The buy to let mortgage market is vast, with significant variances between lenders, products, interest rates and mortgage terms. Whether you are thinking of investing in your first rental property or are a seasoned investor looking for tailored guidance to improve or extend your portfolio, Think Plutus can assist.
Mortgage costs are the most significant expense associated with owning a rental property or adding new acquisitions to a rental portfolio. Our years of knowledge, expertise and commitment to remaining up to speed with developments in this fast-moving market perfectly position us to deliver sound recommendations and make your investments more profitable.
In this guide, we look at why an independent broker is essential to securing the most beneficial buy to let mortgage products and the services on offer.
The Importance of Buy to Let Mortgage Advice
Thousands of landlords rely on price comparison websites or published rate tables to make borrowing decisions. Unfortunately, this typically means missing out on the most competitive offers or remaining unaware of the exceptional value available from specialist buy to let lenders or niche providers operating outside of the mainstream.
When we consult with a new client, we get to know your objectives to align the suggestions we make with your priorities; ensuring you have full knowledge of all the potential solutions, the pros and cons of each, and insights into the suitability of any buy to let mortgage product you may be considering.
In terms of cost savings, a whole-of-market broker can signpost you to lenders you may not have heard of, or included within your comparisons, negotiating directly to secure the best possible terms and liaising closely between all parties until your financing agreement has been finalised and you are ready to move ahead.
Buy to Let Mortgage Borrowing Explained
For new or aspiring landlords, it may be useful to consider the nature of a buy to let mortgage to explain why this product varies so considerably from normal residential borrowing.
As the name suggests, a buy to let mortgage is a product designed to finance a property acquisition where the home is intended to be let to tenants on a profit-making basis. In most scenarios, it is not possible to finance a property you expect to live in with a buy to let mortgage. Likewise, you cannot let a property to a tenant if the home is financed through residential lending.
The primary reason is that Financial Conduct Authority (FCA) rules apply to residential mortgage products but not always to buy to let financing. FCA regulations only apply to rental properties where a certain proportion is purchased as a residence for the buyer or the tenant is a family member.
Buy to let mortgages may be relevant to a broad range of properties, although, in some instances, we may suggest a specifically designed product if this proves more appropriate. Examples of buy to let property acquisitions might include:
- Rental homes or apartments.
- Holiday homes intended to let.
- Accidental landlord scenarios.
The latter occurs when a homeowner has been unable to sell a property and decides to repurpose it as a rental home, potentially until the property market improves or as a long-term investment.
Other accidental landlord situations materialise when an owner has inherited a property.
In any of these positions, a buy to let mortgage may be the best-suited borrowing product either to purchase the property or refinance lending currently secured against it.
Buy to Let vs Residential Mortgages
Buy to let mortgages are normally more expensive in terms of interest charges and fees. This is because the risk profile of a rental property is naturally higher from the lender’s perspective. Risks include vacant periods where the landlord is not receiving rental income to cover the mortgage costs.
One of the most notable contrasts with a residential mortgage is that buy to let products are nearly always structured as interest-only. Each month the landlord pays the interest owing without including a proportion of the capital.
When the buy to let mortgage term ends, the full value originally borrowed becomes repayable. Lenders, therefore, require an exit strategy to indicate how the owner will finance the repayment – standard options include selling the property or remortgaging at that point.
This mortgage structure makes sense since the rental income should comfortably cover the interest payment, ensuring you, as a landlord, return a reasonable yield each month while the property appreciates in value.
Eligibility criteria for buy to let mortgages are also assessed differently than for a residential product. Rather than solely considering your income, age and outgoings, buy to let lenders will also require information about the projected rental income, alongside other relevant financial information.
Borrowing Thresholds for Buy to Let Mortgages
As in a residential mortgage, your borrowing capacity will rely on several aspects, including the forecast rental proceeds, the value of the property, and the deposit you have available. In most cases, you will need to demonstrate rental income of at least 25% to 30% higher than the monthly mortgage costs, although potentially more if you are a higher-bracket taxpayer.
