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Using Rental Income to Qualify for a Mortgage

Everything you need to know about using Rental Income to help with Mortgage Affordability

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: May 20, 2022

Landlords ask us all the time about using rental income toward mortgage affordability, as this is something many lenders have tight policy around, and it can be difficult for many.

The good news is if you’re a landlord using rental income to qualify for a mortgage, there may well be several options, even if you have been declined previously. .

We’re often asked,  “can rental income be used to qualify for a mortgage?”, and “how is rental income calculated for a mortgage?”.

Can I use rental income to qualify for a mortgage?

If you have rental income which you can evidence through your accounts for a least the last 3 years, you should be able to use it to help you qualify for a mortgage with several different lenders. You will need to ensure the income is official, and not simply rely on proving it through your bank statements or rental agreements.

Naturally, it’s important to also be able to meet all the usual eligibility and affordability criteria, which will vary from lender to lender.

Rental income for buy-to-let or residential mortgage applications

While you can use rental income to apply for both buy-to-let and residential mortgage applications, there are a few key differences on what lenders require based on the type of property you want to purchase. Although there are many lenders who will treat them the same, other lenders will ask for full income verification for main residential mortgages.

If you’re purchasing a buy-to-let property many lenders will happily accept rental income shown on your bank statements, especially if you haven’t received the income for more than 12 months. If you are a professional landlord with multiple properties it will be easier to find lenders willing to accept your rental income for your mortgage application than it would be if you were only just starting out as a buy-to-let landlord.

Evidencing rental income for residential mortgage applications

As you’d expect, lenders will accept proof of employment income (some even offer mortgages with bonuses, overtime and commission factored in) to support an application, but for those who are self-employed (as many landlords are) or who rely upon multiple streams of revenue with which to back up their claims, the onus to provide demonstrable levels of proof grows exponentially.

Most lenders are not OK with counting rental income as acceptable for mortgage applications just from bank statements or rental agreements alone, and require the income to be evidenced through self-employed accounts, for at least the last 3 years.

Thankfully some will accept just 2 years, and a handful of others may offer a self-employed mortgage based on 1 year’s accounts if you’re planning on using rental income towards the home loan.

Why is this?

There are several reasons why lenders aren’t keen on allowing rental income to be used to pay a mortgage but the crucial one (so far as landlords are concerned) is that most lenders tend to regard the acceptance of rental income for mortgage qualification as falling outside of their criteria.

For example, the growing emphasis on affordability and careful, responsible lending in the past few years has led to an increasing wariness amongst lenders as to the unpredictability of rental income and the possibility of ‘void’ or tenantless periods.

What’s more, some landlords have offered anecdotal evidence to suggest that even when verifiable data is provided to show that properties are generating enough income to meet mortgage income requirements, lenders merely choose to ignore them altogether (i.e. it isn’t regarded as a liability, but it isn’t regarded as a source of income either).

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How does rental income affect mortgage qualification?

The quickest and most effective way to get a mortgage with rental income and to prove to lenders that rental incomes exist is by declaring them to HMRC. This is done by completing a Tax Calculation document (or SA302 form) and full accounts for limited companies, which provides evidence of earnings on rental properties and the amount of tax which is owed.

How much mortgage can I afford with rental income?

To work this out, most lenders will average these figures against a typical period of two or three years (meaning, of course, that very few lenders will lend to landlords with less than two years accounts) and feed them into their rental income mortgage calculator to reach an average  figure on which to base affordability. A small number of lenders may use the most recent 12 months figures (which can lead to higher income figures and larger loan amounts).

This total will then either be taken in its entirety as 100%, or treated as a second income and a percentage of the earnings will be used to calculate loan amounts (although this percentage can vary; some will take 50% or 60% into account while others may choose to ignore the sum completely).

Which rental income figures are used?

For sole trader mortgages, lenders will only lend against the amount of taxable income (or net profit) which is declared (once mortgage payments, management fees, service charges and maintenance costs have been deducted).
With mortgages for company directors, lenders may only consider the income drawn in dividends and salary, where others can consider the net profit whether drawn or not.

How much rental income is required for a buy to let mortgage?

Whether you’re funding a buy to let mortgage with rental income from the property itself or capital from another property or properties you own, most lenders will want to see that there is enough rental income to cover the mortgage, typically by 125-145%.

