Property Investment Mortgages Explained

Working out how much you can borrow on a buy to let mortgage is a little more complicated than taking out a loan on your own home. Property investment mortgages have different affordability rules that relate to the rent from tenants rather than the owner’s income.

Many lenders also limit their risk by lending less to landlords than homeowners because they figure they have less incentive to keep up the repayments because they will not lose the roof over their heads if the property is repossessed.

Working out what you can borrow:

Expect to find a deposit of around 25 per cent of the property value, leaving a 75 per cent loan-to-value mortgage. Loan-to-value or LTV is the jargon for the percentage of the property’s buying price a bank or building society will lend.

A deposit is the difference between the purchase price and the mortgage. Equity is the difference between the property value and any loans secured against it. Equity increases and decreases as loan amounts and property values change.

Borrowings are directly related to the rent. A lender will want a minimum rent cover of 125 per cent of the monthly interest-only mortgage repayment, usually calculated at a rate of 5 per cent. Rent cover is the rent required to cover the mortgage repayment.

So how does the calculation work? Take an average priced home, which is around £163,000 according to the latest house price surveys.

Step 1: Calculate the maximum mortgage and deposit at 75 per cent LTV

£163,000 x 75 per cent = £122,250
£163,000 x 25 per cent = £40,750 (Also the same as £163,000 - £122,250)

Step 2: Calculate the rent cover

The monthly interest only mortgage repayment is (£122,250 x 5 per cent) divided by 12 = £509
Rent cover is 125 per cent, so the rental income must be 25 per cent more than £509, which is £636

If the rent is less than £636, then the lender will reduce the mortgage amount pro rata, which means a larger cash deposit.

The buy to let mortgage market:

Many banks and building societies offer investment mortgages direct to landlords or through brokers. Just like residential loans, buy to let mortgages are offered as a range of fixed rate, tracker and standard options.  A point to watch is arrangement fees. Lenders will charge a fee payable on completion of the loan that can range from £150 to 3.5 per cent of the loan, depending on bank or building society.

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