Want to purchase a rental property and need to raise funds in order to do so? How do you get a mortgage for a buy-to-let property in the UK?
If you’re well prepared and work with the right professionals, obtaining lending and purchasing an investment property can be straight forward.
Be prepared
Before speaking to a financial advisor or bank about getting a mortgage for a rental property its sensible to be prepared; know your cash position and ensure your finances are in order to make you an attractive prospect for lending.
Cash deposit
The minimum deposit on buy-to-let mortgages is usually 25% of the property’s value although it can vary and maybe closer to 40%.
Not only will most lenders want to see that you have a good deposit amount they also want to see that you have additional cash to cover associated costs such as Stamp Duty Land Tax and a contingency fund.
Each lender will have a different set of criteria, knowing what you have available in cash before speaking to a bank of broker will allow them to provide the most accurate advice.
Credit history, home ownership and existing debt
Lenders will expect you to have an excellent credit rating if you’re looking at borrowing money to buy a rental property.
Owning a property whether it is with a residential mortgage or outright is often an important factor to lenders as crudely, you have collateral.
Lenders will also be checking over all your existing debt to ensure you aren’t to stretched with your current outgoings.
Income
Although banks tend to only lend on properties which have rental income in excess of the mortgage repayments they still require that you have a decent and steady income as an assurance on the mortgage.
As per the residential mortgage process, it is often the case that they look for a minimum term of employment at one company to show stability.
Affordability is key, lenders will calculate your income and current outgoings and decide if you are in a position to borrow. For those who earn income in a non-standard way working with a mortgage broker can assist with demonstrating your affordability.
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Broker or bank?
When getting a mortgage for rental property in the UK, engaging the services of a mortgage broker can be invaluable.
Walking into your bank and simply asking for a buy-to-let mortgage won’t always mean you get the best possible loan. A broker can shop around and find the best lender to suit your position and your investment plans.
It is often the case that one broker will have special relationships with certain lenders and another broker might have better relationships with others which is why in some instances there is merit in having preliminary discussions with more than one mortgage broker.
Find investor friendly lenders
There are certain lenders who predominantly lend to investors and facilitate those beginning or building on their portfolios. The main high street banks are no always the best option when it comes to getting a mortgage on a rental property as they’re often geared up primarily for residential mortgages.
A good question to ask of a lender if you’re planning on building an investment property portfolio is: How many loans can you offer to one investor?
Equally, it is important to find a broker who is investment savvy as arranging financing with one who doesn’t have the experience or knowledge might mean your financing is not structured in the best way from the outset.
It might be that you work with a broker on your first purchase and then decide to build your portfolio directly working with a lender when you understand more about how the process works.
Be aware though, whilst one lender might have offered the best product for you on the first rental property when it comes to additional property purchases further down the line a better product might be available via another lender. It’s wise to shop around or get your broker to do so for you.
How much can you borrow?
The amount you can borrow to buy a rental property will be dependent on the cash deposit you have available and the expected rental income on a property.
Most buy-to-let lenders require that the rent is 25%-50% higher than the mortgage repayment and that the cash deposit is 25%-50% of the property’s value.
Finding the right property
With so much of the lending requirement being based on a rental property’s performance finding the right property to buy is very important.
Once you have spoken with a broker or lender and have an idea of the figures that the property needs to achieve you can begin considering suitable properties.
As stated above, a lender will require the rental income to be a certain % higher than the monthly interest mortgage payments. They might also present this criteria to you as a minimum yield which a property must achieve in order to fit their requirements for lending.
Calculating rental yield
Rental yield is a percentage figure which demonstrates the return an investor is likely to achieve on a property via rental income.
The most simple way to establish the rental yield of a property is to use this calculation:
(Annual rental income ÷ property purchase price) x 100 = % rental yield
Predicting rental income
A lender will want to see some proof that a property will meet the rental returns they require whether this be via indication from a local agent or comparable evidence. Another way to meet this criteria is to purchase a property that has an assured rental yield.
To learn more about rental assurances please read our article on the subject.
In short, a rental assurance means that the management company overseeing the rental property are so confident in the predicted yield that they are happy to cover any difference should they need to.
Many of the properties we advise our investors to purchase come with rental assurances in place.
Professional rental investment advisors
Our team of investment consultants can help you find a property that meets the requirements set by your lender. To learn more about our services please call us on +44 (0) 2039507939 or send us an email at [email protected].
