You may be new to property investment and wondering about how much can you borrow based on your rental income. Mortgage lenders use a rental cover calculation (see Rental Income Required Calculator below) to calculate what the rental income needs to be on a property.
Mortgage lenders require the rental income to be 125% of monthly mortgage payments for basic rate tax payers and 145% for higher rate tax payers for interest only buy to let mortgages. But the interest rate used to calculate the mortgage payments is the stressed interest rate not the actual rate.
The amount you can borrow on your rental income on a buy-to-let mortgage is currently restricted by three main criteria. These are as follows:
Loan to value – The loan to value (LTV) is the ratio of what you borrow as a mortgage against the property’s valuation, which is the different between the purchase price less your deposit. For example, if a property is valued at £100,000 and you can borrow up to £75,000, the LTV is 75%.
Stressed mortgage rate – The stressed mortgage rate is used to determine if you will still be able to pay the mortgage if interest rates rise above the proposed mortgage rate at the time of borrowing. For example, the product rate for the mortgage you are applying for maybe say 3.5%, but the stressed mortgage rate might be 5.5%.
Interest rate cover ratio (ICR) – The interest rate cover ratio is the ratio of gross rental income to mortgage interest repayments and is affected by your highest rate of tax. Lenders use a minimum ICR of 125% for basic rate tax payers and 145% for higher rate tax payers. For example, if the stressed mortgage interest were £500 per month, the monthly rental income must be at least £625 per month using 125% for basic rate tax payers, or £725 per month using 145% for higher rate tax payers. So if you are a higher rate tax payment, rental cover will be higher.
Can you get a Buy to Let mortgage based on rental income?
You can get a buy to let mortgage based on rental income by using a rental cover calculation, but this will be up to a maximum of an agreed percentage of the property’s value or loan to value (LTV). If the LTV figure is lower than the rental cover loan calculation, the lender will use the lower LTV figure for lending purposes.
Proof of rental income for mortgage
The easiest way to prove the rental income for a buy to let mortgage application is to obtain a copy of the Assured Shorthold Tenancy (AST). If the rental income property doesn’t have a tenant in situ ask a local letting agent for guidance on rental potential, but lenders will normally use a valuer to check rental potential for nearby comparable properties to assess the amount they will lend.
How much can you borrow based on your rental income using our Rental Income Required Calculator
Use the following “Rental Income Required Calculator” or “Rental income mortgage calculator” to work out how much you can borrow for your chosen investment property.
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How Much Can You Borrow Based On Your Rental Income?
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Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!
