When it comes to investing in property, understanding the ins and outs of buy-to-let mortgages is key to success for property investors.
For any borrower, understanding how affordability and income play into what you can borrow is incredibly important. And as these rules are more stringent for property investors, it’s even more crucial to understand how this works when seeking buy-to-let mortgages.
Whether you want to buy your first property investment or expand your portfolio, make sure you take the time to research the products and deals on the market and how much you should be able to borrow.
How does stress testing work?
Stress testing was intended to ensure that borrowers could afford mortgage payments, even with increases to mortgage rates. But formal stress testing was scrapped from August 2022. So, how do lenders assess finances and make decisions on how much you can borrow?
Lenders need to comply with FCA guidelines, and the loan-to-income ratio remains in place. This is a measure used to assess how much money you can borrow for a mortgage based on your income, and it means you can’t borrow more than 4.5x your annual income.
What does this mean for property investors?
Residential mortgages are based on a borrower’s salary and expenses, while buy-to-let mortgages are based on the expected rental income of the property. Applications for buy-to-let products are also based on other criteria, including deposit amount, employment status, age, credit score and location.
In terms of rental income, lenders will generally want this to be at least 125% of the monthly mortgage payments, according to the Mortgage Advice Bureau. This is typically calculated on an interest-only basis. Some lenders may even require 145% or even more for buy-to-let mortgages, depending on their particular criteria.
If the rental value isn’t forecast to be high enough, the loan-to-value that your lender requires may be impacted. So, this could mean that you need to provide a larger deposit. Buy-to-let mortgages usually require a loan-to-value of 75-80%, which means you’ll typically need to pay at least a 20-25% deposit.
If you’re interested in taking out a mortgage or remortgaging, research various lenders and investigate the different products and offerings out there. A mortgage broker is particularly advantageous as they have an in-depth understanding of the mortgage market and can help you you find the best product for your circumstances.
What’s happening with buy-to-let mortgages?
Recent figures from Twenty7tec revealed March saw the highest-ever volume of buy-to-let mortgage searches in a single month on their platform. Some 347,419 searches for this were handled last month, which is a 12.3% increase on the numbers from February.
Nathan Reilly, spokesperson for Twenty7tec, said: “March 2023 saw overall mortgage searches records set and this was also true for the total number of Buy To Let mortgage searches which we handled. In fact, ten of our busiest ever 12 months for BTLs have been over the past year.”
This research shows that there’s strong demand for buy-to-let mortgages. Appetite among property investors has increased recently as the UK housing market and mortgage sector has stabilised.
The Bank of England’s base rate has increased in recent months, reaching its current level of 4.25% last month. Mortgage rates for buy-to-let products have increased at a similar rate to standard mortgages. But with borrowing more expensive than a year ago, there has been a rise in the number of people, including property investors and landlords, opting for cash purchases.
In recent months, mortgage rates have been falling. And now higher rates are expected to be temporary with interest rates set to dip, which is welcome news for anyone who might be set to remortgage or take out new borrowing soon. Many investors will likely be keeping a keen eye on the mortgage market for any shifts in the coming months.
