How is Buy to let affordability calculated?
When it comes to borrowing on your buy to let property the way mortgage lenders work out what they can lend to you is calculated quite differently to how they calculate if you were buying the home yourself to live in.
Firstly they will factor in if you have any income and at what level to understand if you can meet your own living costs without being reliant on the rental income.
They will then ask you to confirm what the property currently is or will be rented out for per calendar month and how much deposit/equity there is available.
Once they have determined the mortgage amount requested they will apply a “stress test” rate to this, so even though you may only be paying 2-3% they will be potentially working off a “stress test” rate which could be as high as 5-6%.
Then they will apply another stress figure on-top typically related to what tax band you fall into and the type of ownership of the property (If in your own name or a Ltd company) which is typically where they add 25-45% on-top of that.
The end result of this calculation is the rental income per month the property will need to generate to achieve the mortgage amount requested. If there is a shortfall this can be sometimes made up by the lender taking some of your earned employment income into consideration or alternatively you will need to borrow a lesser amount and therefore have to put more down as a deposit.
Let’s look at an example.
Property of £200,000
Deposit of 25% £50,000
Mortgage of £150,000
Stress rate of 5.50% with a basic rate taxpayer banding of 25%
£150,000 Mortgage X 5.5% Stress tested X 125% rate banding= £10,313
So on the above example, the property would need to attract at least £860 pcm in rental income.
Minimum deposit required is typically 25% but some lenders can accept 20%
This can be a very complex calculation and there are numerous factors to consider and each lender has their own stress test calculations, different criteria, varies rate bandings and also depending on whether you take a 2 or 5 year fixed rate the calculations are assessed differently.
So speak with your mortgage broker who will be able to research the options available to you and confirm your borrowing levels.
Read on to find out what’s the implications of different buy to let ownership structures are in “Personal vs Ltd company ownership”