What does a Buy to Let mortgage calculator do?
Our free buy to let calculator gives you quotes for BTL mortgage interest rates, monthly repayments, and rental yield estimations using basic information such as property value, monthly rent, and how much you want to borrow. It’s an essential tool for anyone looking to purchase or remortgage an investment property.
What is a buy to let mortgage?
A buy to let property is a property let or rented out to tenants and is a type of investment property. A buy to let mortgage is a loan secured against a residential investment property.
Do I need a buy to let mortgage to rent out a property?
Mortgage lenders assess the risk and affordability of buy to let mortgages differently from your home mortgage; therefore, it is almost always necessary to get a buy to let mortgage for an investment property. The only exceptions to this are: if you purchase the property outright in cash and do not need a mortgage or if your existing home mortgage lender grants you permission to rent out the property. Please note that you need to ask permission from your lender to do the latter and that not seeking approval can put you in breach of your mortgage contract, resulting in the lender calling in the loan early.
How are buy to let mortgages calculated?
While every mortgage lender has their own criteria for determining how much you can borrow, they all look at the following key factors when calculating a buy to let mortgage:
Loan to Value (LTV)
This is the amount of the mortgage, expressed as a percentage of the property value. For example, a 75% LTV mortgage on a property valued at £100,000 would mean borrowing £75,000. Generally, a lower LTV gives you access to more competitive rates and a more comprehensive range of lenders.
In the buy to let property investment market, 75% LTV is the most popular level to purchase at. Mortgage products do go up to 85% LTV, but you will have less choice and find interest rates, and therefore the monthly repayments, significantly higher.
The rental income
Buy to let properties should be self-funding - the rental income should cover the mortgage interest plus other costs associated with running the property. When lenders assess affordability, they calculate the mortgage interest payment and then require that the rent is a certain percentage higher to ensure sufficient income covers your costs.
What is interest coverage ratio?
Interest coverage ratio (ICR), also known as the rent to interest (RTI) calculation, debt service cover (DSCR) or “stress test”, varies from lender to lender. Mortgage lenders use this calculation to ensure that the expected rent will cover the mortgage interest and other costs associated with running a BTL property. Therefore, you may find that the amount you can borrow from one lender differs from another based on this calculation.
An example of an interest coverage ratio is 145% at a notional interest rate of 5.5%. For this calculation, the expected rental yield for the property must be enough to cover at least 145% of a notional 5.5% interest rate on the loan.
The level of ICR can depend on whether you’re a basic or higher-rate taxpayer and whether you’re investing in your personal name or a limited company. Therefore, we recommend speaking to an experienced broker to get the most accurate mortgage rate for you.
How much deposit do you need for BTL?
Buy to let mortgages usually carry different eligibility requirements than standard residential mortgages as they are higher risk for lenders. This means that applicants need to be able to put down a deposit of 25-40% of the property’s value.
What is the difference between a buy to let mortgage and a standard mortgage?
A buy to let mortgage is assessed on its profitability (the ability of the rental yield to cover the mortgage costs). Standard mortgages assess affordability based on your income less committed monthly outgoings.
That does not mean that your income plays no part in the affordability assessment for a buy to let mortgage. All BTL lenders need to be satisfied that should the property become void (not generating any rent), you will be able to cover the mortgage repayments. Some lenders require you to have a minimum income of £25,000, and others are slightly more flexible.
Other notable differences between buy to let and standard mortgages include:
Interest rates
Typically, interest rates are higher for buy to let mortgages than standard mortgages.
Arrangement fees
The arrangement fees associated with BTL mortgages are often slightly higher than when you mortgage your own home. Sometimes, you’ll find the fees expressed as a percentage of the loan amount rather than a flat price. E.g. 1% of the loan vs £995. Furthermore, it’s not uncommon for conveyancing/valuation costs to be slightly higher for buy to let mortgage applications.
How to compare BTL mortgage offers
There are three main things to consider when comparing buy to let mortgages, and the headline interest rate isn’t one of them!
Criteria - Lender criteria vary enormously from provider to provider. While you might be a textbook applicant for one, another wouldn’t even consider your application. So rather than starting with a rate you want, start with a lender that will likely lend to you to avoid disappointment.
