Bad Credit Buy-to-Let Mortgages

How to get a buy-to-let mortgage with bad credit

You may have found getting a buy-to-let mortgage approved with bad credit a real challenge, either doing it alone or through a broker. We get it, and it can be tricky, especially if you’re an inexperienced landlord or broker.

The main considerations lenders look at are:

• Exactly what the bad credit issue was
• How long ago it happened
• Has it been settled
• Why it occurred
• As well as how much equity/deposit you have
• And a lot also hinges on the rental income, and affordability stress testing across your portfolio (if you have multiple properties)

In general, the more minor the bad credit and the more time that has passed since, the better your chances of finding a deal that works.

The impact of different types of credit issue

As mentioned in the summary, the type of credit issue you have impacts the number of lenders that will consider you, and typically also the rate you’ll get and the deposit you’ll need.

To give you an idea, as of writing, there are at least 63 BTL lenders that can consider late payments, 56 for BTL + defaults or CCJs in the last 3 years, 27 for BTL + Debt Management Plans in the last 3 years, 11 for BTL + IVAs settled in the last 3 years, 21 for BTL + a previous repossession, and at least 8 lenders for BTL + a bankruptcy discharged in the last 3 years.

Less-severe issues

• Low credit score
• Late and missed payments
• No credit history

Severe issues

• Mortgage arrears
• Defaults
• County Court Judgements (CCJs)
• Debt Management Plans (DMPs)

Very severe issues

• IVAs
• Debt Relief Orders (DROs)
• Bankruptcies
• Repossessions

The impact of when your issues were

In general, the more recent the issue, the fewer lenders will consider you.

Even the most severe issues (e.g., bankruptcy) can be accepted by a large percentage of lenders if they were discharged 6+ years ago, whereas smaller issues like late payments can lead to many lenders rejecting you if they were within the last 12 months.

Some examples of this (approx. lenders correct at last update, as reported by the OMA®Engine data):

• Debt Management Plans (DMPs) live now = 25+ lenders
• DMP completed 0-3 years ago = 40+ lenders
• DMP completed 3-6 years ago = 55+ lenders
• DMP completed over 6 years ago = 75+ lenders
• Bankruptcy discharged in the last 12 months = 4+ lenders
• Bankruptcy in the last 3 years = 38+ lenders
• Bankruptcy registered 3-6 years ago = 43+ lenders
• Bankruptcy registered over 6 years ago = 70+ lenders

How much deposit you’ll need

The minimum deposit amount you will need to get a buy-to-let mortgage can vary depending on what lenders are offering, and has been as low as 15%. At the time of the last update, some lenders were offering 20%, but the majority were starting at 25%.

That said, if you include bad credit history, the number of lenders at 25% reduces (again, depending on what and when), and you might find that you need to put down 5-10% more.

Is it different for portfolio landlords?

In short, maybe.

Whilst lenders for new mortgages (either purchase or remortgage) will assess your credit issues against their criteria in much the same way, having a portfolio allows you to evidence a greater spread of security – the more equity you have, the less risk you are.

In the same way that one property with 50% LTV would be lower risk, there are more lenders than if you had a 25% deposit/equity.

If you have multiple properties and your total equity vs. loans is sufficient, new lenders may still consider your application, whereas they might not for someone with one property already leveraged to the limit.

Credit “score” and credit “checks” are not the same

Don’t worry too much about what your credit score is.

2 main points here:

1. Lenders have their own way of assessing you – Whilst a score from one of the credit reference agencies is often a good indicator of what’s going on in your credit profile, it doesn’t translate across to mortgage applications which include so many other factors (your income, the property rental income, the value/equity etc.). Lenders will score you according to their own model, and it might be that someone high on Experian doesn’t pass with the lender, or vice versa, someone low on Equifax passes with the lender.
2. Not all lenders “score” anyway. Often, the more flexible bad credit lenders will just check your report for issues, and if they are all within policy, you get approved.

How credit issues impact how much you can borrow

In short, getting the maximum borrowing can be harder, as the credit issues and potential higher rates can impact affordability assessments.

This is mainly due to the reduction in the number of lenders (and therefore the less likely likelihood of the lender offering the most being available to you) and the fact that increased interest rates can reduce borrowing if the rental income is fixed, because they may use higher rates for the stress test calculations.

