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If you want to buy a property with the intention of renting it out, you will require a specialist mortgage, known as a buy to let mortgage.
Buying a property to rent out can offer the opportunity to benefit from capital growth on the value of the property, as well as income from rent payments.
Unlike residential mortgages where lending is assessed on an applicant's salary and credit status, criteria for buy to let lending is treated on a different basis. Mortgage lenders will apply a rent to interest (RTI) cover calculation which basically means a borrower must be able to show they can get enough rental income from the prospective tenant to cover the interest repayments on the mortgage.
RTI cover calculations will vary depending on which BTL lender you are dealing with, however typically rental income will need to be 145% for standard buy to lets and 170% for Houses in Multiple Occupation.
To all intents and purposes, a buy to let mortgage operates in a very similar way as a standard residential mortgage. You can choose from a range of buy to let mortgage offers, including fixed rate, variable rate, and tracker mortgage deals. However, buy to let mortgages can differ from residential mortgages in several key ways:
Buy to let minimum deposits – In general, the available loan to value (LTV) on buy to let property purchases is lower than those available for equivalent value residential purchases. While residential mortgages of up to 95% loan to value (LTV) are available through the Government’s Help to Buy scheme requiring just 5% deposit, the minimum deposit required for a buy to let mortgage is usually around 20% to 25 % of the property’s value.
Buy to let fees - Arrangement fees on buy to let mortgages can be a lot higher than on a residential mortgage.
Buy to let interest rates – The interest rates charged by mortgage lenders on buy to let mortgages tend to be higher.
Proof of rental income – One of the key areas of difference between a buy to let mortgage and a mortgage on your home is how affordability is assessed. One of the main things a buy to let mortgage lender will consider is how much rent you are likely to be able to charge on the property you intend to purchase.
