What you need to know about buy-to-let eligibility

Posted by Simon Banks, December 8, 2021

What you need to know about buy-to-let eligibility

Buy-to-let mortgage eligibility

Buy-to-let is traditionally a popular investment method in the UK. With the opportunity to earn high yields and see the property value grow over time, there’s both short and long-term rewards not found with many other types of investing. Nothing is a given, of course, and you need to do your research before investing. But if you do go down the buy-to-let route, you might have some questions regarding buy-to-let (BTL) eligibility criteria and what you need to get a mortgage. That’s the purpose of this guide, which has everything you need to know about BTL eligibility. 

Different types of BTL eligibility criteria

Buy-to-let lending criteria varies from lender to lender, but there are some key similarities to look out for, no matter who you borrow with:

  • Amount you wish to borrow
  • Size of the deposit
  • Type of property
  • Achievable rental income
  • Your credit rating
  • Employment status
  • Annual income

What does that look like in real life? One lender might be happy to lend for buy-to-let properties but require the investor to pay a 25% deposit on a property older than two years. The rental income will also likely need to earn at least 125% of the mortgage annual interest rate. 

How to prove your buy-to-let mortgage eligibility

Lenders should display their mortgage eligibility requirements on their websites so you can check if you meet the criteria. Alternatively, if you’re using a broker, they will look for a suitable buy-to-let mortgage for you on your behalf using the information provided.

When it comes to applying for a mortgage, the lender asks for specific personal documents. These include: 

  • Three to six months of payslips
  • Two years accounts if you’re self-employed
  • Address history
  • Expenditure, including debts and daily spending
  • Three to six months bank statements 

You can also expect the lender to perform a credit check to see your credit rating. The higher your score, the more likely you will qualify for lower interest rates. If, however, you need to improve your credit score, you can take actions such as registering for the electoral roll, reducing your credit to debt ratio and updating personal details.

Once you’ve passed the personal eligibility checks, the lender will likely survey your property to see if it’s worth the amount you’ve agreed with the vendor. Surveys are performed electronically or physically by a surveyor employed by the lender. Sometimes you’ll need to pay for the survey, but it may also be included free of charge.

Buy-to-let affordability

Buy-to-let mortgages differ from residential ones. The loan is usually interest-only for starters, meaning you pay the interest each month but not the amount borrowed. This keeps payments down and significantly increases the likelihood that you’ll profit from the monthly rental income.

To get an interest-only buy-to-let mortgage, you will need to prove that you can pay the loan amount back in full at the end of the mortgage term. Investors usually do this through the sale of the property. The average mortgage term is 25 years. 

Lenders also give more weight to the property’s rental performance than they do your personal finances. As a rule of thumb, they expect landlords to earn at least £25,000 per year. But since January 2017, the Prudential Regulatory Authority (PRA) has required lenders to conduct stricter stress tests on landlords and factor in the harsher buy-to-let environment in order to avoid risky mortgage agreements.

Part of this is interest cover ratio (ICR), which is the minimum ratio between the expected rental income of the property and a notional interest rate.

How does that work?

If you’re borrowing £150,000 at 3.5%, then the yearly interest rate is £5,250, and the rental income would need to be at least 125% of that amount. That means you would need to achieve at least a monthly income of £547. 

Online mortgages and BTL criteria

You can get a buy-to-let mortgage entirely online, which is a faster and simpler way to invest in bricks and mortgages. If, however, you’re unfamiliar with BTL mortgages, going down the online-only route might seem a little daunting. 

Therefore, you should use an online lender who is clear and transparent about eligibility and is easily contactable should you need any further advice. Most online lenders even have a chat function on their website, so you can get the info you need quickly. 

Using an online lender means you can apply without booking appointments or submitting copious amounts of paperwork. Everything happens digitally, so you can get access to the amount you’d like to borrow faster and start thinking about letting the property. 

Final words: buy-to-let mortgage eligibility

Mortgage eligibility and stress tests are designed to protect borrowers. The measures are put in place to ensure that you can borrow with peace of mind and don’t take on too much financial responsibility. If you pass the eligibility criteria and stress test, you can look forward to owning a buy-to-let property and hopefully turn it into a good investment that offers short and long-term gains.

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