The buy-to-let market has often been a ‘ride’ of ups and downs for all stakeholders, but particularly for landlords. Once a reliable route to steady yields and potential long-term capital growth, today a sharper strategy and deeper mortgage broker-client insight is required.
Put simply, for landlords, UK rental income alone doesn’t always cover the mortgage and property maintenance costs. Mortgage costs have increased as a result of higher interest rates and affordability challenges, although these costs are falling again as the Bank Base Rate (BBR) falls.
Even as tenant demand holds firm, borrowers and their advisers can face greater challenges getting deals over the line. So, what are the options to make the numbers work for your buy-to-let clients?
Affordability pressures
Plenty of landlords continue to find new tactics to get yield from their property investments. BBR falls and rising consumer confidence mean at last, some activity is returning to the buy-to-let space. According to trade body UK Finance, the last quarter of 2024 saw over 52,000 new buy-to-let loans complete, which is a 39% increase in volume and a 47% rise in value against the same quarter the year before.
Rental yields remain solid. The average UK gross yield reached 7% in Q4, up from 6.74% a year earlier. But rent inflation is slowing. Zoopla’s latest data showed annual rent increases have eased to 3%, the lowest level in three and a half years.
At the same time, affordability for tenants is tighter, with landlords having to cover costs, such as increased mortgage repayments plus higher costs across the other responsibilities and tax implications of being a landlord.
The interest coverage ratio
The buy-to-let mortgage affordability assessment has become the point of reckoning, where we, as lenders, have to balance market pressures with the potential lending risk. One of the central tools all lenders use in buy-to-let affordability assessments is the interest coverage ratio (ICR). This widely-used standard allows us to evaluate whether the rent being charged on a property can cover the interest on the mortgage. Typically, lenders want to see the rental income exceed the mortgage interest by 45%, which equates to an ICR of 145%.
Put simply, if a landlord’s monthly interest payments are £800, their rental income needs to be at least £1,160 for the case to pass on ICR alone. It’s a safety margin that protects both lender and borrower from market volatility, but it can present a hurdle in regions where yields are lower or property prices are higher, like London or the South East, for example.
If the rental income falls short of the ICR threshold, the application may be declined, unless the lender allows for top slicing.
The income boost
We use top-slicing to consider a borrower’s personal income in addition to their rental income when assessing affordability.
Take, for example, a landlord earning £65,000 annually in employment. Their rental property generates £950 per month, but their mortgage interest costs them £800 monthly. At 119%, this falls short of the standard 145% requirement, but with top slicing, we can assess the borrower’s overall financial position and determine that their income covers the shortfall.
At Bank of Ireland for Intermediaries, we offer a proposition that caters directly to the challenges advisers and their clients face in today’s buy-to-let market. The bank offers two affordability pathways. First, a standard ICR-based route which doesn’t require any proof of income and applies a 145% stress to the rental income which is well within market norms. Or for landlords who wish to remortgage with no extra borrowing, we’ll consider rental income which is at least 125% of the monthly interest for ICR applications. Meanwhile, top-slicing provides a second route and is designed for borrowers whose rental income covers at least 100% of the monthly interest.
To qualify for top slicing, clients must have a minimum household income of £40,000 and the property must be valued at £100,000 or more. The Bank accepts up to four applicants on a case, provided all live at the same address and at least one is a homeowner.
Borrowers can hold up to three mortgaged buy-to-let properties across all lenders, including Bank of Ireland UK, with a maximum exposure of £2m to the bank. We go up to 75% loan-to-value (LTV), with individual loan sizes capped at £750,000.
Zoopla forecasts that rents will rise between 3% and 4% this year, but affordability remains the key constraint for both tenants and landlords. With no major boost in rental supply expected – and new regulatory changes on the horizon – advisers will need to guide clients through an increasingly complex landscape.
Lenders like ourselves are responding with practical solutions that reflect the realities of today’s market. Whether through top slicing or flexible underwriting, our emphasis is on creating a balance between risk and opportunity, sustainability and service.
Buy-to-let is now a much more nuanced investment than it was perhaps at any other time. But with the right approach, the right lender, and the right advice, it’s still a sector where the numbers can add up.
Alan Longhorn is head of distribution, sales and marketing at Bank of Ireland for Intermediaries.
