This is a question we often get asked by new property investors and those who are thinking of investing in property for the 1st time and it’s a valid question because they do work differently from residential mortgages. 
 
It is easy to think that they work on the same basis as a personal mortgage and that the terms and rates offered are identical. Unlike with residential mortgages were the amount you can borrow is based on your personal income and outgoings, a buy to let mortgage is calculated on what we call the rental stress test. The amount you can borrow is based on the rental income you expect to receive for the property upon completion, or if you already own the property and you are remortgaging the rental income you are currently receiving. 
 
The buy to let affordability calculation is based on the rental income AND your personal tax banding. If you are a non-taxpayer, a basic rate taxpayer or buying through a LTD company the rental income you recieve is stressed at 125%. If you are a higher rate taxpayer, the rental income is stressed at 145%. This reflects the amount of income tax you will pay on the rental income each year when you file your self-assessment. 
 
When using the rental stress test calculators with buy to let lenders they will offer you 2 loan figures, one if you opt for a 2-year tracker/fixed rate and other if you fix the rate for 5 years. The longer you fix the rate which will provide you with additional security against future rate rises and make you a customer of that lender for longer the lender will allow you to borrow a little more. 
 
Some lenders will offer you the ability to ‘Top slice’ your buy to let mortgage affordability which involves using surplus personal income or surplus rental income from your property portfolio. To qualify to do this you either need to have an income of £50,000+ per year or a property portfolio of 4 or more properties. Top slicing allows you to use surplus personal income to support an affordability assessment. Lenders will take a holistic view of you and your portfolio and allow you to borrow more money than the stress test would normally allow you because they can see that you have other income to support mortgage payments if interest rates were to increase or your tenant moved out and you had to cover the mortgage payments for a period of time. 
 
Being a portfolio landlord not only allows you to top slice the rental income affordability assessment but also opens up other possibilities in terms of lenders who require a track record as a landlord before they will lend to you. This is especially relevant for more complex mortgages such as HMO mortgages and short term/holiday lets. The size of your portfolio can also reduce your lender options as many high street lenders cap the number of mortgages they allow you to have in your overall portfolio but also how many mortgages they will allow you to have with that particular lender. 
 
Although the affordability assessment for a buy to let mortgage is based on the rental income, some lenders (not all) do have a minimum income requirement to qualify for a buy to let mortgage with them. This is typically a minimum annual income of £25,000 per year, which can be from employment, self-employment or from investment income. 
 
All lenders have a minimum property value that they will lend on as well, and this minimum value will vary from lender to lender. But the absolute minimum value that a lender will lend on is a purchase price of £50,000. Which if you are reading this outside of the north of England sounds ridiculous, but there are properties for sale valued at £50,000! 
 
Depending on how you decide to own the property, either in your personal name or in a LTD company the mortgage may or may not show up on your credit file. If you buy and hold the property in your own name, the mortgage will show up on your credit file. If you hold the property in a LTD company this wont show on your credit file as the legal owner of the proeprty is actually the company, not you. Although you are a director of the company. 
 
Holding buys to let mortgages in your personal name do not affect your residential (personal) mortgage affordability. As the tenant you have in place is paying you rent, the lender recognises that this property is an asset, and your tenant is responsible for paying your mortgage (via their rent) and not you. After completing your 1st self-assessment, you will now be able to use this income to support a residential mortgage application as you can now prove that this buy to let property is another source of income for you and not a liability. 
 
If you are thinking of investing in property or would like to ask us any property or mortgage questions, please contact us today. 
 
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