If you are wondering whether rental income can be used to qualify for a buy to let (BTL) mortgage in the UK, then the answer is “yes” – though finding a lender willing to do so may sometimes prove a challenge.
Buy to let mortgages are granted based on the business case made by the applicant – and that business case rests on the rental yield that is projected to be realised once the mortgaged property is let.
If you are in search of buy to let mortgages based on rent only, success is likely to depend on the level of rental yield projected and the certainty with which that projection might be met.
Most buy to let mortgage lenders look for evidence that your let property will yield a rental income that is at least 125% of your monthly mortgage repayments – in some cases, they may be looking for a rental income of at least 145%, explains the website Money Facts.
In making that calculation, most lenders use a representative rate of interest – known as the interest cover ratio (ICR) – rather than the actual rate applied to the mortgage, which is likely to vary over time of course. Currently, most lenders use a representative interest rate of 5.5%, suggests an article by Which? magazine.
Proof of income
It is one thing to have a projected rental yield; it is quite another to convince a mortgage lender that the projection will be realised. That is the objective if you hope to secure a buy to let mortgage based on rent only.
A guaranteed rental yield, of course, is impossible to achieve. What any mortgage lender will look for instead is the expertise, experience, and professionalism with which you have been able to arrive at the projections of rental yield.
Factors which might count in your favour include:
- if the property is currently let to tenants, there is a clear history of rental income that at least one landlord has managed to achieve;
- if you already own other buy to let properties, you may be able to demonstrate your proven track record of success in property investment and the management of buy to let properties; and
- with the help of a sufficiently experienced and expert mortgage broker, you may be able to lend greater weight to the business case to be made for investing in the particular property for which you want a mortgage.
Other sources of income
Although you might get a buy to let mortgage based on rent only, your chances of success are going to be enhanced if you have proof of other sources of income – from any source, earned or investment income.
A secondary income stream may give a lender confidence and reassurance that even if your let property experiences a period of sustained loss of rental income – because you are finding it difficult to attract suitable tenants, for instance.
You are probably in the strongest position if you have a regular, full-time job. Your employer’s confirmation, together with the payslips you receive each month, will provide evidence enough of that regular income.
If you are self-employed, it is typically somewhat more difficult furnishing the evidence that most lenders are going to require. Some lenders ask to see proof stretching over three years, some for two years, and others for not much longer than 12 months.
Whatever the period requested, the proof you need may be made by way of audited accounts or the official SA302 forms which are issued by HMRC to confirm what you have earned in any given year and the income tax you have paid on those earnings.
Expanding your property portfolio
Once you have secured your buy to let mortgage and have been doing business as a landlord for several years’, you have a proven track record of managing the business, attracting the rental yield you anticipated, and maintaining the repayments on your mortgage.
Having demonstrated that you have sufficient income to cover one mortgage, your lender is likely to look more favourably on your plans to expand your portfolio by purchasing a further property with the help of another mortgage. In that event, it is even more likely that any such additional buy to mortgage is based on rent only – since it will be reasonable to assume that any leaner times in terms of rental income from one property can be more than compensated by the income from your other property or properties.
If you want a BTL mortgage based on rental income, you may wish to speak to a mortgage broker who can identify the most suitable lender and product for you.