What is The Buy-to-LetMortgage

What is The Buy-to-LetMortgage


There was a time when a mortgage to buy an investment
residential property was virtually impossible. The problem was
simply that lenders applied the same lending criteria to such
transactions as they did to a normal residential mortgage. In
other words, the commercial aspect of the venture (the rent) was
ignored and the borrower was expected to fund the mortgage
entirely from his earned income. If there was a mortgage already
in place on another property, the earned income would have to be
sufficient to cover both mortgages! Not surprisingly, there wasn’t a
great deal of scope for investing in the residential sector.

In the late 1990s, the buy-to-let (BTL) mortgage changed all that.
Lenders decided, in effect, to ignore any existing mortgage and to
concentrate instead on the new BTL purchase. What mattered was
not the borrower’s personal earned income but the potential
rental income from the new investment.

To protect themselves (and the borrower) they set strict limits on
the amount that could be borrowed and also required that the rent
should comfortably exceed the interest paid on the mortgage. In
the early days the maximum mortgage available was 75% of the
purchase price. This gradually moved to 85% which is now the
norm (although some lenders will offer 90%). The rent must be
125% or 130% (depending on the lender) of the mortgage interest
payment. A few lenders, however, will take a more relaxed view
and accept 110% or 115%. A few will even consider 100% if the
borrowing level is very low.

An additional incentive for lenders was the new assured shorthold
tenancy (AST) introduced by the Housing Act 1988. This assured
the tenant the right to the property for the term of the tenancy
(six or 12 months) but also, crucially, assured the landlord the
right to recover possession easily and quickly at the end of the
tenancy. The risk of being saddled with a tenant for life had
disappeared