The lender requires assurance that you will be able to maintain the mortgage payments and have sufficient rental income to do so while generating a profit margin to cover property maintenance and tax. This indicates that the investment is financially viable and of low risk.
While the specific eligibility criteria depend on the lender you select, the overall assessment process remains important. One of the first steps to working with the Think Plutus team is a discussion about your position to ensure we recommend lenders who we believe are well-suited and most likely to offer approval.
Income Calculations for Buy to Let Mortgage Products
As noted, a lender will wish to assess the projected rental income, calculating the returns you expect to make to ensure the property investment will return a profit. This evaluation usually looks at the income potential of the property, less the mortgage and running costs. Lenders will then divide that profitability by the required borrowing value to arrive at a ‘return on investment’ figure.
This may be indicative but acts as an initial appraisal to see whether the property will achieve a rental return of at least 125% or above the interest only mortgage payment. Lenders will then apply a stress test to see whether your borrowing would remain affordable should the rental income or interest rate change.
The yield from a rental property is a different metric and looks at the difference between the costs of the property and the income generated. A lender will calculate the rental yield, by dividing the total cost – i.e. the purchase value – by the annual rental income. Yields of 8% or more are typically seen as positive.
Although there is no standard minimum income required to qualify for buy to let mortgage borrowing, some providers will use one or the other of the above approaches and may apply predefined thresholds above which you must score to be made an offer.
Other mortgage lenders require all applicants to have a separate source of income with an annual minimum income.
Deposits in Buy to Let Mortgage Applications
Buy to let mortgage lenders will require a deposit of roughly 20% to 25%, with a normal maximum loan-to-value ratio of between 75% and 80% – dependent, of course, on the lender and their policies. These figures are a rough guide rather than a hard and fast rule since every aspect of buy to let borrowing depends on what a lender is prepared to offer and the way they view the risk attached to your application.
For example, a strong buyer with years of experience and a high projected rental yield presents a far lower risk than a first-time investor with an adverse credit score. The latter may be asked to put down a higher deposit to offset some of the risk the lender is accepting.
Some property investors choose to refinance other properties within their portfolios to access equity to use as a higher deposit. The norm is to find that the larger a down payment you can offer, the more acceptable your application is to a lender, and the more you can borrow.
However, as with all things mortgage-related, we recommend getting in touch with the Think Plutus team before making any decisions. We can help evaluate the total cost of borrowing, including refinancing to release equity, to determine whether this is the most favourable approach and whether you would indeed need a higher deposit to access the financing you require.
Buy to Let Mortgages and Credit Scoring
All of the above criteria are important in buy to let lender assessments, but they will also conduct credit checks on the applicant, irrespective of the rental yield available. Having a low credit score or adverse credit events on your record does not preclude any chance of approval but may impact the lenders we suggest or the mortgage products you are eligible for.
Many high street banks have more rigorous policies around bad credit, but there are often alternatives, such as specialist lenders who focus on applicants with bad credit or niche buy to let mortgage providers who do not base their lending decisions on credit scoring.
The nature, value and timing of adverse reports within your credit file may also make a difference. Less severe credit issues some time ago and of a minimal value will be far less impactful than, say, a property repossession within the last two or three years.
If you have experienced difficulties with your credit score, you may need to contribute a higher deposit or could potentially be offered a buy to let mortgage but with higher interest rates.
Contrasting Buy to Let Mortgage Advisers and Brokers
Although the terms ‘adviser’ and ‘broker’ are commonly used interchangeably, it is important to determine the difference and the status of any broker offering you advice or assistance. A buy to let mortgage adviser working on behalf of a particular lender or bank is not independent and can only provide information related to the products they are authorised to sell.
Independent, whole-of-market private brokers are autonomous. That gives us the flexibility to offer recommendations, support and factual information to inform your decision-making, with no affiliations or links to any lender.
Whole-of-market buy to let brokers exist to streamline your financing applications, advocate for your interests and ensure you have control over your borrowing while offering customised recommendations based on your key requirements.
