How Much Can You Borrow On A Let To Buy

For the homeowners who are willing to purchase their next home without selling the home they currently own, a let-to-buy mortgage can be a good option. The old property becomes a rental investment and the next property is financed with a new residential mortgage. 

One of the most frequently asked questions by borrowers is, how much they can really borrow on a let to buy. The answer depends on a variety of factors including rental income, stress test, loan to value (LTV) limits, personal affordability and lender requirements. 

Understanding how these rules work can help homeowners make better plans and improve their chances of securing finance. 

What Is a Let-to-Buy Mortgage? 

A let-to-buy mortgage is comprised of two separate mortgage contracts. The existing residential property is remortgaged as a buy-to-let and is rented out, and a new residential mortgage is taken out on the property the borrower wishes to occupy. 

The borrowing capacity is typically calculated based on the expected rental income, not personal income. But the lender will still check all the applicant's finances as they would have two mortgage payments on their shoulders.  

Understanding Rental Stress Testing 

Rental stress testing is one of the key factors that can impact borrowing capacity. 

Lenders do not just determine if the projected rents will pay for the mortgage payment at the interest rate. Rather, they use a higher hypothetical interest rate to determine if the home will be affordable, in case the interest rates rise in the future. This is called "stress testing". 

A lender determines the amount of the mortgage payment that would be at a stressed interest rate, which is typically between 5.5% and 7%, depending on the lender and the type of mortgage. The rent received by the entity should be sufficient to cover the payment made under the stressed payment by a certain percentage called the Interest Coverage Ratio (ICR). 

The idea behind this is to reduce the risk for lenders while allowing the borrower to keep paying the mortgage if rates go up. 

How LTV Limits Affect Borrowing 

LTV, or loan-to-value, is another significant factor that affects the amount of money that can be secured. 

LTV is the percentage of the property's value to the amount of money borrowed. The remainder will be financed from the borrower's equity. 

If you are looking to buy a house with a let-to-buy mortgage, most lenders will have a maximum LTV of around 75%, but this can differ from lender to lender. In some cases, the higher LTV product may be available, but the higher the LTV, the higher the borrowing costs. 

For example: 

A property valued at £400,000 

Maximum LTV of 75% 

Maximum borrowing of £300,000 

If the rent makes this a bigger mortgage, then the lender's LTV limit can still limit the amount. 

Other Factors That May Influence Borrowing 

There are many other factors that can impact how much a lender is willing to offer. 

Lending criteria might also be affected by the type of property, especially flats, houses in multiple occupation (HMO) or non-standard construction property. 

Candidates with a strong credit profile can have access to better mortgage deals. Some lenders may also have a positive view of landlords' experience. 

Some lenders might have minimum income requirements even if rent income meets the affordability requirements. Applicants might require a minimum personal income of approximately £25,000 or more, in some cases. 

Conclusion 

The amount you can borrow on a let-to-buy mortgage depends on a combination of rental income, stress testing calculations, LTV limits and residential affordability. The buy-to-let element is usually based on rental income, but the lender will also take account of your overall financial circumstances to make sure the buy-to-let is viable. 

Since the lender criteria vary significantly, assistance from a professional mortgage broker such as AWS Private Finance can help identify suitable lending options and create a finance structure that supports both property investment and future homeownership goals.