at retirement is traditionally set to reduce. However, the reality is that with a buy to let mortgage, the rent covers the mortgage payment. There are a lot of lenders who are very flexible on upper age limits, with instances where there is no limit at all.

A lender will want to see some kind of personal income, to ensure there is money to cover mortgage payments when a tenant moves out – in case you have a gap before the next tenant moves in, where there is no rental income. But, this needn’t always be a given amount, so pension income or income from the rent of another property you own may be sufficient.

Credit profile

Lending money considers the risk of it being repaid. A clean credit history is widely preferred, because that means you are good at managing your money and repaying debts, but some lenders will consider minor or historic adverse credit.

Other lenders have a business model and mortgage criteria specifically set-up to help people with adverse credit challenges. The best thing you can do if you are concerned about your credit profile is to get the help of a broker and be really specific and detailed on the details. 

Remember, brokers deal with all sorts of people every day, they aren’t going to judge you, it is their job to find a lender who can help you, or if you cannot be matched to a lender, to describe to you what position you need to get to in order to move forward with your plans – remember it is in their best interests to help you.

Residency status

Most lenders require UK residency. Some lenders will consider expat borrowers or foreign nationals with a UK credit footprint – this means you have some sort of strong financial link to the UK.

Remortgaging property as an expat is far easier than buying, because when you buy you have to have a solicitor in the UK and a solicitor in the country you are living in and the process gets complex. 

When you are buying buy to let property as an expat, you will need to be working for a reputable company that is easy to identify from the UK.

Remember too that you will have to send original versions of your ID (e.g. your passport) and proof of address documents (e.g. hard copies of bank statements, bills) to your broker, or the lender.

Income

There are large numbers of lenders who set a minimum personal income for applicants, but the same proportion who don’t, so don’t be concerned that this will hold you back, especially with a specialist broker like Commercial Trust.

You may see lender criteria which talks about the lender having “no minimum income” requirement. This means that whilst they cannot help if you literally have nothing coming in except the rent from the property you are buying or remortgaging, they are not saying how much you need in personal income. 

Remember, income can be from employment, but it can also be from a pension, from rent from another property, from investment income – so there is lots of flexibility. Where a lender wants some sort of income, they will want proof of it – e.g. bank statements that show it.

There are niche instances where a lender won’t ask you to prove income, but it is far less common.

Deposit and Loan to Value (LTV) requirements

The minimum amount you have to put down as a deposit on a buy to let mortgages is higher than standard residential mortgages. The absolute minimum deposit is 15% of the property's value. The number of lenders who offer this are very few in number.

If you are investing in a holiday let mortgage, the minimum is 20% deposit (80% loan to value).

With a 20% deposit there are more lenders who will offer a buy to let mortgage on a standard rental property, and then more again with a 25% deposit.

The more you put down as a deposit, typically the lower the mortgage interest rates available to you, so it does pay to put down as much as you can, as the difference in rate can be significant – you can get a feel for this by running different scenarios through our buy to let mortgage calculator.

Rental income and affordability testing

Buy to let lenders assess whether a mortgage will be affordable to you using calculation based on a “stress rate” and an “interest coverage ratio”, rather than a conventional income multiple (as with a residential mortgage). 

The “stress rate” used in the affordability calculation is specifically calculated and is greater than the actual mortgage interest rate of the mortgage you are applying for. 

The “Interest Coverage Ratio” (ICR) gives you a buffer of money between the rent you receive and the actual mortgage payment. A lender will only view a mortgage as affordable to you, where the rent you are getting (or will get) is greater than the monthly mortgage payment by a given percentage. That percentage can range from 125%-145% (but can be more).

Typical affordability calculations:

• Basic-rate taxpayers: 125% ICR using a stress rate of around 5.0–5.5% for a 5 year fixed rate, if the product is a 2-year deal (fixed or variable) it is typically higher.
• Higher-rate taxpayers: 145% ICR using a stress rate of 5.0–5.5% for a 5 year fixed rate, if the product is a 2-year deal (fixed or variable) it is typically higher.
• Limited companies: Often assessed at 125% ICR with slightly lower stress rates (e.g. 4.5–5.5%) for a 5 year fixed rate, if the product is a 2-year deal (fixed or variable) it is typically higher.

