Here's a very simplistic example of how borrowing via a buy-to-let (BTL) mortgage allows you to multiply your returns versus owning a property all-cash:
A landlord purchasing a £300,000 property outright would need to invest the full £300,000 and generate £15,000 in annual rental profit to achieve a 5% return. By contrast, a landlord using a 75% interest only buy to let mortgage would invest £75,000 as a deposit. Assuming a 5% mortgage rate, annual interest costs would total £11,250, leaving rental profit of £3,750. In both scenarios, the return on invested capital remains 5%.
You're getting the same ROI, but by borrowing at 75% LTV, you could buy four properties instead of one with the same amount of capital.
e.g. Prices rise by 5% over 3 years, and properties worth £300,000 are now worth £315,000. The cash owner has gained £15,000 equity and a 5% return, while the investor with the 75% mortgage has seen a 20% return on their money.
Across four properties (25% deposit put down on each), it's also four times the equity gain, £60,000. Of course, you would have to spend more on mortgages and on maintenance, repairs, and legislative changes, and there could be months when you don't have paying tenants, but the overall return could still be better.
Once you have built up enough equity in a property, you should be able to remortgage and release some of that profit, which you could then use to fund the deposit for another property.
In this way, over time, it's possible to 'recycle' your capital and end up with a rental property that has none of your own money tied up in it. As long as you invest wisely, the rental income can cover all the ongoing running costs, including servicing the mortgage debt, and still leave you some profit on top.
How easy is it to get a BTL mortgage?
When you apply for a mortgage for a home to live in yourself, lenders assess affordability primarily based on your personal income. But rental properties are considered a business investment, so the amount a lender is willing to offer via a mortgage is based primarily on the property's rental income potential, as confirmed by a qualified surveyor. Usually, the lender will require the monthly rental income to be between 125% and 145% of the mortgage repayment amount, known as the interest coverage ratio (ICR).
The other significant differences between a BTL mortgage and a standard residential loan are that around three-quarters of BTL products are broker-only deals, meaning you cannot access them as an individual going directly to a lender. To ensure you get the most appropriate product at the best rate, you need to work with a specialist broker, such as Mortgage Scout.
How many BTL properties can I own with a mortgage?
At the point you buy your fourth BTL property, you are classed as a 'portfolio landlord', and the lending criteria tightens.
All the properties you own with mortgages are treated as a single portfolio, and the total borrowing cannot exceed 75% of the portfolio's value. For example, if you have already bought three properties with LTV mortgages of 80% and you want to buy a fourth, you have two options:
Wait until prices rise (this isn't a given) and you have enough equity to be able to remortgage those three properties at 75% LTV, or
Invest more capital yourself to bring down the LTV.
A specialist broker should be able to advise you on your options in more detail, according to your individual circumstances.
Other important things to know:
- A lender being "big" or "well known" doesn't mean they're right for your deal; a broker is best placed to advise#
- If you own over four mortgaged rental properties, many lenders will want to assess your whole portfolio
- Some lenders won't allow investors to have more than three BTL properties with them
- Some limit the number of properties you can own within one postcode or local authority area
- Lenders will usually cap the total level of borrowing, with higher levels for more experienced landlords
- The ICR is more likely to be 145%
So, if you are planning to build a significant portfolio, discuss this with a broker as early as possible so they can help ensure you can access the right deals and approach the most suitable lenders.
