Buy-to-let mortgage guide: How to choose a loan

Kitchen
Kitchen
A home needs a working kitchen and bathroom to be mortgageable

Apart from the numbers (see How much can you borrow), a buy-to-let mortgage lender will look at you, the property itself and the tenants you plan to put in it when deciding whether to give you a loan.

Buy-to-let mortgage requirements for you

With a bog-standard buy-to-let purchase, lenders won’t comb through every last soy latte receipt, as they’d have done for your residential mortgage. Nevertheless, they do have some basic criteria. You would be their dream client if you:

  • Earn at least £25,000 as an employee (or £40,000 as joint applicants)
  • Own your main home
  • Have a spotless credit record
  • Own a few rental properties, but not too many
  • Are a UK resident.

In the light of that last point, what if you’re an expat? It’s tricky but not impossible: specialist brokers and private banks offer buy-to- let products that are not widely available. Thanks to all the extra hoop-jumping to prevent fraud, fees tend to be high and waiting times long. As ever, requirements vary. Some lend only to expats who live in specific countries or work for big multinationals; others want specific firms to certify your accounts.

» Credit file error almost sinks deal

Good brokers make all the difference. Due to a bank blooper, our credit record once mistakenly showed that we had missed a mortgage payment on our main home. It came to light three years later as we were purchasing a buy-to-let flat – nearly causing the whole deal to collapse. Thanks to the intervention of our brilliant mortgage adviser, our bank fixed the error within a day and the purchase went ahead.

» How to make yourself more creditworthy
  • If you don’t tick all the boxes, speak to a broker early to find out how you can boost your chances. The self-employed and business owners (like us) usually need around two years of accounts
  • Before you approach any lender, check your credit report for any errors that could jeopardise your chances
  • Don’t apply for too many loans. Each application shows up on your credit report, and if there are too many, you’ll get rejected by all.

Buy-to-let mortgage requirements for your property

Lenders also don’t like non-standard homes. Their ideal property:

  • Has a lease longer than 80 years (if it’s leasehold)
  • Is habitable with a working kitchen and bathroom
  • Is not a flat above a shop or in a tower with more than five storeys
  • Has a standard construction (not wood or concrete)
  • Needs a loan of more than £40,000, so it’s worth their bother.
» Balcony phobia scuppers loan

Call them bigots, but lenders don’t like anything out of the ordinary – not even balconies. One client was refused a buy to-let mortgage on his two-bedroom ex-council flat in a leafy part of southwest London because it had a balcony on the raised ground floor. It was ‘a security risk’. (Never mind that if a door on the ground floor were such a big risk, three-quarters of homes in Britain would be unmortgageable.) Sadly, he ended up having to sell.

Buy-to-let mortgage requirements for your tenants

As for tenants, in a now familiar refrain, lenders don’t like non-standard ones. That means few will accept:

  • Students, despite most of them having rent guarantors
  • Renters on housing benefit, even though any tenant can start claiming this without telling you if they lose their job
  • Unrelated sharers, though this depends on the number of rooms and whether they are on one contract or separate tenancies.

Lenders have been known to refuse mortgages when there are locks on bedroom doors, saying that the property could be let out by room – even when the landlord intends to let to a single family.

It gets even more complicated if criteria intersect. A self-employed accidental landlord wanting to let to students will have few options to choose from.

What to look for in a buy-to-let mortgage

Once you’ve narrowed it down to the lenders that will take you on, it’s time to weigh up the options, considering:

  • How much they’ll lend you
  • At what interest rate
  • Whether said rate is fixed or variable. A rate that is fixed, typically for two to ten years, allows you to plan ahead with monthly payments that stay the same throughout. Of course, variable is better if you think rates will drop. This includes ‘trackers’ – pegged to Bank of England’s rate – and ‘standard variable rate’ loans, which the lender can change whenever they feel like it (though in practice they tend to follow the Bank rate)
  • Fees, ahem. There are arrangement fees, valuation fees, legal fees (some force you to use a legal firm of their choice), exit fees, just-because-they-can fees…
  • Nasty terms and restrictions in the fine print
  • Penalties if you overpay or clear the loan early.

Yes, that’s a lot of bullet points. Which drives home the point that there is more to choosing a buy-to-let mortgage than picking the lowest rate from a best-buy table. A good broker will be your new best friend.