Buy-to-let mortgage eligibility
Before purchasing a buy-to-let with a mortgage, you’ll need to meet the lender’s eligibility requirements. With that in mind, you may be wondering about their criteria and how it all works. Here, we look at buy-to-let mortgage eligibility to give you a better idea of what to expect when applying.
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
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:
- One to three months of payslips
- Tax returns 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, updating personal details and making sure all repayments are made on time.
Once you’ve passed the personal eligibility checks, the lender will conduct a survey to value 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. At Molo, we use automated valuations (AVM) where possible to save on both time and cost.
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 don’t pay back any of the borrowed amount. This will likely keep payments down and increase any profit from the 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.
Other product types and repayment methods are also available and can be considered by lenders.
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 can be a faster and simpler way to invest in property. If, however, you’re unfamiliar with BTL mortgages, going down the online-only route might seem a little daunting.
Therefore, you could use an online lender, like Molo, 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 the more important things like 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.
