Our guide to buy to let mortgages income requirements

damianyouell Buy to let mortgages are designed for landlords intending to let their property to rent-paying tenants. Since buy to let mortgages are cornerstones for what are essentially business propositions, they differ substantially from regular residential mortgages sought by prospective owner-occupiers.

Our Guide to Buy to Let Mortgages Income Requirements is intended to explain the key features of this kind of borrowing, and share information on minimum income requirements. It is intended for both corporate and individual buy to let investors alike, whether you have a single let property or a whole portfolio of such properties.

Buy to let mortgages background

Specialist buy to let mortgages have been marketed only since 1996, but already comprise around 14% of new mortgages currently being granted – according to statistics provided by the Council of Mortgage Lenders (CML) last year.

With certain exceptions – where the property is to be let to a close family member when the mortgage is styled a consumer buy to let mortgage – buy to let or BTL mortgages are not regulated by the Financial Conduct Authority (FCA). The FCA’s objectives lie in regulating the mortgage market for homes occupied by their owners and not the business risks taken by buy to let investors.

Interest only mortgages

The majority of buy to let mortgages are interest only – monthly repayments cover the interest on the mortgage advance only, leaving the outstanding capital payable at the end of the mortgage term.

The business case typically rests on the fact that the let property is eventually going to be sold, with the release of sufficient funds for repayment of the capital balance.

To that extent, interest only buy to let mortgages represent a greater risk for both the lender and the borrower – is the value of the property going to be sufficient for repayment of the outstanding capital at the end of the mortgage term? This adds to the ongoing business risks of the BTL landlord generating a consistent income from tenants’ rents to cover the monthly interest repayments on the mortgage.

These additional risks also mean that interest only BTL mortgages typically attract a higher rate of interest than regular residential repayment mortgages.

Read Our Guide to Interest Only Mortgages for more information.

What are buy to let mortgages income requirements?

There are a number of buy to let mortgage providers in the UK and their income requirements and suitability checks may vary from one to another.

Generally, however, the following points will be considered by a lender to decide whether to accept your mortgage application:

Meeting minimum income requirements

  • most lenders insist on borrowers having a minimum annual income;
  • typically, this income threshold is £25,000 a year or more, but once again some BTL lenders have no minimum income requirement;

Your credit status

  • as with any mortgage application, your credit status is scrutinised by any potential BTL mortgage lender;
  • you need a healthy credit record – with evidence of your managing ongoing commitments to existing borrowing – on other mortgages, loans and credit cards, for example;

Loan to value (LTV) ratios

  • probably more important is the loan to value (LTV) ratio between the size of any buy to let mortgage advanced and the value of the property in question;
  • while it may be possible to achieve an LTV as high as 95% on the purchase of a home for owner occupation, for instance, buy to let mortgages are likely to have an LTV of 80% at best or even 60%;
  • in other words, the size of the deposit you’ll need could be anywhere between 20% and 40% of the value of the property;

Your homeownership status

  • the Money Advice Service suggests that you need to own your own home – whether mortgaged or not – to stand any success in securing a BTL mortgage;
  • many lenders insist that BTL borrowers are also already homeowners – ownership of a property offers further security and the possibility of that home being remortgaged if difficulties arise in meeting the financial obligations of a buy to let mortgage;
  • however, not all BTL lenders impose such a requirement;

As with any mortgage application, your financial status plays a critical part in the likelihood of success. Existing property ownership, income, and the size of the deposit you have to offer are all important considerations.

SPV limited companies

The potential credibility and status you offer may be greater if you are an established limited liability company with a proven financial track record. If you are a Special Purpose Vehicle (SPV) limited company – with the exclusive objective of holding let property – your prospects for a successful application may be higher still.

If you are unsure whether to apply as an individual for a BTL mortgage or as a limited company, we recommend you seek specialist advice.

What are BTL mortgage affordability tests?

Of course, any BTL mortgage lender is anxious to share your optimism and enthusiasm for the sound business case you make for owning and letting a particular buy to let property.

Along with buy to let mortgages income requirements, an affordability test for a BTL mortgage enables any potential lender to see just how viable a loan would be based on a number of important things.

Ideally, financial success rests on your generating sufficient rental income not only to cover your buy to let mortgage repayments but all the other operating costs faced by any landlord (landlord insurance, maintenance, taxes etc.), together with the aim of making a profit on your business venture.

The size of any mortgage you secure, therefore, is also directly related to the amount of rental income the property is estimated to achieve.

Lending criteria

Although the Financial Conduct Authority (FCA) does not regulate buy to let mortgages, the Bank of England’s Prudential Regulation Authority (PRU) has, from time to time, sought to impose limits on the lending criteria it expects mortgage companies to follow.

The current standards are set out in Supervisory Statement SS13/16, published in September 2016, which suggests that rental income on a buy to let property must achieve at least 125% of monthly mortgage repayments. The PRU has subsequently suggested raising this benchmark to 145%.

As an article in the money pages of the Daily Mail newspaper of November 2017 argued, however, the PRU’s guidelines do not appear to be set in stone.

Less than a year after the PRU published its requirement that rental income achieves a minimum of 145% of monthly mortgage repayments, a number of BTL mortgage lenders were already offering loans based on the lower target of just 125%.

BTL mortgages – next steps

Landlords investing in buy to let property are embarking on an undertaking that carries risks associated with any business venture. These risks are reflected in the ways in which applications for buy to let mortgages are considered by lenders.

At NeedingAdvice, we work with a number of key BTL mortgage lenders. Our expertise allows us to match you with the most suitable lender, based on the property you are buying, its estimated rental income, and your own unique financial circumstances. This gives you a better chance of being approved for a BTL mortgage compared with you approaching the first lender you find and whose lending criteria you may not match.