For example, a £150,000 loan at a 5.5% stress rate results in an annual interest cost of £8,250. To meet a 125% ICR, the required rental income would be £10,312.50 per year, or approximately £859 per month.

Top-slicing

Some lenders offer top-slicing, where personal income is used to supplement a shortfall in rental income. This is typically available to high-earning applicants with strong affordability and low personal outgoings.

Portfolio landlords

Landlords with four or more mortgaged buy-to-let properties are classified as portfolio landlords. Additional buy to let mortgage requirements may include:

• A full portfolio assessment, including individual property yields and overall portfolio loan to value
• A business plan or strategy document
• A property schedule and evidence of rental income
• Minimum yield thresholds, for example 5.5% gross rental yield across the portfolio

Property criteria

When it comes to the type of property you want to secure your borrowing against, you may think all properties are equal, but in fact there are properties that considered ‘standard’ versus those that are more specialist and as such are higher risk.

Standard properties

First and foremost, properties must be in lettable condition. So if it is a home a tenant will live in, there must be a functioning kitchen and bathroom and the property must be in good order in terms of health and safety and overall liveable conditions.

Where you are dealing with a home, in broad terms a standard property is a house with brick walls and a tiled roof. Flats are more of a grey area, because various things can make them non-standard in the eyes of a lender.

If your property needs work before it is fit for purpose, you may need to take out a bridging loan to get renovations done and then pay that off with a buy to let mortgage. Our team can help you arrange both financial solutions.

Specialist or higher-risk properties

The following property types are more specialist, so carry higher risks to a lender and will therefore require specialist products:

• HMOs (Houses in Multiple Occupation): Often (but not always) limited to experienced landlords; the maximum number of bedrooms varies by lender.
• Multi-Unit Freehold Blocks (MUFBs): Up to 20 self-contained units; often require specific experience and lender panel solicitors.
• Flats above commercial premises: Assessed on a case-by-case basis, due to increased risk of valuation issues or noise complaints. If you own both the flat and the commercial unit on the same title, you would need a semi-commercial mortgage, but where you just own the residential rental a buy to let mortgage is the right product.
• Short-term let or holiday let properties: Because the way these properties are let is so different to a standard long term let property, there are products set up specifically for them. Holiday let mortgage lenders do not all accept properties operated on a short-term let basis (aka an “AirBnB” style rental), so our broker team will help you navigate through this.

Some examples of factors that make a property non-standard are described below, but, if your property has any of these features, as a specialist broker we are in a great position to find you a lender.

Flats

• Studio flats: some lenders have a minimum floor area requirement, usually 30–35 square metres.
• Ex-council owned: not all lenders will accept ex-council owned properties.
• Large blocks: if a flat is in a building comprising many floors this will be considered more specialist.
• Deck-access: this is a walkway along which the front doors of multiple flats are accessed and makes the building more specialist.
• Short leases: if a flat is owned on a leasehold basis (meaning the exterior of the building is owned by someone else) and the duration of the remaining lease is less than 80-85 years the number of lenders who will accept it will reduce, at less than 50 years the list of lenders will be even shorter still.

Houses

Lenders are far more flexible with houses, but there are a few things to look out for:

• Areas of flat roof: if the house is the only one in the area with large sections of flat roof, some lenders will not accept it.
• Close to a petrol station: if the house is close to a petrol station, it will fall outside some lender’s criteria, due to the risk of fire.
• High proportion of council housing: where your house is the only privately owned property amongst council houses, some lenders will not take it on.

Documents

When you apply for a mortgage, the lender may require some of the following documents from you:

• Lender’s application form 
• Property portfolio schedule (portfolio landlords only)
• Assets and liabilities statement (portfolio landlords only)
• Direct debit mandate
• Schedule of works (Bridging loans only)
• House of Multiple Occupation (HMO) licence (HMOs only)
• Right to reside /remain details (Foreign nationals)

And sometimes:

• Proof of identity
• Proof of address
• Proof of income
• Tenancy agreement

Smooth your path to completion with our help

For a stress-free journey from application to completion, you can get the specialist mortgage brokers at Commercial Trust to do all the work for you. We will find a lender and steer you through the buy to let mortgage requirements. 

You can talk to us from the comfort of your sofa, as we operate via the telephone and by email. Let us organise everything for you, so you avoid all the hassle, admin and chasing up.

Call on the Freephone number above, or enquire online, when you have an offer accepted on a property and are ready to apply.