Buy to Let Mortgages: Securing a Loan Based on Rental Income
Investing in the right buy-to-let properties can be a lucrative venture, offering the potential for steady rental income and long-term capital growth with the asset appreciating.
However, securing a buy-to-let mortgage can sometimes be complex, especially when relying primarily only on rental income rather than personal earnings.
In this guide, we’ll explore how buy-to-let mortgages based on rental income work, the criteria lenders consider, and why Kerr & Watson is your ideal partner for helping you with this process.
Understanding Buy to Let Mortgages
A buy to let mortgage (BTL) is specifically designed for investors who wish to purchase property to rent it out to tenants.
Unlike residential mortgages, where personal income plays a significant role, BTL mortgages can often be secured based on the expected rental income from the property, with sometimes, just a minimum income that the investor needs to earn separately.
This approach is particularly beneficial for those who may not have substantial personal income but have identified a promising rental property that will give them a good return.
Key Features of Buy To Let Mortgages
- Interest Rates: Typically higher than residential mortgages due to the perceived risk to the lender.
- Deposits: Usually require a larger deposit, often around 25-30% depending on how much rent the property will generate and the type of property.
- Affordability Assessment: Focused mainly on the rental income potential rather than the borrower’s personal income.
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How Rental Income Determines Mortgage Eligibility
The Role of Rental Income
For a buy-to-let mortgage based on rental income, lenders primarily assess the potential rental yield of the property. This involves a detailed analysis of the local rental market, property type, and expected monthly rent. The expected rent amount is then forecasted by a qualified surveyor. The key metric used by lenders is the Interest Cover Ratio (ICR), which compares the rental income against the mortgage payments.
Stress Tests and ICR Calculations
Lenders apply a stress test to ensure that the rental income can cover the mortgage payments, even if interest rates rise. Typically, lenders require the rental income to cover at least 125% to 145% of the mortgage payments depending on the applicant’s tax bracket. For instance, if the mortgage interest payments are £500 per month, the expected rental income should ideally be between £625 and £725. This varied heavily per lenders though so best to speak with a mortgage adviser.
Types of Buy-to-Let Mortgages
Interest-Only Mortgages
Many buy-to-let investors opt for interest-only mortgages, where monthly payments only cover the interest, with the principal repaid at the end of the mortgage term. This approach can keep monthly payments lower, making it easier to manage cash flow, especially if there are any unexpected costs such as property repairs.
Repayment Mortgages
Repayment mortgages require monthly payments that cover both the interest and a portion of the principal. While this leads to higher monthly payments, it ensures that the mortgage balance decreases over time which may be good if you are trying to pay the mortgage off to increase rent profits at a later point in your life.
Securing a Buy-to-Let Mortgage Without Proof of Income
No Income Proof Mortgages
Certain lenders offer buy-to-let mortgages without requiring proof of income. These products focus solely on the property’s rental potential, making them ideal for investors who may not have a steady income stream. However, these mortgages may come with higher interest rates due to the perceived increased risk. These mortgages may be suitable for people that have just started business and can not yet show their profits, or homemakers that do not have an income.
The Role of a Mortgage Broker
Finding your way around the buy-to-let mortgage market can be challenging, especially when seeking a mortgage based on rental income alone.
A knowledgeable mortgage broker can provide invaluable assistance by:
- Identifying Suitable Lenders: Brokers have access to a wide range of lenders, including those offering niche products like those that do not have a minimum income criteria.
- Tailoring Advice: They can help tailor mortgage options to fit your financial situation and investment goals.
- Simplifying the Process: Brokers handle the process in terms of dealing with the lender through to the mortgage offer stage.
Risks and Considerations
Market Fluctuations
The rental market can fluctuate, affecting your rental income. It’s important to have a financial buffer to cover potential void periods when the property is unoccupied or any large costs that you were not expecting, for example, property repairs. Owning a rental property involves ongoing maintenance and repairs. Budgeting for these expenses is essential to ensure the property remains attractive to tenants and compliant with regulations.
Tax Implications
Rental income is subject to taxation, and recent changes in tax regulations have reduced the benefits of mortgage interest relief. Consulting with a tax advisor will help you understand your obligations and optimise your tax position.
Conclusion
Securing a buy-to-let mortgage based on rental income can open up investment opportunities, even for those without a substantial personal income.
However, it requires careful planning, understanding the market, and knowing the most suitable mortgage products. At Kerr & Watson, we’re here to guide you every step of the way, ensuring you make informed decisions and achieve your investment goals.
Contact Kerr & Watson today for a free consultation.
