Buy to Let Mortgages Based on Rent Only: Everything You Need to Know

Are you interested in getting a buy-to-let mortgage based on rent only? If you are, then you are in luck. Yes, it is possible to get a BTL mortgage based on rent only in the UK, but it may be a challenge to find a lender.

Buy-to-let mortgages are granted based on the business case made by the applicant, which is supported by the projected rental yield of the mortgaged property. If you are looking for a BTL mortgage based on rent only, your success will likely depend on the level of rental yield projected and the certainty with which that projection can be met.

In simple words, the lender will want to see that you have done your research and that you have a realistic plan for how you will generate enough rental income to cover your mortgage repayments. They will also want to be confident that you will be able to maintain this level of rental income over the long term.

In this article on the topic “BTL mortgages based on rent only” we will explore the topic in depth details. We will also answer the frequently asked questions around the topic.

Post Topics

What are Buy-To-Let Mortgages and How Do They Work?

What Are The Pros And Cons Of Buy To Let Mortgages Based On Rent Only?

Expanding your property portfolio

Buy-to-let market overview

Next Steps

FAQs

What are Buy-To-Let Mortgages and How Do They Work?

Buy-to-let (BTL) mortgages are specialised mortgages designed for people seeking to purchase property as an investment. As the name implies, these mortgages are intended to buy a property and rent it out to generate income.

Unlike traditional mortgages that require a buyer to put forward a hefty deposit and income proof, BTL mortgages are based on the projected rental yield.

A buy-to-let mortgage can usually be approved quickly and offers more flexibility when it comes to the loan amounts and repayment terms. This makes them a popular choice for investors wanting to take advantage of the rental market. However, they come with their own set of risks and require careful consideration before applying.

When seeking a BTL mortgage based on rent only, lenders will assess your financial capabilities and the stability and potential of the rental market in the area where you plan to purchase.

What Are The Pros And Cons Of Buy To Let Mortgages Based On Rent Only?

The main advantage of a BTL mortgage based on rent only is that it allows investors to enter the property market without needing to provide a large deposit or income proof. This makes it attractive to those unable to afford other mortgages.

The main disadvantage is that it can be difficult to obtain such a mortgage, and the interest rate may be higher than with a traditional mortgage. Additionally, there is an increased risk of rental income dropping or being intermittent. Furthermore, if the property does not generate enough rental income, you could find yourself in debt as you struggle to make the mortgage payments.

Overall, buy-to-let mortgages based on rent only are a viable option for investors looking to enter the property market but should be approached with caution.

Rental yields

Most buy-to-let mortgage lenders look for evidence that your let property will yield a rental income that is at least 125% of your monthly mortgage repayments – in some cases, they may be looking for a rental income of at least 145%, explains the website Money Facts.

In making that calculation, most lenders use a representative rate of interest – known as the interest cover ratio (ICR) – rather than the actual rate applied to the mortgage, which is likely to vary over time of course. Currently, most lenders use a representative interest rate of 5.5%, suggests an article by Which? magazine.

Proof of income

It is one thing to have a projected rental yield; it is quite another to convince a mortgage lender that the projection will be realised. That is the objective if you hope to secure a buy-to-let mortgage based on rent only.

A guaranteed rental yield, of course, is impossible to achieve. What any mortgage lender will look for instead is the expertise, experience, and professionalism with which you have been able to arrive at the projections of rental yield.

Factors which might count in your favour include:

• if the property is currently let to tenants, there is a clear history of rental income that at least one landlord has managed to achieve;

• if you already own other buy-to-let properties, you may be able to demonstrate your proven track record of success in property investment and the management of buy-to-let properties and
• with the help of a sufficiently experienced and expert mortgage broker, you may be able to lend greater weight to the business case to be made for investing in the particular property for which you want a mortgage.

Other sources of income

Although you might get a buy-to-let mortgage based on rent only, your chances of success will be enhanced if you have proof of other sources of income – from any source, earned or investment incomeIncome received from investments..

A secondary income stream may give a lender confidence and reassurance that even if your property experiences a period of sustained loss of rental income – you are finding it difficult to attract suitable tenants, for instance.

You are probably in the most vital position if you have a regular, full-time job. Your employer’s confirmation, together with the payslips you receive each month, will provide enough evidence of that regular income.

If you are self-employed, it is typically somewhat more difficult to furnish the evidence that most lenders are going to require. Some lenders ask to see proof stretching over three years, some for two years, and others for not much longer than 12 months.

Whatever the period requested, the proof you need may be made through audited accounts or the official SA302 forms, which HMRC issues to confirm what you have earned in any given year and the income tax you have paid on those earnings.

Expanding your property portfolio

Once you have secured your buy-to-let mortgage and have been doing business as a landlord for several years, you have a proven track record of managing the business, attracting the rental yield you anticipated, and maintaining the repayments on your mortgage.

