Buy to let mortgages are advanced on the strength of the business case made by the prospective landlord – will there be sufficient rental income generated to at least cover the need to maintain the mortgage repayments and meet the operating expenses of the buy to let business?
That reliance on the buy to let business model leads to two further fundamental differences between a buy to let (BTL) mortgage and an owner-occupier’s mortgage for the home they live in:
- because they are essentially business transactions, buy to let mortgages are not regulated by the Financial Conduct Authority (FCA), explains the Council of Mortgage Lenders (CML); and
- affordability – your ability to maintain the mortgage repayments is mainly measured with reference to the lettings business (with any other income you receive used to support your mortgage application).
Both factors may help to make lenders attitudes towards establishing proof of income more flexible when you are applying for a buy to let mortgage than, say, a standard residential mortgage as an owner-occupier.
Buy to let mortgages with no proof of income
Some buy to let mortgage lenders stipulate a minimum income for applicants. In the case of HSBC – and several others – for example, a minimum income of £25,000 a year is required.
The relatively low level of qualifying income again reflects the fact that any lender is more interested in the business case for your proposed buy to let investment – namely the likely yield from rents received – than your earned income.
Indeed, at one time, some lenders were prepared to accept your word for the income you said you earned – a so-called “self-certification” process.
Self-certification was popular among the self-employed, freelancers and those earning commissions since it was at times notoriously difficult to furnish documentary proof of earnings over any sustained period. Because they relied on the honesty of the mortgage applicant – a reliance that was sometimes abused – they became known as “liar loans” by some sections of the media.
For better or worse, however, because of tighter regulation of the mortgage market and more rigorous affordability assessments by the major lenders, self-certification mortgages have been banned in the UK.
BTL self-employed mortgage
The fact remains, however, that some individuals – especially the self-employed – continue to find it more than usually difficult to furnish the proof of income required by many buy to let mortgage lenders.
But the self-employed may qualify just as easily as anyone else for a buy to let mortgage. Lenders recognise that more important than any other income is the projected success of the buy to let business and its reliance on rents received from tenants. More important than your proof of income, therefore, is likely to be your experience of the property market and the private rented sector in particular.
Traditional mortgage lenders who concentrate on the residential market for owner-occupiers may continue to ask for two or even three years of self-employed tax returns – form SA302 which is HMRC’s confirmation of how much you have earned and how much tax has been paid – or the audited accounts of your business for the same period. The aim, of course, is to satisfy the lender that your buy to let mortgage might remain affordable even if rents falter for a while – you have a longer than usual void, for example.
But a hard and fast approach in requiring proof of income for the past two or three years overlooks one important reality – and that is the dynamic, constantly changing environment in which you are likely to be self-employed.
For any number of reasons, one year of poor trading might be followed by a more certain performance by your business that sets it on the road to longer-term success. A snapshot of two or three years of SA302 returns or audited accounts, in other words, cannot give the whole or accurate picture of your financial standing and reliability as a buy to let mortgage borrower.
Recognising these realities, more and more buy to let mortgage lenders these days are adopting a pragmatic approach and placing far greater emphasis on the business case to be made by your plans as a landlord and the rental yield your let property is likely to achieve.
While you may no longer be able to self-certify your income and some proof of income is likely to be required by any buy to let mortgage lender, that proof is likely to be flexible and just one year’s worth of accounts or a single SA302 return may suffice.
Your mortgage broker will be able to identify the most suitable buy to let mortgage provider in circumstances where you are unable to prove your income.