Most landlords in the UK finance their rental properties through buy-to-let mortgages. For newcomers to the property rental market, there’s an even higher likelihood that a buy-to-let mortgage will be necessary to kickstart your investment.

However, with the steady rise in average buy-to-let mortgage interest rates in recent times, what does this mean for your prospects of obtaining a mortgage for your rental property?

Assessing Your Mortgage Affordability

Before a lender approves your mortgage application, they will rigorously evaluate your ability to manage and repay the loan. This process is called an affordability check. Here’s what it entails:

• Rental Income Expectations: Lenders examine the potential rental income from the property.
• Interest Rate Changes: They’ll also consider if you can still cover the mortgage if interest rates surge.

It’s worth noting that buy-to-let mortgage applications are viewed as riskier. Consequently, the affordability criteria set by lenders and the Bank of England have become more stringent. Combined with rising interest rates, this has made securing a buy-to-let mortgage increasingly challenging.

Key Buy-to-Let Mortgage Requirements

Lenders will have varying criteria for granting buy-to-let mortgages. Some general requirements include:

• Age Limits: While most lenders require borrowers to be at least 18 or 21, some might set the minimum age at 25. On the other end, while many have a maximum age limit of 70 or 75, others might not have any.
• Income Checks: Your annual salary, alongside expected rental income, can influence your eligibility.
• Deposit: Typically, a deposit of about 25% of the property’s value is expected.
• Affordability and Stress Tests: Lenders want assurance that your rental income can cover the mortgage and withstand substantial interest rate hikes.
• Credit History: A poor credit score could be a potential roadblock.

Remember, buy-to-let mortgages are specifically for properties you don’t intend to live in. While most lenders accept applications from first-time buyers, it’s always a good idea to confirm beforehand.

Delving into the Mortgage Affordability Test

The crux of affordability checks lies in ensuring borrowers can comfortably manage their loan. A commonly used method is the Income Cover Ratio (ICR). This metric mandates that your rental income should be between 125% and 145% of the mortgage repayments.

For instance, if you plan to buy a £310,000 property, putting down a £62,000 (20%) deposit and securing a mortgage at a 4% interest rate, your monthly repayments would be £827. To satisfy a 125% ICR, your rental income should be at least £1,033.75 monthly.

Tax brackets also play a role:

• Basic rate taxpayers are typically evaluated at 125%.
• Higher rate taxpayers are evaluated at 145%.
• Additional rate taxpayers might face even higher percentages.

These buffers accommodate other potential landlord expenses like maintenance, insurance, and periods when the property remains unoccupied.

Grasping the Stress Test

A stress test ensures you can handle your mortgage if interest rates rise sharply. This became notably relevant when the Bank of England’s base interest rate climbed from 0.1% in October 2021 to 5.25% by September 2023.

In our £310,000 property example, with an 8% interest rate, monthly repayments would jump to £1,653. To meet the 125% ICR, your rental income would need to rise to £2,066.55. It’s pivotal to understand that lenders might use different rates for their stress tests.

Bank of England and the PRA Guidelines

The Bank of England’s Prudential Regulation Authority (PRA) set rules for buy-to-let mortgage stress testing. As of 2016, they mandated that borrowers should be able to handle:

• An interest rate of 5.5%.
• Or the product interest rate plus two percent (whichever is greater).

Given that many buy-to-let rates exceeded 5.5% in 2022, most lenders now use the latter approach for stress tests.

The Role of the FCA

While most buy-to-let lending escapes the purview of the Financial Conduct Authority (FCA), “consumer” BTL mortgages, meant for accidental landlords or those leasing to family, fall under FCA regulations.

Making Use of Buy-to-Let Mortgage Calculators

To make your journey easier, numerous lenders and comparison sites offer buy-to-let mortgage calculators. These tools help you:

• Estimate potential borrowing based on your monthly rental income.
• Calculate probable monthly mortgage payments based on deposit and interest rate.

By utilising these tools, you can gauge your readiness and decide whether to pursue a buy-to-let mortgage or make adjustments to your plans.

Disclaimer: This guide aims to provide a general overview. It’s crucial to consult with a mortgage adviser or financial expert for specific advice tailored to your situation.