An adverse credit buy to let (BTL) mortgage is just what it says – a buy to let mortgage for someone who has an adverse credit history. Can you get one? Yes, you can – though you might have to look a bit harder than normal.
Mortgages and your credit history
When you apply for any kind of mortgage – including a BTL mortgage – one of the principal investigations any lender will make is about your credit history. Your credit history indicates how you have managed debt in the past, whether you have made repayments on time, or if you have missed some altogether – all as a way of trying to determine whether you are likely to repay the mortgage loan for which you are now applying.
If you have defaulted on the repayment of past debts or credit, had to make individual voluntary arrangements (IVAs) with creditors, received county court judgments (CCJs) against you, or ever declared bankruptcy, you will be given a low credit score. A low credit score means it is likely to prove tough getting a mortgage, warned Which? magazine in an article last updated in March 2020.
What credit score do I need for a BTL mortgage?
The credit reference agency Experian explodes the myth that your credit history gives you just one credit score.
That is simply not the case. Whenever you make an application for a mortgage – or, indeed, any other kind of credit – the lender will work out a credit score for you, based on its own lending criteria.
In the same way, the credit reference agencies also calculate their own credit score for you. Typically, the higher the score, the more likely you are to be granted the loan or credit for which you are applying. In the case of Experian, for example, credit scores run from a high of 999 down to zero. The higher the score, the more qualified you are likely to be for the most attractive mortgage deals and rates – but with a low score you could be struggling to get a mortgage.
Adverse credit buy to let (BTL) mortgage
It is not just your credit score that potential lenders want to examine. Your past record of managing debt might tell them something about what to expect in the future, but any new mortgage also needs to be affordable. Will you be able to make the mortgage repayments from the income you receive, less the expenses and other expenditure you are likely to be making?
It is at this point, of course, that a buy to let mortgage differs from a standard residential mortgage designed for the home owner-occupier.
Decisions on whether to grant BTL mortgages are made on the strength of the business case made by the prospective landlord. Will the anticipated rental income from the let property be sufficient both to cover the monthly mortgage repayments and meet all the running expenses – such as repairs, maintenance, and landlord’s insurance?
For that reason, BTL mortgage lenders typically look for a rental income equivalent to at least 125% of the mortgage repayments. The strength of the business case – evidence that projected rental income is likely to significantly exceed that minimum 125%, for example – may take priority over the borrower’s poor credit history. The lender may be prepared to exercise greater flexibility towards a BTL applicant with a poor credit history if the business case for the loan is especially strong.
If rental income is merely hovering around the lender’s minimum guidelines, and with everything else being equal, however, the applicant with adverse credit may be offered less favourable borrowing terms.
The loan to value (LTV) ratio of the BTL mortgage to the value of the property may be lowered, for example – so that you would have to find a bigger deposit – or you might be offered a less competitive rate of interest on your mortgage deal.
A poor credit history and a BTL mortgage
Even if you have adverse credit, however, the type of BTL mortgage you are likely to be offered is likely to be the same as that offered to other applicants – namely, an interest-only mortgage. With such a mortgage, you repay only the interest accruing on your mortgage in the instalments paid each month while repayment of the capital loan is delayed until the end of the mortgage loan. It is at that stage, therefore, that the typical BTL landlord sells the property and repays the mortgage capital from the sale of a property that has appreciated in value over the preceding years.
Seeking specialist advice from an adverse credit buy to let mortgage broker may be your next step.