How lenders assess your fitness for investment finance
Few investors purchase a buy-to-let investment outright. Not many people have enough cash to do so. And even if you do, if you pay cash for a property you won’t take advantage of the benefits of leveraging in property investment. Using other people’s money to make money is a great way to boost your returns.
Using other people’s money means getting a mortgage to fund part of your buy-to-let investment. You’ll need a special type of mortgage called a ‘buy-to-let mortgage’ to fund an investment property. These are a little different to ordinary residential mortgages. Obtaining the best buy-to-let mortgage is crucial to your profits. The interest rate you pay directly affects your cash flow – 1% on every £100,000 of property investment finance will cost you around £83 per month.
When a lender assesses your buy-to-let mortgage application, they examine several factors when deciding the size of mortgage and rate that they will offer you. This article looks at the main factors, and how they affect the amount, you will be able to borrow as well as the interest rate.
Buy-to-let investment mortgages – a question of risk vs reward
When you invest in property, you will measure the risks of buy-to-let property investment. If the potential rewards outweigh the risks, you’ll make the investment. The more that rewards outweigh risks, the more confident you will be of investing. Lenders take a similar attitude to extending buy-to-let financing.
Banks and other lenders want to lend money. It’s how they make money. They also want to reduce their risk when lending. Therefore, they will measure their risks before advancing funds. The lower the risk, the lower the interest rate they are willing to accept. If they assess the risk as being too high, they won’t lend you the money to finance your buy-to-let investment.
Buy-to-let mortgage criteria that matter
Before a lender offers you an investment mortgage, they want to know that the value of the property will cover the outstanding mortgage should you default. They will also want to know that your income will cover the ongoing mortgage payments. And they’ll want to know something about your background, as a manager of money and as a buy-to-let investor. These are the main criteria that affect a buy-to-let mortgage assessment:
The LTV is a ratio used by a lender to assess the ability for the property to repay the mortgage should you default. Residential mortgages are available at up to 100% of the value of the property. You won’t be able to borrow nearly as much to invest in buy-to-let property. Typically, the maximum you can borrow is 80% of the value of an investment property.
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Paying a higher deposit is viewed by the bank as greater investor confidence in the property’s potential. It also reduces the lender’s risk should you default. Therefore, in general, the more you put down as a deposit, the lower the interest rate you will be offered.
Rental income vs interest payments
When you borrow to buy your home, the residential mortgage lender wants to know that you can afford the repayments. They will assess your income, including wages, regular overtime, commissions, bonuses, pensions and benefit payments. Assessment of income for a buy-to-let property is based solely on its rental income.
For a buy-to-let mortgage, a lender will request that the rental income is a percentage of mortgage payments. The lender is also obliged by law to assess your mortgage payments based on a minimum of 5.5% interest rate. Typically, the lender will ask for rental income of 125% of the mortgage payments. Some lenders require as much as 145%. It means that if your mortgage costs, say, £690 per month, you may need a rental value of £1,000 per month.
The rental value will be verified by the surveyor who does the valuation for the mortgage company. Most lenders will not take any other income into consideration, other than rental income.
Your credit score
The better you manage your money, the more likely you are to be accepted for a buy-to-let mortgage. The lender will want to see evidence that you aren’t overstretched on another borrowing, and that you manage your financial affairs well. For example, that you pay bills on time, are not behind with your residential mortgage, and that credit cards and loans have been serviced properly.
They will want to see that you have kept up repayments on your residential mortgage. If you don’t own your own home, you may find some lenders won’t offer you a mortgage for a buy-to-let investment.
To assess your financial well-being and trustworthiness, the lender will check your credit score with a credit reporting agency such as Experian or Equifax. The higher your credit score, the more favourably you will be viewed by lenders. Factors that negatively affect credit score include:
- Late payment
- County Court Judgements (CCJs)
- Defaulted payments
- Debt management
- IVA and bankruptcy
If you are under an IVA (or have been declared bankrupt) within the last three years, you are least likely to be accepted for a buy-to-let mortgage.
Your buy-to-let investment history
Though a history as a buy-to-let property investor is not a requirement for a lender to extend financing to you, it could help your standing with the lender. If you can prove that you have a successful property portfolio, the lender will be more confident that you understand buy-to-let investment. They will be more confident that you have done your sums, worked out your cash flow, and assessed the property properly as a viable and profitable investment opportunity.
Other lending conditions may apply
Some lenders apply rather particular conditions when lending buy-to-let mortgages. These might include minimum values, only lending on certain property types, restricting the number of properties you can own in a portfolio, and restrictions on age.
When you are considering which buy-to-let mortgage is best for your needs, you should also consider arrangement fees, early repayment penalties and other charges, as well as the mortgage interest rate. We would always recommend using an experienced buy-to-let mortgage broker to source your buy-to-let investment financing. To discover some of the best mortgage brokers in the business, contact one of the Gladfish team today on +44 (0)207 923 6100.
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