How does rental income affect the amount you can borrow?
The relationship between rental income and the amount you can borrow to finance your investment is one of the most important.
One of the first checks lenders make when you apply for a buy-to-let mortgage is whether the rental income is high enough to cover the repayments and associated costs of letting the property.
Although it can vary, lenders usually want rental income to be 125-130 per cent of the amount you repay on the mortgage each month. Knowing this, it makes sense for you to check these figures for yourself, before you apply, by following these steps:
Step One - Is your property already being let out?
If a property you are interested in buying is already being let out, check how much rent the tenant is currently paying, but don’t assume that this is the maximum you could achieve.
Many landlords do not increase rents each year for existing tenants, particularly if the tenant has been in the property for several years.
Local letting agent websites or property portals such as www.rightmove.co.uk or www.zoopla.co.uk will advertise properties for rent similar to the one you are looking to buy, so look at these to get a better idea of what you could achieve on the open market.
A good tip when searching online is to check the ‘Let Agreed’ box, to see properties that have actually let, as that is a good indication that the advertised rent level is fair.
Bear in mind that anyone can set up as a letting agent - they don’t have to have any qualifications or experience, only to join a Property Ombudsman scheme – so look for self-regulated agents who are members of NALS, ARLA, or are RICS-registered, so you can be confident their valuations are reliable.
Step Two - Use a mortgage calculator
Use our mortgage calculator to find out how much your mortgage repayments would be if you were to buy a property for a certain amount. Most buy-to-let mortgages are taken out on an interest-only basis as this is tax deductible.
This means paying the interest on the mortgage loan, rather than also paying back a portion of the capital borrowed.
Step Three - Consider the rental income
Once you know the monthly rent levels and the cost of the repayment, you can calculate whether the rent is more than 125 per cent of the mortgage cost. Simply divide the rental income by the repayment amount.
For example, £700 rent divided by a £500 mortgage cost gives a ratio of 140 per cent.