Criteria part two - Buy-to-Let income needed for mortgage.
Lenders in the first instance will base the amount they'll lend on the market rental figure, which is usually established by the lender employed surveyor. But there are a lot of other factors that are looked at, depending on the specific lender.
Some lenders have a minimum income requirement, which is commonly set at £25,000 per applicant, and is mandatory no matter how many existing buy-to-lets the client has. This is often proven by three payslips, a P60, and bank statements showing the salary credit going into the account. For the self employed, they will usually require 2-3 years SA302’s and tax overviews.
Due to buy-to-lets being un-regulated, mortgage lenders have to be careful with their criteria. 99% of lenders require you to own at least one other property at the time of making the application, and after the application has completed. This is to try and stop applicants purcasing a property as a buy-to-let when they intend to live in it. The motive for people to try this is usually because it is outside their current income and affordability limit to be able to purchase it as a residential.
It is also possible to remortgage your home property on a buy-to-let basis if you want to move to another property to live in. Again, nearly all lenders will insist that you complete the new purchase simultaneously with what is known as the let-to-buy remortgage. Again, this is intended to stop applicants remortgaging home property beyond what they are able to borrow under normal income and affordability limits.
There are a handful of specialist lenders that will take the entire application without any minimum income requirements, but they will insist that you are an experienced landlord with at least 6 months experience. This will mean you would have to have a property in your name, and have rented out for at least 6 months. The lender will still require proof of income if you have an income, and this is often proven by 3 payslips, P60, and bank statements showing the salary credit going into the account for employed applicants. For self employed, they will usually require 2 or 3 years SA302’S and tax overviews. The good thing is even if you earn nothing or a very small amount, the lender will look at your application based on rental income.
Rental income calculator is now mostly dependent on whether you are a lower rate tax payer or higher rate tax payer in the UK. The formula is normally that the rent is at least 125% of monthly mortgage interest charges for lower rate tax payers, and 145% for higher rate tax payers.
How to work out what you can borrow using these two common rental ratios.
125% lower rate tax payer.
Currently being used by most lenders for the calculation is a reversionary interest rate of 5%, but you would need to check with the lender what rate they are using currently for this.
Lower rate tax payer
Firstly you would need to work out the mortgage you think you will need. Lets say a £300,000 purchase price minus standard 25% deposit for buy to lets = £225,000 mortgage needed. Then you multiply this by 5% = £11250, and then divide by 12 to give you a monthly interest amount of £937.50. Next you multiply by the current lenders lower rate tax payer ratio of 125%. So in this example, £1171.88 is what the market rent needs to be. If it’s the same or higher than this you are good to go for the required mortgage amount. If it is lower you will need to put more deposit towards the purchase price to be able to buy the property .
For higher rate tax payers
Exactly the same formula to get to the monthly interest amount of £937.50. Then multiply by the lenders higher rate tax payer ratio 145%. In this example, £1359.38 this is what the market rent needs to be. If it’s the same or higher than this you are good to go for the required mortgage amount. If it is lower, you will need to put more deposit towards the purchase price to be able to buy the property .
So you can see if you are a higher rate tax payer, you would need more rental income from property than as a lower rate tax payer.
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