Maximise the investment.

How lenders assess a buy-to-let mortgage

Buy-to-let mortgages are assessed differently from residential mortgages, which is where some landlords get caught out.

The starting point is usually the property’s expected rent. Lenders usually use a rental coverage calculation to check whether the rent will cover the mortgage interest by a required margin. They normally test this using a higher interest rate than the one you will initially pay.

Your personal income can still matter. Some lenders require a minimum earned income, while others may use it to support an application if the rent falls slightly short, known as top slicing. Your credit history, landlord experience, existing portfolio and the type of property will also influence the decision.

Buy-to-let mortgages usually require a larger deposit than residential mortgages. Some lenders accept a 20% deposit, but putting down 25% or more will normally give you a wider choice of products. Rates and arrangement fees can also be higher, so we compare the overall cost rather than focusing on the headline rate alone.

Buying or remortgaging through a limited company

More landlords now consider buying property through a limited company, partly because of the different tax treatment. However, it is not automatically the right choice for everyone.

Always speak to a qualified tax adviser before choosing this route. We can advise on the mortgage, but whether a company structure is suitable will depend on your income, future plans and existing property portfolio.

People may consider a limited company because:

• Mortgage interest is generally treated differently for Corporation Tax purposes than it is for an individual landlord.
• Profits can be retained within the company to help fund future property purchases.
• A company can provide flexibility around ownership and involving family members, subject to legal and tax advice.
• Some lenders apply different rental coverage calculations, which could support a larger mortgage in certain circumstances.

A word of caution: Limited-company mortgages can carry higher rates and fees, and directors will normally be asked to provide personal guarantees. There are also company administration costs and potential personal tax to consider when taking money out.

Transferring a property you already own into a company is normally treated as a sale. This could result in Stamp Duty Land Tax, Capital Gains Tax, legal fees and refinancing costs. Any potential tax benefit must be considered alongside all of these costs, both now and in the future.

Let-to-buy

Let-to-buy allows you to keep your current home and rent it out while purchasing somewhere new to live.

Depending on your plans, you may need consent to let from your existing lender or a full buy-to-let remortgage. You will then take a separate residential mortgage on your new home, sometimes using equity released from the original property towards the deposit.

Because you will own two properties, the higher rates of Stamp Duty Land Tax will normally apply to the new purchase in England. You will also need to account for the costs and responsibilities of becoming a landlord.

Let-to-buy can work well when the rent, equity and borrowing all stack up, but both mortgages need to be considered together. We will help you understand the complete picture before you commit.