Buy to let mortgages

Assessed on rent, not on your salary

On a residential mortgage the lender asks what your income can support. On buy to let it asks what the property can support. The rent has to cover the mortgage with a margin, and the lender decides both the rent figure it will use and the margin it requires.

The rent figure is not the one you hope to achieve and not the one the letting agent has written on a listing. It is the figure the lender's valuer puts on the report as the achievable market rent. Where the valuer comes in below your expectation, the loan available falls with it, and there is rarely much time to fix that.

The rental stress test

The lender does not test the rent against your actual monthly payment. It tests the rent against a notional payment calculated on an interest-only basis at an assumed rate that is higher than the rate you are paying, and it requires the rent to exceed that notional payment by a set margin. That is the interest cover test, and it is the single most important calculation in buy to let lending.

Two consequences follow. First, the assumed rate matters more than the actual rate, so the cheapest-looking product does not necessarily allow the largest loan. Second, because the test is calculated on an interest-only basis, the term of the mortgage does not enter it — lengthening the term does not help a stress test that falls short, however intuitive that feels.

What the stress test decides

The rental stress test, not the purchase price, decides how much can be borrowed. Landlords regularly discover the numbers do not work on a property they have already agreed to buy — and by then the deposit is the only variable left.

The lever that does usually work is the length of the fixed rate, because many lenders apply a lower stress assumption to longer fixes. The others are more deposit, a different lender with a different calculation, or a different property. We would rather run the test with you before you offer than explain it afterwards.

Top slicing

Some lenders will allow surplus personal income to make up a shortfall in the rental calculation. That is top slicing, and it opens up properties in low-yield areas — a good deal of London included — that the rental test alone would rule out.

It is not a general escape route. Lenders that offer it want to see genuine surplus income after your own housing costs and commitments, they will assess that income with the same scrutiny as a residential application, and they set their own limits on how much of the shortfall can be covered this way. It also means a buy to let application starts to look and feel like a residential one in terms of paperwork.

Personal name or limited company

Borrowing personally and borrowing through a limited company are both entirely normal, and the choice affects far more than the mortgage.

On the lending side: the lender panels differ, the pricing structures differ, company lending almost always requires personal guarantees from the directors, lenders will want the company to be a special purpose vehicle with appropriate activity codes, and they will look at the directors' and shareholders' own positions as well as the company's. Moving an existing personally held property into a company is a sale and purchase, not a transfer, with all the cost and consequence that implies.

On the tax side: the treatment of rental profit, of finance costs, of extracting money from the company and of eventual sale is genuinely different, and it is the reason most landlords ask the question in the first place. That is a matter for your accountant and not advice we give. We will explain how the lending differs, tell you what each route means for your borrowing capacity, and work alongside whatever your accountant advises.

Portfolio landlords

Once you hold several mortgaged rental properties, lenders treat you as a portfolio landlord and the process changes character. Expect the whole portfolio to be reviewed rather than just the property being financed.

• A full schedule of properties with values, balances, rents and lenders
• A business plan and cash flow, sometimes on the lender's own template
• An assets and liabilities statement, and personal tax documents
• A test applied across the whole portfolio, not only the subject property, so one weak property can hold up a good one
• Tighter appetite where the portfolio is concentrated in one street, one block or one tenant type

The work that adds most value here is sequencing: deciding which property to refinance, when, and with which lender, so that today's deal does not block next year's. Landlords who take each case in isolation tend to end up with all their properties tied to one lender and all their product end dates in the same month.

First-time landlords

If you have never let a property, part of the lender market closes to you, and some of what remains wants you to be an owner-occupier already. Buying your first rental property while renting yourself is possible but narrows the choice further.

The cases we see most often are people leaving a home they cannot sell for the price they want and letting it instead. If you have a residential mortgage on it, you need either consent to let from that lender or a move onto buy to let terms — letting it out quietly is a breach of the mortgage conditions and of your insurance.

Tenant types that narrow the lender list

Lenders care who is living in the property, because it affects both the security and the ease of recovering possession. The following all reduce the number of lenders available, and none of them makes a case impossible.

• Letting room by room, or to sharers on separate agreements, which often takes the property into house-in-multiple-occupation territory and licensing
• Students, particularly where a property is let by the room
• Tenants in receipt of benefits, or a local authority or housing association lease
• Short-term and holiday letting, which is a different product category with its own assessment
• Corporate lets, diplomatic tenancies and company-name agreements
• Letting to a close family member, which changes the regulatory position entirely

When buy to let is regulated

Most buy to let is not regulated by the Financial Conduct Authority. There are two distinct exceptions, and they are commonly muddled together, so it is worth being precise.

Letting to a close family member

If the property is let to a close relative — a parent, child, sibling, grandparent or grandchild, or their spouse or partner — the loan is a regulated mortgage contract, and the full mortgage conduct rules apply to it as they would to a mortgage on your own home. Lenders often call this a regulated family buy to let, and only some will do it.

Consumer buy to let

Consumer buy to let is a separate and lighter regime. It catches borrowers who did not enter into the arrangement wholly or predominantly for business purposes — classically someone letting out a home they used to live in, or a property they inherited, rather than someone who set out to invest in property. It brings its own protections and its own process, but it is not the same as a regulated mortgage contract and should not be described as carrying the same protections as a residential mortgage.

Which category your case falls into affects the lender you can use, the paperwork, and the protections that attach to the loan. We confirm which applies before anything is committed, and we will not let a case be presented as unregulated business when it is not.

Your property may be repossessed if you do not keep up repayments on your mortgage.

What we charge

Our fee is typically £495, though complexity moves it, and it is always disclosed in writing before you apply. Each stage of the fee is earned when that stage is reached and is not refundable after that point. Separately, you have the right to cancel within 14 days, as set out in our Terms of Business. We are usually also paid a procuration fee by the lender.