Cost - The true cost of the mortgage is so much more than the interest rate. You should always consider the arrangement and valuation fees, and legal costs alongside the rate. We can help you compare products’ lifetime costs to ensure you secure the most financially efficient option.
Hidden stingers - Some products have quirky additional terms, such as exit charges extending beyond the fixed-rate period, which can catch you out financially. Ensure to carefully read over all the mortgage documentation or speak to a broker about whether there are any.
Other things to consider when comparing buy to let mortgages
How long do you want to borrow for?
The term of your loan will help determine the returns for the lender and the interest rates applied to it. Most BTL investors choose a loan term of 20-30 years. A longer loan term may help reduce monthly repayments costs, but you’ll pay more interest costs over the lifetime of the mortgage. A broker can help you work out what will work best for your circumstances and plans.
Are you looking for a fixed or variable rate?
BTL mortgages are offered at either fixed or variable interest rates. A fixed-rate means that your interest rate and monthly repayments will stay unchanged throughout the fixed term of your BTL mortgage. A variable rate is set by the lender and tracks against a standard base rate, so your monthly repayments and rate will fluctuate as the interest rate changes.
What initial period are you looking for?
Fixed-term and discounted interest rates keep payments the same for a prescribed amount of time (e.g. two or five years). How long you want to fix for is entirely up to you, and there are pros and cons to both short and long terms. Typically, these mortgages have Early Repayment Charges in place to put you off remortgaging early. If you’re unsure, speak to your broker about your plans with the property to help decide what the best length of fix might be for you. Keep in mind that once the fixed term is over, the interest rate is likely to increase significantly, which is why it’s crucial to remortgage on time!
How to get your buy to let mortgage in just four steps
Step One: Secure an AIP
Whether or not you’ve found a property to purchase, you can come to our mortgage brokers to secure an Agreement in Principle (AIP). This will give you a solid idea of how much you can borrow, the type of rates you have access to and whether a lender will accept you at all. An AIP also shows estate agents that you’re a serious and creditworthy candidate for purchasing a property.
Step Two: Application process
Once you’ve found a property, we can start the formal application process. We’ll collect lots of supporting documentation from you, including bank statements, proof of income etc. Once we submit the buy to let mortgage application to the lender, the underwriters will review the application, and a surveyor will value the property. If everything meets expectations, we’d expect your formal mortgage offer returned within four to six weeks.
Step Three: Solicitor checks/conveyancing
Mortgage offer in hand, your solicitor can carry out the necessary searches and work on the legal side of things. We’ll stay in touch with them to make sure everything is running smoothly and help resolve any issues if they do occur. Your solicitor will let you know when it’s time to pay your deposit.
Step Four: Mortgage granted
Once you pay the deposit and everything is in place, your solicitor will ask the lender to release the funds. Congratulations – you now own a new buy to let property!
Why use a broker for your BTL mortgage?
There are many benefits to using a buy to let mortgage broker, but cost and time are the two most important reasons.
Access to a wider range of BTL mortgage deals
While there are plenty of high street buy to let lenders, there are many mortgage lenders that you cannot apply to directly, called intermediary-only lenders. Whole-of-market brokers, like Mortgages for Business, have access to all the lenders and products you might otherwise not even know about, including these intermediary-only lenders.
This means that you’ll have a better chance of securing the most competitive and cost-efficient rate. Furthermore, these lenders are geared towards landlords and the way that buy to let investment works. As a result, they’re accustomed to more complex circumstances, giving you a better chance of attaining the funding you require.
Streamlined, efficient processes that save you time
Your time is valuable. Researching buy to let mortgage rates and lender criteria is time-consuming, and that’s before you even get to completing the application forms. For our expert brokers, knowing which lender and mortgage products are the most suitable for you is quite literally the day job! So, save yourself time and let us do the hard work.
The time-saving element goes well beyond the initial search; we’re a central contact for all involved parties and support you and your application right through to completion. Should any unforeseen issues arise, we’ll use our knowledge and experience to overcome them. In summary, we’ll be the experts, so you don’t have to be, and we’ll keep things moving, so you don’t have to!
