How are buy to let mortgages calculated?
Two things determine the amount you can borrow for a buy to let mortgage:
Loan to Value (LTV): this is the amount of the mortgage, expressed as a percentage of the property value. E.g. 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.
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 significantly higher.
The rental income. Buy to let properties should be self-funding, i.e. the rental income will 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. This calculation is known as the rent to interest (RTI) calculation or debt service cover (DSCR) and varies from lender to lender. Therefore, you may find that the amount you can borrow from one lender differs from another based on this calculation.
Why use a broker?
There are many benefits to using a buy to let mortgage broker, but the two primary reasons many landlords do are cost and time.
While there are plenty of high street buy to let lenders, there are lots that borrowers cannot apply to directly (known as intermediary only). Whole of market brokers, like Mortgages for Business, have access to all the lenders and products you might otherwise not even know about! 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 buy to let investment works. Consequently, they’re accustomed to more complex circumstances, giving you a better chance of attaining the borrowing you require.
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!
Overview of process
First Step: whether or not you’ve found a property to purchase, you can come to us 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. Having an AIP also shows estate agents that you’re a serious and creditworthy candidate for purchasing a property.
Application: 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.
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 issue if they do occur. Your solicitor will let you know when it’s time to pay your deposit.
Completion: Once the deposit is paid 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!
Items to look out for when considering a BTL mortgage
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. 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 some quirky additional terms, such as exit charges that extend 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.