Rental Income Mortgage

What proof of income or documents will I need for a mortgage using rental income?

This varies wildly depending on the lender. For a very simple Buy to Let remortgage, you might not need to provide anything beyond ID documents for anti-money laundering reasons.

They might be able to verify your rental income on that property electronically, or maybe even just from a single bank statement to show that rental money coming in. Some lenders don’t even care what your personal income is.

Other lenders might ask for everything you’d expect on a normal residential. They’d want to see the tenancy agreement and three months’ bank statements proving that rental coming in.

Can I get a mortgage using rental income for a Buy to Let?

Yes, you can use rental income and, in fact, it’s the most common way. The least common way is pure affordability based on your personal income. Really, we all want to know that you can cover the mortgage with the rent.

A challenge might occur where you’ve got a longstanding tenant and you haven’t been increasing their rent in line with the market, because you want them to stay. They look after the property and you don’t want to punish them, so you let that rent drop a bit.

It might get to a point where you’ve dropped so far below the market that it’s not seen as affordable by a new lender. In that situation, some lenders will go by market rent rather than what you’re actually receiving. So we can get around that, but it can be restricting.

It’s something to be aware of and keep on top of. You do need to do rent reviews, and that may get harder when new reform bills come in from the Labour government.

How much mortgage interest tax is payable against revenue from rent?

We’re not tax advisers and so I can’t get into the specifics, but most people know that you can no longer offset the cost of your mortgage interest against profit.

Your accountant will probably look at your gross rental income and assess that as taxable, even though you’ve also got a mortgage which knocks out a lot of that income.

Can I get a mortgage using rental income if I have bad credit?

Potentially, yes. We would want to know what the credit blips are, how historic they are and what they were on.

Compared to a residential mortgage, Buy to Lets tend to be harsher on bad credit. Their logic is that if you’re not going to pay a mortgage, your Buy to Let property will go first. You’re probably going to keep up with your mortgage payments on your residential for longer than your investment property.

They therefore want to see slightly cleaner credit, especially if you’re looking at really specialist properties or situations. If it’s a really complicated property or personal situation, they’re probably going to want really clean credit. The way they are funded comes into that as well – it’s not the same as normal banks. Specialist banks are funded through investors, which is definitely something to be mindful of.

How do I apply for a mortgage using rental income?

The application process is pretty much the same. Even though a lender might not ask for many documents when looking at rental income, as a regulated broker we have to ask for those anyway.

We’re regulated for advice on both Buy to Let and normal regulated residential borrowing. We would be asking for bank statements, proof of income, ID and proof of deposit.

We would also be asking for a signed tenancy agreement or, on an existing property, a bank account showing that rental going in. We need to verify that everything matches up with what we’re telling the lender.

If we can verify everything, there’s a very good chance a lender will give you that mortgage offer, which is ultimately what we want.

What else do we need to know about mortgages with rental income?

We’ve covered most of it, but I hope I’ve demonstrated some in-depth knowledge around Buy to Let and rental income. Not everyone does these things as well as we do.

Quiz your adviser and make sure that they know what they’re talking about and that you’re comfortable with them. One tricky thing is that a mortgage adviser is definitely not going to be a tax adviser or an accountant – and how you set yourself up to manage investment properties can have a massive impact on your bottom line.

So, it’s really important to find a broker that doesn’t mind working with an accountant to find the best route forward.

Key Takeaways:

• Rental income can be used for Buy to Let (BTL) and residential mortgages; for residential, it’s often treated as self-employed income, ideally requiring two years of rental profit tax computations.
• BTL mortgages require stress tests where rental income must exceed the mortgage payment by a set percentage (e.g., 125% or 145% at 5.5% interest).
• Your tax band significantly influences the maximum borrowing amount; higher rate taxpayers generally qualify for smaller BTL mortgages than lower rate taxpayers or limited companies.
• If BTL rental income is less than the monthly mortgage cost, ‘top slicing’ (using personal income) or assessing repayment mortgages on an interest-only basis can help secure approval.
• It is crucial to find a mortgage broker who will work with an accountant to determine the best financial structure for investment properties.
  
  

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

NOT ALL BUY TO LET MORTGAGES ARE REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

For specialist tax advice, please refer to an accountant or tax specialist.