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If you own investment properties and receive rental income from them, you may be able to use this as income for mortgage affordability. This guide explains everything you need to know about the considerations and process when securing a mortgage using rental income.
Can you use rental income to qualify for a mortgage?
Yes, it’s certainly possible. It’s worth mentioning that the criteria are different for both residential and buy-to-let mortgages. We are referring to using rental income for residential Mortgage purposes, but we will cover buy-to-let mortgages specifically further below in the article.
Some lenders accept this income while others do not. Lending criteria vary among lenders. Some lenders may accept all of the rental income, while others may only consider a proportion of it. For example, some may average the last two years’ net profit from property, while others may have their own tailored calculations. Some lenders require the properties receiving the rent to be unencumbered (i.e., without a mortgage) to consider the income, while others do not. Additionally, some lenders require you to have a separate earned income, whereas others are okay with rental income being your sole source of income.
How Much Can You Borrow Based on Rental Income?
The amount you can borrow based on rental income depends on the lender and your specific circumstances. Some lenders may only accept 50% of the rental profit, while others may accept 100%. Typically, lenders will lend 4.5 to 5 times your income. They may take a two-year average of your rental profit to calculate this.
For example, with a £10,000 annual profit based on a two-year average net profit:
- If a lender uses a 4.5x income multiplier and accepts 100% of the rental income, you might qualify for £45,000 in borrowing.
- If a lender accepts only 50% of the rental income, you might qualify for £22,500.
This borrowing would be in addition to any other borrowing based on earned or other income. You could borrow solely based on rental income or use it as an additional form of income.
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Which lenders will accept rental income?
There are many lenders that consider rental income for mortgage affordability, some more favorably than others depending on your circumstances. For example, NatWest and Coventry accept 100% of rental income and take a two-year average of net profit. Halifax and TSB will consider a two-year average but require the properties to be unencumbered (without mortgages) to qualify.
Santander uses their own calculations based on the rent received and property deductions and does not require a two-year history. HSBC has their own calculations, which can be more generous compared to others depending on your circumstances.
Ultimately, there are many factors to consider, and using a mortgage broker to help with your application will give you the best chance of success.
What documents do you need to get a mortgage using rental income?
To get a mortgage using rental income, you generally need the following documents, though specifics can vary by lender:
- Tax Documentation: 2 years of SA302s and tax year overviews. Full tax returns for the last two years
- Bank Statements: 3 months of bank statements showing rental income
- Mortgage Statements: Existing mortgage statements where applicable
This is in addition to other standard mortgage requirements and any income evidence for other sources of income aside from rental income.
Buy to let mortgages
The criteria for using rental income for buy-to-let mortgages differ significantly from using rental income for residential mortgages. Buy-to-let mortgage affordability is predominantly based on the rental income and the ability for the rent to cover the mortgage payments when stressed at a certain rate. For example, lenders may want to see that the rent covers the mortgage interest at an assumed 5% rate and is stress-tested at 145%. In contrast, the affordability for residential mortgages is often based on the profit from rental income rather than the gross rental income.
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Best lenders for rental income for mortgage affordability
The best lenders for mortgage affordability using rental income will depend on your circumstances and other elements of the application. NatWest, Coventry, and HSBC are known for having fairly generous criteria when it comes to getting a mortgage using rental income.
How can Strive help?
At Strive, we specialise in helping clients secure mortgages using rental income. Our extensive experience with lenders who accept rental income means we understand their criteria and can guide you through the process smoothly. We work closely with you to gather all necessary documentation, ensuring everything is in order to maximize your chances of approval. Our expertise will help you unlock your borrowing potential and give you the best chance of success in securing the mortgage you need.
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FAQ’S
Yes, you can get a mortgage using property income. Not all lenders accept, those that do will typically consider rental income as part of your overall income when assessing your mortgage application, provided you have the necessary documentation and meet their criteria.
Yes, many mortgage lenders accept rental income as part of your income assessment. However, they usually consider net profit before tax rather than gross rental income or will use their own calculations to factor in property expenses.
Yes, you are required to pay tax on rental income regardless of whether you have a mortgage. However, you can deduct certain expenses related to the property, including mortgage interest, which can reduce your taxable rental income.
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For more information on mortgages for contractors, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.
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