An important part of any mortgage application is the lender’s assessment of “affordability” – lenders have an obligation to verify that you can afford to repay the mortgage amount that you borrow. For normal residential mortgages, lenders base this decision on an assessment of the applicant’s income as verified by payslips, or in the case of self-employed applicants, their accounts and/or HMRC tax calculations. While these same checks – alongside a credit record check – may be used in a buy-to-let mortgage application to assess your overall creditworthiness, lenders instead calculate buy-to-let affordability by comparing your projected rental income with the mortgage payments.
If you’re asking, “How much can I borrow for Buy to let?” then the answer is: “It varies from lender to lender.” However, the most common approach for buy-to-let lenders is to look for your projected rental income to be more than the projected monthly mortgage payment by a set margin. It was previously common for mortgage lenders to look for rental income to be 125% of the mortgage payment. However, tighter buy-to-let lending rules introduced by the Prudential Regulatory Authority at the beginning of 2017 mean that most lenders now typically expect rent to be 140% or 145% of the mortgage payment. For specialist cases, such as lending on Houses in Multiple Occupation (HMOs) the percentage can be as high as 170%.
The new rules also require “stress testing” affordability – what this means in practical terms is that, when working out a mortgage payment level to compare against rental income, lenders won’t use the actual buy-to-let product interest rate, but will instead use a higher rate representing a “worst case scenario” of a rate hike; this is used to assess whether the borrower will still be able to afford the mortgage if changes in the economy lead to an increase in interest rates. The rules say that unless the interest rate is fixed for five years or more, lenders should use the higher of:
- Market projections of future interest rates
- An increase of at least 2% above current rates
- A minimum of 5.50%
Let’s have a look at what that would mean in terms of buy-to-let affordability. Let’s say you are taking out a mortgage of £210,000 on a property valued at £300,000 – therefore 70% loan-to-value (LTV). The annual interest on this at 5.50% would be:
£210,000 x 5.50% = £11,550
The monthly payments on an interest-only mortgage would therefore be (rounded up to nearest pound):
£11,500 ÷ 12 = £963
Applying a 145% multiplier would give (rounded up to nearest pound):
£962.50 x 145% = £1,396
Therefore in this case, to afford a £210,000 mortgage, the lender would be looking for a projected income of £1,396 per month to consider the mortgage affordable. Lenders have various ways of checking whether your rental income figures are reasonable, including checking with in-house or external surveyors familiar with the area and property type.
Please note that the illustration above is a simplified example. Lenders will usually also take into account void periods (assuming that for one month out of every 12 there will be no rental income) as well as property-related outgoings such as letting agent fees, and maintenance and repair costs. Also bear in mind that your overall borrowing against any property will be limited by the lender’s maximum loan-to-value ratio – 75% in the case of most buy-to-let lenders.
How Just Mortgage Brokers can help
We have years of experience in working with lenders, and understand the ins and outs of buy-to-let affordability, and how this can vary depending on whether you are purchasing the property as a self-employed individual, or via a limited company structure. Contact us today and let us help you find the buy-to-let mortgage that’s right for you.