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What rental income is needed?

New regulations limit borrowing based on the rent deemed achievable by the lender's valuer. The minimum is assessed at a rate of 5.5% ensuring a 125% coverage.

As such for a £100,000 mortgage you would need at least £572 rent. Put simply you need £5.72 rent at a minimum for every £1,000 borrowing. That demonstrates the minimum - mortgage lender criteria may be tougher.

Landlords who are higher rate taxpayers or have personal income below a threshold, unfortunately, have higher stress tests.

Landlords who are basic rate taxpayers, get 5-year fix mortgages or invest via a limited company, are offered lower stress tests.

Property types also affect affordability with HMO Mortgages having higher stress tests.

Our mortgage advisors will assess the market to help find the best mortgage given the anticipated rental amount. We can recommend structures to get lower stress tests or help release equity to fund higher deposits.

Buy to Let Mortgage affordability is calculated by ensuring that the rent payable is over the minimum mortgage that will be required to be paid AND in most cases your personal income.

Their are three variables to formula mortgage lenders use - the Rent/the Loan, the Multiplier and the Rate.

Many lenders also require the applicant(s) to have a Minimum Income from there employment or self-employment.

NOTE: Some Lenders do not allow Rental Income to be included in Minimum Income calculation.

The Two Buy to Let Affordability Formulas

You can use the formula in two ways:

Rent to Max Loan Formula

Given the Rent you can achieve what is the maximum loan a lender will offer:

theRent (divide) theMultiplier (divide) theRate (multiply) 12 months

See it in action on Google.

Rent Required for Loan Formula

Given the Loan you want to borrow, what is the minimum rent a lender will require:

theLoan (divide) 12 months (multiply) theRate (multiply) theMultiplier

See it in action on Google.

New PRA Buy-to-let Regulation (January 2017)

Buy to Let Mortgage Lenders (that are regulated by the PRA) from 1 January 2017 will have to implement restrictions on lending criteria.

These changes include stricter affordability tests including Interest Cover Ratio including the impact of recent Tax Changes and a stress test on interest rate rises.

Other restrictions such as regulatory burdens on portfolio landlords will be implemented by 30 September 2017.

The regulatory changes come into effect for new Purchases or Capital Raising - remortgage buy to let properties remain unaffected.

Other loans including Holiday lets, bridging loans, property investment lending and corporate lending are exempt from the underwriting standards.

Affordability Testing

The PRA has required lenders implement into their criteria an Interest Coverage Ratio Test (and/or) a personal income affordability test.

The lenders in such affordability test must take into account any tax liability.

While the PRA outlines minimum requirements, it does not set a minimum Interest Coverage Ratio threshold, this move bank lending into a justification of their procedures under the rules.

Except for the future interest rate test, in which the PRA prescribes that a lender must have a minimum test of 5.5% during the first five years of a buy-to-let mortgage.

The affordability test must include a set of variables including income affordability test, all costs associated with renting a property, tax liability, income net of tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs. Your personal affordability will hold more weight in affordability if you require on personal income to support the rent.

Lenders are now allowed to base affordability assessment on the equity in the property used as security. This is a viability of business test and not lenders security.

The PRA does not expect it to drop further than 125% and a minimum rate of 5.5%.

The formula to find Maximum Loan:
theRent (divide) theMultiplier (divide) theRate (multiply) 12 months

With expected minimums:
theRent (divide) 125% (divide) 5.5% (multiply) 12 months

So with £500 per month rent the maximum loan, on the VERY MINIMUM requirements is: £87272

Many lenders are currently above the current minimum (and expected minimums).

Portfolio Landlords

The PRA is to require from Lenders a special underwriting process for Landlords with four or more mortgaged BTL properties.

This is because the PRA has found that arrears rates increase as portfolio size increases.

The PRA does not prescribe a requirement but outlines lenders should take into consideration a Landlords Experience and record their full portfolio, rent and outstanding mortgages. In addition to assets and liabilities and tax liabilities.

Lenders should also take into consideration the merits of any new lending in accordance with the landlords business plan.

In addition to historical and future expected cash flows.

PRA not concerned with tax changes and this combining effect.
PRS not concerned that some lenders wont have to implement this change, as they have asked for more powers from govt.

In Summary

When it comes to affordability requirements many lenders already have such minimum requirements above and beyond current requirements. Many lenders have increased these stress test recently in anticipation of the PRA requirements or as a consequence of the Tax Changes. Its not much of a change but can effect total borrowing.

Portfolio Landlords may be in for a harder process on the next purchase after September 2017. The specialist process will require a lot more information and may include as the PRA suggests Cash Flow Forecasts, Business Plan and Portfolio Spreadsheets. Nothing new to anyone undertaking business loans.

Read in full

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