The Role of an Experienced Buy to Let Mortgage Broker
As your private mortgage broker, our responsibilities are to ensure you choose the right buy to let mortgage, including limited company buy to let mortgages and SPV mortgages, make informed decisions about your borrowing options, and have complete oversight of the process. Investing in a property can involve large sums, and it is imperative you can see the bigger picture or have advance knowledge of possible stumbling blocks or issues, whether related to the property, your returns, or your mortgage borrowing.
Brokers do not sell you products, nor do we charge based on the amount you decide to borrow or the lender you choose to apply to. Think Plutus works on a fixed-fee basis to assure every client is assured of the full backing of our talented team without any risk that the costs associated with completing the process will increase or change.
Among the many services we offer and their benefits, we provide:
- Independent guidance, whether discussing different types of mortgage products, evaluating your overall property financing, or evaluating the efficacy of a particular property investment plan.
- Market research, assessing which mortgage and financing products currently available on the market are best aligned with your objectives and which may offer favourable rates or competitive product fees. Since Think Plutus is an independent and whole-of-market mortgage broker, we can suggest any buy to let product, any lender or any package of products we believe is the best solution for you.
- True like-for-like comparisons. One of the most common errors in mortgage financing we see is that when two products are not directly comparable – for instance, having different charging structures – borrowers make decisions based on the wrong figures.
- Application support. When you are ready to proceed, we ensure your application documentation is complete, addresses any potential questions we think your chosen lender might ask, and provide a full breakdown to expedite processing by the lender and sidestep any delays.
- Negotiation and lender liaison. The nature of buy to let mortgage borrowing means that many decisions are made at the lender’s discretion. As your broker, we liaise with the lender to keep up to date with progress made, address any issues or queries, and negotiate to ensure the rates and fees you are offered are competitive.
With an established network of reputable lenders and buy to let lending specialists, the personal level of communications we provide can often make a significant difference to the outcomes, where adding context to your application or providing background information can influence the decisions the lender makes.
Below we answer some frequently asked questions about working with a buy to let mortgage broker and applying for rental property financing. Should you have further questions or wish to begin a consultation to start looking for the right funding for your next property investment, please get in touch at your convenience.
Our contact page includes a simple enquiry form to help us collate some basic details, or you are welcome to call our office directly using the phone number provided.
Frequently Asked Questions: Using a Buy to Let Mortgage Broker
Can a Buy to Let Mortgage Broker Assist if I Am a First-Time Investor?
Absolutely – first-time landlords often find the buy to let mortgage market somewhat unwelcoming since many mainstream lenders impose minimum levels of experience for applicants to be eligible for their more competitive products.
Every property investor and landlord needs to start somewhere, and a broker can improve your borrowing prospects while ensuring you do not pay more than necessary for the financing you need.
Will I Be Able to Borrow Through a Buy to Let Mortgage Past Retirement?
Rental property portfolios can be a stable long-term investment, where rental yields and capital appreciation provide a steady income and asset base, often used to finance retirement or retained past retirement as a secondary revenue stream. While most lenders have policies stating that they will lend to applicants between upper and lower age thresholds, this is not universal.
For example, one buy to let mortgage provider might accept applicants aged 21 or above but require three years of financial records and income statements – meaning very few younger applicants would have the documentation to demonstrate their eligibility.
In contrast, other niche lenders may offer new buy to let mortgage products to any applicant up to age 80 and beyond, provided the financials make sense and you have a suitable deposit. Please get in touch if you would like further information about lenders with more flexible age-related policies.
How Can I Check if My Buy to Let Property Investment Will be Profitable?
The calculations we explained earlier should help you to assess the viability of your planned investment. Using rental yield and return on investment provides an indicative performance rating that you can compare against the normal standard of ‘good’.
If you remain unsure whether the costs of an interest-only buy to let mortgage will be manageable when compared to your anticipated rental income, please send us an enquiry, and we will arrange a good time to run through the figures with you.