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What you need to know before getting a buy-to-let mortgage

Getting a buy-to-let mortgage can help you purchase your first rental property or expand your portfolio further. And it's helpful to know the key requirements for lending before you apply.

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A buy-to-let (BTL) property can be a great way to invest and enjoy short term returns from rental income, as well as long-term benefits with capital appreciation. 

The majority of landlords who purchase a rental property do so with a buy-to-let mortgage, which is similar to a residential mortgage, with a few key differences. Here are three key things you need to know about lending requirements before applying for a buy-to-let mortgage. 

1. Loan to value

Having a deposit in place is one of the most important parts of getting a mortgage, and lending criteria for a buy-to-let is slightly higher than is it for residential. Lenders usually lend a maximum of 80% of the property’s value.

That means you will need at least a 20% deposit to meet lending requirements. However, it’s important to remember that a higher deposit leads to lower monthly mortgage repayments, so you aim for the highest deposit available to you. 

2. Interest-only

How you pay the loan back is the primary difference between buy-to-let mortgages and residential ones. While a residential mortgage sees you paying off both interest and the amount borrowed, a buy-to-let mortgage usually only requires you to pay the interest. As a result, you will still owe the total amount borrowed at the end of the mortgage term. 

Before getting a buy-to-let mortgage, you will need to demonstrate that you can pay the total amount borrowed at the end of the loan term. This is usually done by selling the property when your mortgage ends, which will hopefully increase in value during the time you owned it, leaving you with a profit after you've paid back the loan amount. 

An interest-only mortgage also means your monthly repayments will be much lower than a residential mortgage of the same amount, allowing you to maximise the rental income received from the property each month.

3. Rental income potential versus your monthly earnings

When deciding to lend on a buy-to-let mortgage, lenders will look at the property's potential rental income before determining how much they are willing to offer. The rental income usually needs to meet at least 125%-145% of the loan's monthly payments. 

Example:

Rental income of 125%

Property borrow amount = £165,000

Monthly Rental = £774 per month

OR

Rental income of 145%

Property borrow amount = £165,000

Monthly Rental = £898 per month

Lenders also require applicants to have a minimum income of £25,000 a year, though there is a greater emphasis on the potential rental income. Like residential mortgages, you will also need to have a good credit score. 

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