When it comes to buying property to rent out, many people turn to buy-to-let mortgages to finance their investment. However, not everyone is familiar with the terms and conditions of such loans. One such condition is the maximum loan to value (LTV) that lenders will offer on a buy-to-let mortgage. In this article, we will discuss what LTV is and what the maximum LTV is on a buy-to-let mortgage.
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What is Loan to Value (LTV)?
Loan to value (LTV) is a ratio used by lenders to assess the risk of a loan. It is calculated by dividing the amount of money borrowed by the value of the property being purchased. For example, if you want to borrow £100,000 to buy a property worth £150,000, the LTV would be 67%. The higher the LTV, the riskier the loan is for the lender, as the borrower has less equity in the property and is therefore more likely to default on the loan.
What is a Buy-to-Let Mortgage?
A buy-to-let mortgage is a type of mortgage specifically designed for people who want to buy a property with the intention of renting it out. Unlike a standard residential mortgage, the rental income is taken into account when assessing the affordability of the loan. This means that borrowers can usually borrow more money than they would be able to with a standard residential mortgage.
How is LTV Calculated on a Buy-to-Let Mortgage?
The LTV on a buy-to-let mortgage is calculated in the same way as on a standard residential mortgage. The only difference is that the value of the property is based on its rental income potential rather than its market value. Lenders will typically use a formula that takes into account the expected rental income, as well as other factors such as the property type and location.
Maximum LTV on a Buy-to-Let Mortgage
The maximum LTV on a buy-to-let mortgage varies depending on the lender and the borrower’s circ*mstances. However, there are generally three maximum LTV limits that lenders offer.
75% LTV
A 75% LTV is the most common maximum LTV offered by buy-to-let mortgage lenders. This means that borrowers can borrow up to 75% of the property’s rental income value. For example, if a property has a rental income of £1,000 per month, the maximum loan amount would be £750,000.
80% LTV
Some lenders may offer a maximum LTV of 80% on a buy-to-let mortgage. This means that borrowers can borrow up to 80% of the property’s rental income value. However, this is less common and usually only available to borrowers with excellent credit scores and a strong rental history.
85% LTV
An 85% LTV is the highest maximum LTV offered on a buy-to-let mortgage. This means that borrowers can borrow up to 85% of the property’s rental income value. However, this is extremely rare and usually only available to borrowers who have a long-standing relationship with the lender or who can provide additional security, such as a guarantor.
Factors that Affect Maximum LTV on a Buy-to-Let Mortgage
There are several factors that lenders take into account when deciding what maximum LTV to offer on a buy-to-let mortgage. These include:
Rental Income
The rental income of the property is a key factor in determining the maximum LTV that lenders will offer. Generally, the higher the rental income, the higher the maximum LTV.
Property Location
The location of the property can also affect the maximum LTV. Lenders are more likely to offer a higher LTV on a property in a desirable location with high rental demand, as this reduces the risk of default.
Borrower’s Credit History
The borrower’s credit history is also taken into account when deciding what maximum LTV to offer. Borrowers with a good credit history are more likely to be offered a higher LTV than those with a poor credit history.
Advantages and Disadvantages of High LTV Buy-to-Let Mortgages
Advantages
The main advantage of a high LTV buy-to-let mortgage is that it allows borrowers to buy more expensive properties or multiple properties with a smaller deposit. This can potentially increase the rental income and profitability of the investment.
Disadvantages
The main disadvantage of a high LTV buy-to-let mortgage is that it increases the risk for the borrower. If the rental income does not cover the mortgage payments, the borrower may struggle to meet their repayments and could potentially lose the property.
How to Improve Your Chances of Getting a High LTV Buy-to-Let Mortgage
To improve your chances of being offered a high LTV buy-to-let mortgage, there are several things you can do:
- Have a good credit score
- Provide a strong rental income history
- Choose a property in a desirable location with high rental demand
- Provide additional security, such as a guarantor
Frequently Asked Questions(FAQs)
What is the minimum deposit required for a buy-to-let mortgage?
The minimum deposit required for a buy-to-let mortgage varies depending on the lender and the borrower’s circ*mstances. Generally, lenders require a deposit of at least 25% of the property’s value, although some lenders may accept a lower deposit of 20% or even 15%.
How is rental income assessed when applying for a buy-to-let mortgage?
Lenders typically assess rental income by asking for proof of the property’s rental income, such as rental agreements and bank statements. They will then calculate the rental income as a percentage of the property’s value and use this figure to determine the maximum LTV they are willing to offer.
Can I get a buy-to-let mortgage if I already have a residential mortgage?
Yes, it is possible to have both a residential mortgage and a buy-to-let mortgage. However, lenders will take into account the borrower’s existing mortgage payments when assessing affordability for the buy-to-let mortgage.
What is the difference between a standard residential mortgage and a buy-to-let mortgage?
The main difference between a standard residential mortgage and a buy-to-let mortgage is that a buy-to-let mortgage is designed for properties that are being purchased with the intention of renting them out. As such, the lender will typically assess the rental income of the property when deciding whether to offer the mortgage and at what maximum LTV.
Can I use a buy-to-let mortgage to purchase a property abroad?
It is possible to use a buy-to-let mortgage to purchase a property abroad, although this will depend on the lender and the country in which the property is located. Some lenders may have restrictions on lending for properties located outside of the UK, while others may have specific criteria for such loans.
Conclusion
In conclusion, the maximum loan to value on a buy-to-let mortgage varies depending on the lender and the borrower’s circ*mstances. The three most common maximum LTVs are 75%, 80%, and 85%. Several factors can affect the maximum LTV, including rental income, property location, and the borrower’s credit history. While high LTV buy-to-let mortgages offer advantages, such as enabling borrowers to purchase more expensive properties, they also come with increased risk.