A more detailed explanation:

Interest Coverage Ratio ICR

Lenders will assess how much you can borrow in different ways, using different calculations to evidence the rental income required to cover the monthly mortgage interest payments. They call this the ICR (Interest Coverage Ratio), which can be 125% for basic rate taxpayers, 145% for higher rate and even 165% for additional rate taxpayers.

Stress-tested rate

They then use a rate (not necessarily the actual pay rate on your mortgage, but often a higher rate) to determine the cost if rates were to increase at some point. This allows for some breathing room, and the rental income must exceed the resulting monthly payment accordingly.

An Example

£100k mortgage, 5.5% stress test rate, 125% lower rate taxpayer, £750 pm rent

To establish the rent needed for a 100k mortgage at 5.5% stress rate and 125% ICR, you’d take the annual interest (£100,000 * 5.5% = £5,500), and then multiply this by the ICR (5,500 * 125% = £6,875). So, essentially, the required rent is £572.91 a month, to cover a payment of £458.33.

If you wanted to establish the max loan, you could work this backwards from the rental income. It would be simply the annual rent (750 x 12 = £9,000), divided by the ICR (9,000 / 125% = £7,200), divided by the interest stress rate (£7,200 / 0.055 = £130,909).

How does bad credit impact the stress test rate?

Lenders can essentially be tighter on these numbers and increase the stress rate used. If the nominal rate is 5.5%, some bad credit lenders use 7-8%.

Longer-term fixed rates can increase loan amounts

The stress rate used can be lower if you take a longer fixed rate, as this brings more stability of payment, and lenders are more comfortable lending to higher levels.

Using your personal income for BTL affordability

This is known as “top-slicing” in the industry. Basically, a lender says, “If you want to mortgage the property beyond the viable coverage of rental income, you can, but you’ve got to evidence how you’ll afford to cover the shortfall.”

So if rent was £1000 pm and the lender needed it to be £1250 to cover the mortgage interest payment at their stress-tested rate, you’d need to evidence other personal disposable income to make up the £250. Typically, this would be an employed salary or profitable set of accounts if self-employed.

What if I want to borrow more money?

If you’ve got BTLs already and want to borrow more, there are a couple of considerations depending on your situation:

You have a good rate now, but have had new credit issues since you took it

If you are tied in or approaching the end and could refinance with the same lender, this might be a good option. Lenders should offer you a new deal on the same basis as your current one (i.e., not changing anything other than the deal, so a like-for-like switch), but they are, of course, within their rights not to offer you any additional borrowing. They may consider doing so on a different mortgage and rate, but it depends on whether your credit issues are within policy or not.

If not, your options are to switch the whole mortgage to a new lender and borrow more at the same time as one bigger mortgage OR to keep the deal you’ve got and borrow more on a second mortgage with a new lender (aka secured loan). Often, the latter is a good option if the main mortgage you have is a great deal.

You have a high rate now, but time has passed, and your credit issues are older

If you’ve had issues that are now older, you may do well to look to refinance the whole mortgage and take the additional borrowing all with one new lender. Again, a lot depends on when your deal ends or if it has any repayment charges.

Who the lenders are

There are over 100 lenders in the market right now, all with wildly different policies on what they will and will not accept across hundreds of criteria points (not just credit issues). Some are really risk-averse and tight on credit history, while others specialise in it.

You may already know this, but there are basically two ways to get a mortgage—directly to the lender or through a broker. While there are many that you can approach directly, finding the right one for your situation can be tough when you consider they all have different stances on your portfolio, ownership structure, leverage and exposure, rental yield and personal income, credit history, and many other factors.

Also, bear in mind that approximately 30% of lenders are broker-only. You literally cannot be whole-of-market and are limiting your options by not using a broker, especially if you have credit issues, as broker-only lenders tend to be the most flexible.

You can review this on the OMA® Comparison tool here, but to list some of these lenders here:

Pepper money, Vida Home loans, Kensington, Bluestone, April, TML, Aldermore, West One, Shawbrook and many more!

What rates to expect

Most people are surprised to learn that rates are not as expensive as expected.

When issues are older or less severe, they often have a low impact on rate and deposit requirements. While this may reduce the number of lenders that consider you, those that do may still be offering table-topping deals.

When issues are more recent and severe, they reduce the lender options further, which naturally means your chance of getting the best deal is lower. However, these lenders tend to charge more in fees and interest to cover the increased risk.