BTL mortgages based on rental income only
Are you a budding entrepreneur looking to get into the property game? Have you seen how lucrative a living you can make from receiving rental income? Well this blog might just exactly what you need if you are looking to build your property empire. In this blog, we will go through one of our most commonly asked questions as buy-to-let mortgage advisors. Can I get a buy to let mortgages based on rental income only?
Buy To Let Mortgages – How They Work
Throughout history, where there has been property, there has been a landlord. From the early days of tribal elders receiving shares of harvest in exchange for land to live on, to multi national corporations with billions of pounds worth of property receiving millions in rental income every month. There has always been and will probably always be a market for buy to let property purchases. Although, recent changes to tax, mortgage lending criteria, and the general cost of living hike has made some buy to let properties more tricky to make a profit on, and we are definitely seeing some landlords opting to sell up and move on to other investments.
Generally how a mortgaged buy to let property works is like this:
When someone decides to either purchase a property to let out or decides to let their own property out, the first thing the potential landlord does is speak to a mortgage advisor to talk through their options and what is actually possible. If you own the property already as a residential home, the buy to let mortgage advisor will look at the current mortgage and see what the options are for changing it to a buy to let one.
Generally the lender will need the owner of the property to have at least 20% equity in the property in order to switch to a buy to let mortgage, but this varies depending on the lender. The advisor will look at the anticipated rental income based on the area and the type of property and will then help the landlord to chose a mortgage product and repayment type that will make the borrower a profit from the rent. The lender will usually assess how much income you receive either as an individual or a pair if you are borrowing with anyone else, and they will determine how they are willing to lend you.
Estimated BTL mortgage approvals per year, showing a slump in 2021 and 2022. (Source: www.uswitch.com)
Purchasing A Buy To Let Property
Purchasing a property specifically to rent out is a little bit different due to lender’s criteria. Most buy to let lenders will want you to not be a first time buyer i.e. you must own your own residential property or have owned one in the past. They will generally want you to contribute a minimum of 20% deposit yourself but more realistically 25-30% deposit will get you a better deal and open up more lenders.
Your mortgage advisor will then do the same affordability checks, making sure that the expected rental income will be enough to cover the rent and make the landlord a profit. Most BTL mortgage lenders will need you to have a minimum income (not received from rent) and will need to know how you plan on paying back the mortgage if you opt for an interest only loan.
Once you own the property and start letting it out to tenants, you will be expected by the government to pay tax on the rental income you receive either personally or through a limited company.
Do I Need An Income To Purchase A Buy To Let Property?
The short answer is no, it is not absolutely essential that you have an income to purchase a buy to let property. However, the majority of lenders will need you to have some sort of minimal employed or self employed income. In this current economic climate, it has become more difficult to do buy to let mortgages based on rental income alone, rather than using any employment income in the application. The main reason for this is the rise in interest rates since September 2022.
Buy to let lenders have been applying higher stress rate levels to the borrowing that you are trying to do. What it is has basically meant is that in places like London where our offices are based, the buy to let affordability checks we have mentioned earlier very rarely fit. That’s why there is a mortgage option called ‘top slicing’ which is essentially using your income to support the rental yield, which may be less than it needs to be.
The main thing that buy to let lenders are concerned about is of course the rental income that is likely to be received. If you don’t receive enough rent on the property, then there is a risk that you won’t be able to afford to keep up with your mortgage payment. So a lot of lenders will want to see that you have a separate income to support your application, should anything go wrong.
Buy To Let Mortgages Based On Rental Income Only
When looking for a mortgage with your mortgage advisor, you may start to see mortgage products where the criteria says ‘No income proof required’ or ‘no minimum income required’. These lenders and products are essentially confirming to you that their main interest is how much rental income you are likely to receive, and not how much you earn.
With these lenders they will generally say things like the rent must cover 145% of the mortgage to be affordable or something like that. Generally, because the risk factor is often higher by basing the lending on rental income alone, they may insist that the rental income received is higher than other lenders. Also, because of the scarcity of lenders offering buy to let mortgage on rental income alone, they will likely charge a higher rate of interest than other lenders.
Landlord and tenants (Source: www.homelet.co.uk)
How Do I Know How Much Rental Income My Buy To Let Property Will Make?
In an ideal world for a person looking to make a living as a landlord, you would want to make as much money as possible on your property so that everything is self financing and you can sit back and relax. However, this is not the case. As a landlord, you have the responsibility to charge a reasonable rental amount per month and in exchange provide a maintained and comfortable place for your tenants to live.
In most cases you are not able to simply make up a rental figure and charge it. The best thing to do is speak to a property professional like a mortgage advisor or an estate agent who will be able to assess average rental incomes in the area that you are going to be operating and the property type that you will be letting.
Once an educated estimate has been calculated by the property professional, your mortgage advisor will use this figure in the lender’s affordability calculations. The lender will use this rental figure either in conjunction with your own income, or just on it’s own to make sure that the monthly mortgage payments will be kept up with. If you are looking to get buy to let mortgages based on rental income only, the rent expected will need to be higher than other lenders allow but your advisor will be able to help with this.
What Will Happen With My Mortgage If I Can’t Pay It?
With any mortgage, the worst case scenario to find yourself in is being unable to keep up with your payments. When you apply for a mortgage, you enter into a legal agreement with the bank that says that you will pay back the mortgage and interest on the loan to the lender. If you choose a purely interest only loan, you will agree to pay interest on the loan per month to the lender, and then pay back the entire balance of the mortgage at the end of the term.
If you are unable to pay your mortgage, you will normally start to incur mortgage arrears. This means that you are behind on your payments and this will show on your credit file. Too many mortgage arrears will turn into defaults and then your lender has the legal right to repossess the property. If you are a landlord, you need to ensure that you have a paying tenant in the property consistently so that their rent will cover your mortgage costs and you never miss a payment.
If you lose a tenant and are unable to find another immediately, you will need to make sure that you have enough money either coming in from an external source or in savings to cover the mortgage otherwise this could happen to you. As you can imagine, if you have a buy to let mortgages based on rental income only and don’t have another source of income, this risk is heightened even more.
Using A Buy To Let Mortgage Specialist To Secure Rental Income
The worst thing that any prospective future landlord can do is try to get a buy to let mortgage on their own. There are thousands of BTL lenders in the UK market, and as we have already mentioned getting a BTL mortgage is much more difficult than it once was. Finding the right mortgage lender and product that matches your affordability and the rental income you are about to receive is a minefield. Not only can you go round in circles trying to find the most lucrative deal, you can also risk getting a mortgage on a property that won’t actually make you any money and could leave you out of pocket.
Get in contact with our specialist buy to let team at Oportfolio Mortgages. Whether you are looking to purchase a buy to let or refinance a property you already own, we can help. So, if you or anyone you know is needing help with a buy to let mortgage, please feel free to give us a call.