Having demonstrated that you have sufficient income to cover one mortgage, your lender is likely to look more favourably on your plans to expand your portfolio by purchasing a further property with the help of another mortgage. In that event, it is even more likely that any such additional buy-to-mortgage is based on rent only – since it will be reasonable to assume that any leaner times in terms of rental income from one property can be more than compensated by the income from your other property or properties.

If you want a BTL mortgage based on rental income, you may wish to speak to a mortgage broker who can identify the most suitable lender and product for you.

Buy-to-let market overview

The UK buy-to-let market is a significant part of the overall housing market, with around 1 in 5 homes being rented privately. In 2019, the total value of new buy-to-let mortgages was £40 billion, and the number of new buy-to-let mortgages was 247,000. However, the buy-to-let market has been affected by a number of changes in recent years, including tax changes and increased regulation.

One of the most significant changes was the introduction of a 3% stamp dutyA tax paid by the buyer when purchasing a property. surcharge on buy-to-let purchases in 2016. This has made it more expensive for landlords to purchase new properties, and has led to some landlords selling their properties.

Another change that has affected the buy-to-let market is the introduction of stricter mortgage lending criteria. Lenders are now required to assess the affordability of buy-to-let mortgages more carefully, and this has made it more difficult for some landlords to obtain mortgages.

Despite these changes, the buy-to-let market remains a popular investment choice for many people. The average buy-to-let deposit is 25%, and the average buy-to-let property value is £258,900. The average buy-to-let interest rate is currently 3.41% (two-year fixed rate).

If you are considering investing in the buy-to-let market, it is important to do your research and to understand the risks involved. You should also seek professional advice to ensure that you are making the right decision for your individual circumstances.

Next Steps

there are buy-to-let mortgages available based on rental income. If you are considering investing in the buy-to-let market, it is important to understand the risks involved and seek professional advice to ensure that you are making the right decision for your individual circumstances. You may also wish to speak to a mortgage broker who can identify the most suitable lender and product for you.

FAQs

Can I Obtain a Buy-to-Let Mortgage Without Proof of Income?

Yes, it’s possible to get a buy-to-let mortgage even if you don’t have a regular salary or traditional proof of income. Lenders often look at the potential rental income from the property instead. A mortgage broker can help you find the right lender for your situation, as they have knowledge of various mortgage products and lenders who might be more flexible with their criteria.

What’s the Difference Between Buy-to-Let and Residential Mortgages?

The main difference is in their purpose. Buy-to-let mortgages are for properties you plan to rent out, while residential mortgages are for homes you’ll live in. With buy-to-let mortgages, lenders focus more on the potential rental income the property can generate rather than just your personal income. They might also require a larger deposit compared to residential mortgages.

How Does Rental Income Affect Mortgage Qualification?

Rental income is crucial for buy-to-let mortgages. Lenders typically want to see that the rental income is enough to cover the mortgage payments, often around 125-145% of the monthly mortgage repayment. They may ask for bank statementsA record of a borrower's financial transactions often requir... or tax returns as proof of this income. A mortgage calculator can help you estimate how much you can borrow based on your rental income.

What Types of Mortgages are Suitable for Different Credit Histories?

Your credit history can affect the types of mortgages available to you. If you have a good credit score, you’ll generally have more options, including favorable interest rates and terms. However, with a poorer credit history, you might need to look at specialist lenders who are willing to consider your application, though the rates might be higher.

How Does Rental Income Impact Mortgage Repayments and Tax?

Rental income can be used to cover your mortgage repayments. It’s important to remember that this income is taxable, so you should factor in tax when calculating your earnings. For commercial mortgages, similar principles apply, but the lending criteria can be different. It’s advisable to talk to a mortgage broker who has experience in commercial mortgages for tailored advice.

Is a Buy-to-Let Mortgage Possible with No Minimal Income?

Yes, it’s possible to get a buy-to-let mortgage even if you don’t have a regular income. Lenders will primarily look at the potential rental income from the property. However, if you have a poor credit history, your options might be limited, and you might need to seek lenders who specialize in such circumstances.

What are Interest-Only Buy-to-Let Mortgages?

In an interest-only mortgage, you only pay the interest on the loan each month, and not the capital amount. This can make the monthly payments lower, but you’ll need to repay the full loan amount at the end of the mortgage term. These can be a good option if you plan to sell the property later, but it’s important to have a repayment plan in place.

What Should I Know Before Getting a Buy-to-Let Mortgage?

Before getting a buy-to-let mortgage, consider the responsibilities of being a landlord, including maintenance and dealing with tenants. Ensure that the rental income will cover your mortgage payments and other expenses. For first-time buyers, it’s crucial to understand all the costs involved, including stamp duty, management fees, and potential periods without tenants. Consulting with a mortgage advisor can provide you with tailored advice and help you understand the mortgage process.