If you’re thinking of buying a property to rent out, the amount you can borrow will usually be based on your expected rental income, rather than other income.
Rather than focusing mainly on your salary or other income, along with your outgoings, as they would if you were applying for a standard residential mortgage, lenders will want to know how much rent your buy-to-let property is likely to generate when deciding how much you can borrow. Here’s what you need to know.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
What affects how much I can borrow for a buy to let mortgage?
There are a few factors that will typically determine how much a lender will be willing to let you borrow to fund your buy to let property purchase.
The most important one is the amount of rental income you expect to earn from tenants renting the property, as this will be used to cover your monthly mortgage payments.
Lenders usually expect your rental income to be equivalent to at least 125% of your mortgage payments, but some require it to be 145% of your payments. This is so that landlords have enough income to cover things like maintenance costs and service charges, as well as any ‘void’ periods when you might not have tenants. If you’re not sure how much rental income the property you want to buy can achieve, it’s a good idea to speak to local lettings agents and find out how much similar properties are let out for.
Some lenders may take other income sources into consideration as well, but the anticipated rental income is usually what they’ll base their affordability calculations on. They will want to see you have some other income coming in though, and will also want to check your credit record, to see how you’ve managed debts in the past. Your score will be higher if you have always managed to stay on top of your debts, for example, whereas it will be lower if you’ve missed any repayments or exceeded your credit limit. It’s a good idea to check your credit score yourself before you apply for a mortgage, so you can identify any ways you might be able to improve it. Find out more in our guide Seven steps to improve your credit score.
Another important factor is how much you are able to put down as a deposit on the property. Whereas residential mortgages can be offered if you have a deposit as low as 5% of the property value, buy to let mortgage lenders will usually expect you to put down at least 20% or 25%. This is because, from their perspective, a buy to let mortgage is much riskier than a residential mortgage.
Bear in mind that arrangement fees often tend to be higher on buy to let mortgages as well – normally these will be expressed as a percentage of the mortgage, so it’s well worth crunching the numbers to see how much you’ll have to pay.
If you’d like to see how much you might be able to borrow for a buy to let property, simply enter your expected rental income in our buy to let mortgage calculator to get an estimate.
Other affordability checks
Affordability tests, designed to check that borrowers can not only cover their mortgage costs now, but also if rates rise in future, changed in August 2022. This has potentially made it harder for buy to let investors to borrow the amount they need. Prior to the changes, the ‘stress’ interest rate used was typically three percentage points higher than the ‘reversion rate’, usually the lender’s standard variable rate, that borrowers revert to when their mortgage deal finishes, unless they remortgage.
This has now been scrapped, so that lenders can apply a stress interest rate of 1% or more above the reversion rate. However, following several increases in the Bank of England base rate over the past, many lenders have chosen to introduce much higher stress rates, sometimes up to 8%, which has a significant impact on how much buyers can borrow.
What else do I need to know about buy to let mortgages?
Unlike most residential mortgages, buy to let mortgages tend to be arranged on an interest-only basis, meaning your mortgage repayments only go towards paying off the interest built up on your loan, and not the capital you’ve borrowed. At the end of the term, you can then either remortgage the property, pay off the capital with your savings, or sell the property to repay what you owe.
For a comprehensive guide to buy to let mortgages, including all the key differences to residential mortgages, read our guide Understanding buy to let mortgages. If you are interested in buy to let but don’t know if it’s the right choice for you, read our article Is buy to let a good investment? which weighs up all the pros and cons.
You can find out more about all the different mortgage options that may be available to you, and how they compare, in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
How to borrow more
If you already have a buy to let mortgage and want to borrow more, speak to your lender and see whether they will allow you to do this. If, for example, you want to borrow more to make property improvements that will boost the amount of rent you’re likely to receive, they may well be happy to let you do this, provided you meet their affordability criteria.
The amount you can borrow on a buy to let mortgage is usually linked to the rental income you expect to receive. However, as previously mentioned, some lenders look at both the property’s rental income and your earned income, which might enable you to borrow more. If your existing lender won’t allow you to borrow more, and you’re not tied into your current deal, you may want to remortgage to an alternative lender that takes a more flexible approach.
Always think very carefully whether you should max out your buy to let borrowing. The bigger your mortgage is, the higher your monthly payments will be, which will mean any void periods you might have will have more of a financial impact. Seek advice if you’re not sure how much borrowing more will cost, or if you need help working out whether you should stick with your current lender or move elsewhere.
How can I get the best buy to let mortgage deals?
If you are interested in buy to let but don’t know if it’s the right choice for you, read our article Is buy to let a good investment? which weighs up all the pros and cons.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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