UK Buy-To-Let Mortgage News

The buy-to-let market in the UK, and the rest of the world, is beginning to pick again as the optimism in both the overall financial market and the real estate market in particular begins to trend upwards. The high house price inflation and problems of affordability are the consequence of an inadequate supply of new housing to the UK market and buy-to-let landlords who have been willing to invest in property long-term have most likely encouraged the construction of new property, particularly inner-city apartments, towards the end of this decade.

The private rental sector is now seeing healthy demand from potential tenants despite increasing interest rates. As well as those people for whom rental is the only option the market is also being kept buoyant by the number of nervous housebuyers who are waiting to see some real movement one way or another in the purchasing market. Against this backdrop of healthy demand the buy to let market remains robust and actually grew more than the mainstream home mortgage market last year.

With around 85,000 mortgages worth over £100 billion and accounting for over 105 of the UK mortgage market, the buy to let sector is now a very significant component of the Uk mortgage market. If you are considering venturing into the buy to let market then the first thing you need to understand is how the lenders will calculate your mortgage availability.

There are 2 main ways that lenders use to calculate your maximum buy-to-let borrowing requirements:

Normal Buy to Let Mortgage Calculation Method

The lender will allow you 3 times your annual salary or income plus a percentage of your forecast rental income.

An example:

If your annual salary is say £40,000 and your forecast rental income on the property against which you are borrowing is £15,000 then you will generally be offered a mortgage ceiling of £127,500 (based on 50% of the rental income being added).

40,000 x 3 + (15,000 x 50%) = £127,500

Deduction Rule Buy to Let Mortgage Calculation Method:

This method is based on an annual income calculation but also factors in any existing loan commitments you have. Against this figure lenders then apply the 'deduction rule'. The deduction rule relates to your annual mortgage re-payments worked out at a pre-set level of interest.

An example:

Say the lender provides 3 times your annual income of £40,000 per year and you have an outstanding mortgage balance on your property of £150,000. The annual mortgage repayments are calculated at a fixed level of interest for the year to be £10,000 (at 10% pre-set interest). This repayment figure is then deducted from your salary to leave £15,000, which is then multiplied by 3.5 to calculate the figure you are allowed to borrow ie. in this case this equates to £52,500.

Read more information regarding buy to let mortgage calculations and buy to let mortgages in general, at the Buy to Let Mortgages Guide where James writes.

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