Buy-to-let mortgage lending criteria have got tougher in 2016, so if you’re looking for a landlord mortgage, what requirements will you now have to meet?
Since the beginning of the year, banks including TSB, Santander and Nationwide have revised their buy-to-let lending criteria, making it a little more difficult for landlords to get mortgage approval.
Add to this the higher level of stamp duty on second homes introduced in April 2016, and it seems like the year’s got off to a tricky start for the UK’s landlords.
If you’re considering investing in a rental property, here’s what you need to know about securing a mortgage, bearing in mind that requirements will vary from lender to lender and also depend on whether you’re already a landlord.
Rough guide to 2016 buy-to-let lending criteria
Loan to value (LTV) ratio
This is how much you can borrow in relation to what the property’s worth. Buy-to-let lenders usually offer maximum LTV ratios of around 80%, although many lenders are now reducing this to 75%. This means that if the property’s worth £200,000, a lender may be able to offer you a loan of up to £150,000.
Rental cover requirements
To make sure you can afford your buy-to-let mortgage, the lender will look at the relationship between your rental income and your mortgage repayments.
Generally, lenders ask for the rental income to be around 125% to 130% of the amount you pay for your mortgage each month, but in 2016 some lenders have upped this to as much as 145%. This means that if your mortgage repayments are £500 a month, for example, you’d need a rental income of at least £725 a month to meet a 145% cover requirement.
Minimum gross income
Your gross income (your pre-tax salary) is sometimes taken into account, particularly if you’re a first-time landlord. The minimum income requirement is usually £25,000 for a buy-to-let mortgage application. Besides the income requirement, you’ll also have to meet other affordability criteria set by the lender.
If you’re self-employed or a business owner you can still get a loan, but the lender will usually require you to have a minimum trading period, perhaps of one or two years.
Some mortgage lenders require first time landlords to be homeowners, and to have paid their mortgage without any problems for at least 12 months.
The minimum term (the length of the mortgage) is usually around five or six years, and the maximum term is usually around 25 to 40 years for buy-to-let purchases.
So which criteria have become stricter?
In January, TSB increased the interest rate used in their buy-to-let affordability assessment, meaning that landlords borrowing over 65% of their property value now need to be able to afford their mortgage (and meet the rental cover requirements) if rates go up by as much as 5.5%.
Santander lowered their buy-to-let loan to income cap, from a maximum of 5 times gross income to 4.45 times income. This means that, for example, if you have an income of £35,000, your loan would previously have been capped at £175,000, but it’s now capped at £155,750.
And as of this month, Nationwide’s buy-to-let arm Mortgage Works is increasing rental cover requirements to 145% (from 125%) and lowering its maximum LTV from 80% to 75%.
Seico Mortgages have been helping people find the right mortgage for over 25 years, and can assist you in securing a buy-to-let mortgage. They pride themselves on customer service and you’ll be given a personal advisor to guide you throughout the mortgage process.