As a landlord, you may own property, but you still need somewhere to live! And the rental income from your property may be your sole source of income. However, there are lenders who will consider the rental income from your buy to let properties towards your own property to live in.
Let’s take a look at the main considerations that mortgage lenders use to decide about rental income residential mortgages.
Applying for a rental income residential mortgage
The process of finding and applying for a mortgage of this type is a little different to other types of income. Some lenders will want full income verification while others will accept bank statements for buy to let properties, especially if you have more than one property.
Evidence of income
Lenders will need some kind of evidence of the income that you have. If you have employment and are getting paid, bonuses, commissions or overtime pay as well as being self-employed then you will need to provide evidence of this. Some lenders will consider bank statements for this, but others will require proof of being self-employed for at least 3 years – it varies between lender.
With the big emphasis on affordability and responsible lending, lenders have to be able to show they have checked you can afford the mortgage payment and still cover all of your other costs. When you use rental income, the worry is always if you have a void or tenantless period where the rental property doesn’t bring in any income.
Declaring rental income
One of the easiest ways to get a mortgage with rental income is to use the information you declare to HMRC for tax purposes. The SA302 form is accepted by most lenders to show the income you have made and how much profit you have. Full accounts may be required for limited companies.
For sole traders, lenders will consider the amount of taxable income or net profit which is declared once mortgage payments, management fees and other costs have been deducted. For company directors, lenders may consider income drawn in dividends and salary while others may consider net profit, whether drawn or not.
How much can I borrow?
Lenders will usually look at a 2-3 year period to work out an average rental income. They will then use an income mortgage calculator system that works out the maximum you can borrow. Some will take the income entirely while others will use a fixed percentage and occasionally, won’t accept it at all.
Most lenders will want to see that the rental income is enough to cover the mortgage by 125-145% to then consider it for a residential property.
Other mortgage options
If you can’t get evidence for the rental income you have or can’t meet the lender’s criteria, there are still other options open to you.
Refinance an existing property
It is possible to refinance one or more properties to create money to buy a residential property outright for your family. This would mean taking a new buy to let mortgage or second charge on your existing buy to let properties rather than simply selling off the property as this would attract capital gains taxation. Some lenders will place a limit on the loan to value ratio they will consider, often around 75%. New rules for landlords with four or more properties looking to refinance will also play a part in this.
If you have a family member, partner or friend who will be living in the property with you, a joint mortgage could improve your chances. Income requirements will be the same as for a single person application – some will add the two incomes together to find the total amount to borrow while others will consider the primary income more than the secondary (other person’s) income.
Short term finance
Short term finance such as bridging loans may work if you need money quickly such as if a property is up at auction or you don’t have the cash for the deposit until rental income arrives. You do need to take into account the much higher rate of interest that these loans have compared to a mortgage.
Get an employed position
Another option is to find an employed position for a time to be able to get the mortgage you want. This might not appeal but could be the only option if you can’t prove your rental income.
Commercial mortgages on rental income
It is possible to get commercial mortgages on rental income – these are known as commercial investment mortgages. Another option is to use a commercial mortgage using rental capital from buy to let properties you own. Some lenders may consider this as long as the name on the property and the commercial mortgage is the same.
Tax on rental income changes
There are changes coming into force in April 2020 that will affect how much tax that landlords will need to pay on their rental income. It is important to be aware of these changes and how this will affect your financial position when it comes into effect.