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Proving income for Buy to Let Mortgages

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By Pete Mugleston   Mortgage Advisor

Last updated: 17th August 2018

Bricks and mortar have long been seen as a sound investment so it’s not surprising that millions of people across the UK have taken their surplus cash and invested in buy to let properties

The buy to let mortgage market is varied and there are plenty of products to choose from but whether or not they’re right for you will depend on a number of factors - including your income.

It may seem odd that a lender will want to know how much you earn and how you earn it, considering it will usually decide how much to lend for buy to let mortgages based on rental income only, but most lenders will.

That’s because lenders don’t like risk. They want to know that you have the ability to cover the mortgage repayments, even if they won’t take that money into account when deciding how much to lend you. Confused? We’re not surprised.

To help clear things up, this article will include:

What income do I need for a buy to let mortgage?

If you are looking to buy a property in order to rent it out (and especially if you are a first time landlord), the chances are that your lender will want to make sure that your pre-tax annual salary (or gross income) is sufficient to cover any ‘shortfall’ losses incurred by the possibility of rental arrears or periods of non-occupancy (although some lenders will offer buy to let mortgages with no minimum income). These are known as affordability assessments.

Most lenders have minimum income requirements

The minimum income requirement for a buy-to-let mortgage application is usually £25,000, although this won’t include any additional or variable ‘add-ons’ such as bonus, overtime or commission payments. Alternatively, some lenders will assess your application on the basis of what is known as an ‘ability to pay’. This is worked out by taking all sources of income (such as pension or benefit payments, savings etc) into account, thereby providing a wider view of your finances.

Buy to let lenders with no minimum income requirement

There are several specialists that have no minimum income requirements, although they stipulate landlords need to have a form personal income, there is no threshold value that is unacceptable.

In the extreme end of the specialist world, there are also one or two that will consider buy to let mortgages with no income at all, providing the landlord is a homeowner already and a business case can justify the situation.

Can I get a buy to let mortgage without a job?

As above, you may be able to get a buy to let mortgage with no income although you may find that the range of lenders or deals are limited. Many lenders will not even consider applications from a first-time landlord unless they can prove that they already own their home and have repaid the existing mortgage for at least 12 months without issue, and have met the personal income thresholds.

If you have no job, ownership alone (in and of itself) is not enough to fit with most lenders. That said, there are a handful who can consider a buy to let with no minimum income in the right circumstances.

If you can demonstrate that you have savings (such as an inheritance lump sum or a redundancy package) or any other justifiable way of covering any rental void periods, then some lenders may make a case exception and offer buy to let mortgage with no income.

Using benefit income for buy to let mortgage applications

If you want to use benefit income to evidence personal income for a buy to let mortgage, some lenders will take some state benefits, such as disability benefits and credit, into account when assessing affordability for buy to let, but this will vary considerably across the board.

As a general rule, if income is likely to be sustainable indefinitely, then a housing benefit buy to let mortgage has more chance of being approved than a temporary benefit such as job seekers or child tax credit.

Using pensions to fund buy to lets.

If you’re over 55, withdrawing cash from your pension is currently possible tax free up to 25% of its value. If you’re under 55, withdrawing cash from your pension is rarely advisable, as the rate of tax can be staggering (unless you are seriously ill and apply to retire early).

Changes to pension legislation however, now mean that borrowers can use pension plan funds in their entirety to finance investments, via a self-invested personal pension (SIPP).

Borrowing and buying property in a SIPP can only be done on a commercial basis (you can’t buy a property to live in via your pension), so this would need to be managed with some expert professional financial and accounting advice. Borrowing against a SIPP can usually be done up to 50% of its value.

Using bridging finance to buy a buy to let.

Many developers use short term bridging finance to buy uninhabitable property in need of renovation before it is sold or let.

Due to the cost of bridging finance, they are seldom used by landlords to finance a property long term, as it is rare the rent would cover the payments (and most bridging lenders only offer deals for 6-12 months).

As a result, most using a bridge will be required to have their exit plan before they start, which can be sale of the property or refinance onto a buy to let to rent it out.

Bridge to let mortgages are a common way of having the buy to let finance agreed at the point of application of the bridging finance, to avoid issues on exit from the bridge.

While bridging loan options can be available to those with enough deposit and no personal income, the exit strategy needs careful consideration, as paying off the mortgage from rental income alone is a risky strategy and would probably require burning through some pre-existing savings.

What if I’m already a landlord and my income is from buy to let?

