UK Buy-to-let Mortgage Guide

In this latest era of tight liquidity, yields on buy-to-let properties are dropping as it becomes increasingly difficult to cover a high percentage mortgage with rental income.

The margins are not what they used to be on buy-to-let, so it is even more important to do careful calculations beforehand.

Buy-to-let using a mortgage is a 'geared' investment which means you can reap the rewards (or be hit with the loss) on an investment many times larger than your deposit.

Buy-to-let mortgages have taken off in the last eight years. They are specialist mortgages designed specifically for this type of property investment. Typically the deposit requirements are higher, the minimum deposit is around 15% and can be as high as 40%.

Many people start their life as landlords by remortgaging their own home, providing there is enough equity. This can significantly increase the cashpile required as a deposit by the lenders.

Letting out a property of course is a riskier exercise than paying for the roof over your own head. No surprise then that buy-to-let mortgages cost more in general than other types of mortgages. However there area range of deals around, the market remains competitive, and you can choose between a number of discounted and fixed rate products.

There are several different approaches taken by buy-to-let mortgage companies. Some have their own calculation broadly based on both your own income and the amount of rent their surveyors estimate your rented property will bring in.

Other mortgage lenders are only concerned with the amount of rental the property will return. Again they all use their own formula. One common method is to compare 1.3 times the annual mortgage payment with the annual rent. If the rent is higher, they will grant the loan. Other lenders will take 3 times your annual salary/income and add this to 50% of the expected annual rental and check to see whether this covers the mortgage payments.

The there are those lenders that use the 'deduction rule'. They take your salary, deduct the expected annual mortgage payments of it and then apply their salary multiple. That is the maximum amount they will lend. So say you earned £50,000. The expected annual mortgage payments come to £15,000. That gives £35,000 times their multiple, let's say it is 3.5, giving a total of £122,500, the maximum mortgage amount.