BUY TO LET MORTGAGES
If you are thinking about buying a property to rent out to tenants then you need a Buy to Let Mortgage.
Buy to Let Mortgages work differently to your standard home owner mortgage. They require a higher deposit and normally come with higher interest rates. We would advise that you have a 25% deposit before considering a Buy to Let Mortgage.
If you are new to the rental market or already have a rental property we can help you.
CAN I GET A BUY TO LET MORTGAGE?
If you are considering a Buy to Let Mortgage you normally have to already own a home, although some lenders can consider first time buyers, and will require a deposit of around 25%. if you have a good credit history this will make it easier.
Buy to Let Mortgages stamp duty rates are also slightly different to a residential property and would need to be factored into your budget.
HOW MUCH CAN I BORROW, AND WHAT IS THE LENDERS STRESS TEST?
Lenders look at the monthly rental income your property will generate rather than your income. Proof of another source of income will also be required though.
The stress test is the calculation lenders use to determine how much they will lend to the borrower. Here is an basic explanation of how it is calculated.
Lenders take the mortgage interest payment based on a certain interest rate, then require that the rent covers this payment with something to spare. The exact calculation varies from lender to lender, and even from deal to deal.
As an example, the lender may say that the rent needs to cover the mortgage interest payment assuming an interest rate of 5.5% (even if this is not the actual rate the borrower will be paying) with 125% coverage (officially called the Interest Cover Ratio or ICR).
Putting this into a real life example, if a borrower is taking a mortgage of £100,000 then the monthly interest payment based on a rate of 5.5% will be £458 per month. However, as they need the rent to be 125% of this figure, the rental income would actually need to be £573 per month for the numbers to work.
For quite a few years now, the average stress test used by buy to let lenders has been 125% at 5-5.5% but this is changing due to higher interest rates.