Income proof for professional landlords with less than 4 properties

If you’re a professional landlord, it may be that your income is exclusively from buy to let - in other words you don’t have another job or source of income.
As long as you can provide the accounts for your properties or your self-assessment tax return, you should still be able to access buy to let mortgages.

Income proof for portfolio landlords with 4 or more properties

Lenders take a different approach to professional (or portfolio) landlords when it comes to how many properties they’ll allow the landlord to have.

Most will have a maximum number of properties that can be mortgaged with that lender as well as a maximum number of properties in total, regardless of who they are mortgaged with. Properties that are owned outright are not usually included in the lender assessment.

Proving income for buy to let if you’re self employed.

As the number of self-employed and contract workers in the UK continues to grow some lenders are choosing to relax their criteria and to adopt a more flexible lending approach with regards to buy to let mortgages for self employed, although you will invariably need to provide up-to-date company accounts for the past one to three years, evidence of earnings over a similar period as well as bank statements, proof of address and photo ID.

You will also need to provide proof of your deposit at a standard 25% of the property value (although in some limited cases your lender may accept as little as 15%).

Alternatively, you could think about approaching a specialist or European lender in order to apply for a self-certification mortgage. These are designed to facilitate borrowers who are looking for a buy to let mortgage no proof of income and are (largely) banned in the UK because of the higher lending threat that they pose.

If you do decide to opt for a self cert buy to let mortgage therefore, bear in mind that it will not be subject to the same level of protection as many other buy to let mortgage deals. As a result, you should always consult with an independent mortgage advisor before you proceed with a self assessment for buy to let.

Can I get a buy to let mortgage as a contractor?

If you’re a contract worker and not in traditional permanent employment you may think getting a mortgage will be impossible, but that’s not necessarily the case. Buy to let mortgages for contractors are available. The number of mortgages available to you will depend very much on the type of contract you have. Some professions operate primarily on contracts but if it is expected that the work will be ongoing you should be able to get a mortgage. On the other hand, if your contract is seasonal or short term you may well struggle.

The main considerations for any buy to let mortgages for contractors are:

  • Is this your first contract or has it been renewed? (renewed contracts are more accepted)
  • How long is left (most lenders require minimum 6 months remaining, although some can consider current contracts so long as its likely to be renewed)
  • How long have you been doing it (most lenders require 6-12 months in the role, although some are happy from day 1)

What are the age limits for buy to let mortgages?

Some lenders will restrict the number of mortgages they offer as well as any possible length of term that they will commit to on the basis of an applicant's age.

The minimum age for those looking to apply for a BTL mortgage is 18, although some lenders will refuse to deal with anybody under 21 (or even, in some cases, 25).

Maximum age requirements can also differ substantially, with some lenders setting a threshold of 75; some going up to 85 and some with no upper-age limit at all.

Will the lender need to know what rent I’ll charge?

Absolutely. Lenders will usually calculate your buy to let mortgage based on rental income only

Given the turbulent market we’ve experienced in the last 10 years, and as a result of new regulation implemented by the Prudential Regulation Authority, lenders are much more strict when it comes to ensuring the mortgage can repaid.

Rather than simply making sure the rent you’ll be able to charge on the property will cover the mortgage repayment, lenders will want you to prove you can generate a higher rental income than is needed. Lenders want to know you’ll be able to afford rental void periods and any maintenance costs.

Furthermore, changes to the way landlords pay tax and the relief they can claim has impacted how expensive it is to run a buy to let property and lenders are aware of that.

Most lenders will now expect you to achieve a rental coverage calculation of 145% - this means you’ll need to be able to charge 45% more than the mortgage repayment in rent. As an example, you will need to generate rental income of £1,450 on a monthly payment of £1,000. Some lenders are more lenient and will only expect you to achieve 125% of the repayment amount.

Can I use my income to cover rental shortfalls?

Some lenders are now prepared to allow borrowers to use their’ personal incomes in order to meet rental income shortfalls (known as BTL top slicing).  Although even when using buy to let income, most will insist that rents achieved on these stress-tested payments reach a minimum of 110%.

Can I get a buy to let mortgage and live in the house myself?

In short, no. Doing this would breach the terms of your mortgage and the lender would be well within its rights to call in the loan.

If you do find yourself as an accidental landlord, through maybe moving in with a partner; most lenders will be happy if you simply notify them, although a few may increase the interest rate slightly.

Speak to an expert buy to let mortgage broker

If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

 

Updated: 17th August 2018
OnlineMortgageAdvisor 2018 ©

FCA disclaimer

The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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