Buy to Let is the common name for a mortgage where you are looking to purchase a property to rent out. The property must be a residential property and usually on a single tenancy (AST) and have no commercial element to it. Where there is more than one AST these are commonly known as a House of Multiple Occupancy (HMO) see HMO for more information.
In lots of ways it works similar to a residential mortgage other than the loan is based on the rental income expected and not on your personal income multiples.
Lenders normally work out the maximum based on the following calculation 140% at payrate on 5 year fixed products.
E.G a property earning £500 per month rent and a rate of 3.4% would be calculated as below.
(£500x12)/140%/3.4% = £126,050 maximum lend subject to LTV limits
Where this calculation will not meet the desired loan again a few lenders will use spare income you may have to meet the rental shortfall known as top-slicing.
Loan to values to 85% of the purchase price are available.
Most lenders will expect you to either own your residential property with or without a mortgage or have other investment property. The reason for this is to discourage buying a property under a Buy to Let mortgage and then moving into it due to the removal of income multiples.
There are few lenders that will allow you to purchase a buy to let without owning your own home but these can be subject to criteria such as the following, this is being it is seen as a higher risk to the lender:
- Larger deposits
- Minimum income levels needed
- Higher rates