The mortgage lender knows that you are planning to let out the property you are looking to buy with a buy-to-let mortgage, so it makes sense that they’ll take the income from the property’s rental into account when assessing your suitability for the mortgage, right?
Well, sort of wrong
The problem is one of proof. Until you’ve actually rented out the property for some time, you have no way of showing the lender that it’s a real income, arriving every month like clockwork into your bank account. To a responsible mortgage lender, saying ‘but you know the rent will come in and cover the mortgage’ is no different to saying ‘I will become a millionaire next year, I really will’!
It’s all promises and speculation with very little to back it up. Sounds like an immediate dead end, doesn’t it?
Well you’d be wrong again!
Can rental income be used to qualify for a mortgage in the UK?
Of course it can! Rental income is as legitimate as any other income, whether that’s a salary from your day job or a monthly stipend from a trust fund. Its all a matter of evidence.
Sole-trader, limited company or just a hobby – what kind of landlord are you?
To the lender it is all about you being able to prove you can make the mortgage repayments. They don’t actually care where the money is coming from, as long as it is considered a reliable form of income.
People who are in a regular full-time job outside of being a landlord have an advantage here over the full-time landlord, because there is a reputable source of income that can be seen and qualified. A regular salary is going to help you look stable, pass any affordability checks, and generally be seen as a reasonable investment.
A sole-trader who is working on becoming a landlord as a full-time occupation, or someone who has formed a limited company with that purpose, is going to have to prove that income through their accounts – and that means time. Most lenders will need to see three years of accounting, some will accept two, and a few specialists will be happy to look at just twelve months, but a blank accounting sheet is unlikely to impress any lender.
If you are planning on becoming a landlord full time, it is a huge advantage to get an accountant. A professional accountant will be able to help you put together your evidence in a well-structured fashion and will show the lender that you are doing this properly – as well as making sure you don’t pay too much tax!
Lenders will average out your self-employed income to meet the accounting they need. This means if you have been trading for a single year, but they require three years of accounts, they will divide your annual profits by 36 to work out the average per month over three years and this can have a devastating effect on your listed affordability! It’s rare that even the best self-employed landlord can show a strong level of financial stability when their accounts are so brutally manipulated.
Proving that your income is solid enough to look after any mortgage payments as well as finding the right level are both key to getting that application through.
Make sure you include every income stream that you have and include solid reported figures only – never try to estimate future earnings or rely on past estimates. Actual figures as evidenced are the only things to hold weight here.
Remember – at The Mortgage Hut we work with lenders that are willing to look at just 12 months of accounts when assessing buy-to-let mortgages, provided you can also show evidence that the property you are planning to buy will provide a strong and stable rental yield.
The bottom line here is that it is important to show as much evidence of income as possible. You might even want to consider spending some time in PAYE employment (three months or more) prior to your application to provide that stable background in addition to the self-employed income. Once the property is secured and the rent coming in, you can reassess your employment status and work out if going full-time as a landlord is the right move for you.
Why are lenders so strict at disregarding mortgage covered by rental income?
Responsible lending is a significant factor in today’s mortgage market, coming from the financial crisis of 2008. Rules are far stricter than they were fifteen years ago.
Mortgage lenders know that there is likely to be a period where your property is untenanted and they want to be sure that you can cover the mortgage payments for an extended period even if your landlord business is struggling. It is not their responsibility to carry you through these dry times, but yours.
Succeeding as a landlord – when rental income is enough for a buy-to-let mortgage
It’s not all doom and gloom. Once three years of rentals has passed, your success as a landlord will show on paper. Future expansion with a second or third property will be easier for you to obtain when you can show documented proof that the mortgage will be covered with the income from your other properties. In this way, rental income will be a significant asset for your mortgage application!
Other options to secure a buy-to-let mortgage
- Joint mortgages
Remember though, that if you are suffering a void period with the property empty, that you and your partner will be equally liable for making the monthly repayments.
With a partner and joint mortgage, the amount available to you will also likely increase, adding to your options as a landlord.
- Bridging finance
This could be costly as the interest rate on bridging finance is high, and the risk if something does go wrong would be great, but it does provide an answer to wary mortgage lenders.
- A larger deposit
Buy-to-let help from The Mortgage Hut
If you are looking into becoming a landlord, we’re here to help. With specialists on buy-to-let mortgages and a wide network of lenders, The Mortgage Hut can get you the deal you need. Fill in our contact form or give us a call to find out more!