Do I have other options?

If you don’t have the means to evidence earnings to get a buy to let mortgage using rental income, or you don’t have enough income to meet a lender’s criteria, there are plenty of alternative options to pursue. Let’s look at some of the most viable ones:

Refinancing an existing property

One alternative to using rental income for a mortgage application would be by refinancing one (or several) of their rental portfolio properties and ‘recycling’ the money which this releases to facilitate an outright purchase on a chosen property (or larger deposit at the very least).

This process is usually achieved by taking out a buy to let remortgage or second charge mortgage loan and effectively allows landlords to access the profits tied up in their properties tax free (as opposed to merely selling off investment holdings and invoking capital gains taxation).

Most lenders will place a limit on the Loan to Value (or LTV) that they are prepared to offer against these types of properties, typically at 75%, where a few will consider  up to 80%, and a handful up to 85% in the right circumstances.

New buy-to-let lending rules introduced by the Bank of England means that landlords with four or more mortgaged properties who wish to refinance may now need to provide their lender with detailed financial information for every property within their portfolio – something to factor into the plan is the complexity of a refinance as a landlord these days!

Joint residential mortgage

Another option for landlords to consider as an alternative to using rental income for mortgage approval is to make a joint application for a residential mortgage with a partner, family member or friend (especially for those who struggle to evidence income).

Another option for landlords to consider as an alternative to using rental income for mortgage approval is to make a joint application for a residential mortgage with a partner, family member or friend (especially for those who struggle to evidence income).

Income requirements for these applications follow the same guidelines as for single person applications (up to and including an almost certain refusal on the part of lenders to accept rental incomes as supporting capital) although the ways in which loan amounts are calculated can vary according to the lender.

For example, some will multiply the earnings of the predominant ‘breadwinner’ and then add ‘secondary’ incomes in order to reach their decision, while others will combine the two and multiply on a more ‘equal’ basis.

This means that, according to financial circumstances, either one of these formulas can work to the advantage or disadvantage of applicants; increasing or decreasing the amount which is offered.

Short-term finance options

Short-term finance options (such as bridging loans) may be suitable for landlords who need to access funds quickly (to buy a property at auction, for example) or to make up a cash shortfall and can’t use rental income for a residential mortgage.

It’s worth noting, however, that interest rates charged on these types of loans are invariably higher than for conventional mortgages and you will need to evidence a viable exit strategy in advance (usually a remortgage or the sale of a property).

Nevertheless, they shouldn’t be discounted completely as they offer a degree of flexibility and understanding of circumstances which is sorely lacking from more mainstream mortgage options.

Get an employed position

It might not sound particularly enticing but, since lenders won’t let rental income count towards mortgages in many cases, it is undoubtedly effective for those who are professional landlords and don’t currently have an employed income!

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What can I do if my rental income is less than my mortgage payments?

We often hear from customers who are already using rental income to cover their mortgage, and some of them want to know what their options will be if they run into difficulty making their monthly payments, i.e. if there ever comes a time when their rental income does not cover their mortgage.

The first thing you should do is speak to your lender. Depending how flexible they are, they might offer you the chance to take out a product transfer and switch to a more affordable deal or lengthen your term so your monthly payments are less.

There may also be a number of other options available – make an enquiry and the advisors we work with will help you determine what they are.

Can I get a commercial mortgage based on rental income?

Yes, this may be possible. If you’re looking to fund a commercial mortgage by renting out a premises to a business, there are products available, known as commercial investment mortgages. You can read more about them on our dedicated page about commercial mortgages here.

Alternately, you might be hoping to apply for a commercial mortgage using rental capital from buy to let properties you already own. Some lenders might allow this, but only if the BTL is owned under the same company name you’re applying for the commercial mortgage under, or is part of a property portfolio owned by the firm.

How much mortgage interest tax should I be paying on rental income?

The government is in the process of reforming landlord mortgage interest tax relief over the course of four years, and by April 2020, landlords will not be eligible for rental income mortgage deduction, i.e. they will no longer be able to deduct their mortgage costs from their rental income.

Until then, the following applies for coming tax years…

  • 2018-19: Landlords may claim 50% of their mortgage tax relief
  • 2019-20: Landlords may claim 25% of their mortgage tax relief

Speak to a mortgage and rental income expert

If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0808 189 2301 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.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. 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.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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