How important is rental income to a buy-to-let mortgage?

If you're looking to take out a buy-to-let mortgage, the underwriting for this type of loan is different from a traditional mortgage. While a residential mortgage will focus on your income and outgoings, buy-to-let lenders are much more interested in the anticipated rental income of the property you are mortgaging.

Our guide tells you everything you need to know about how the buy-to-let mortgage underwriting works. We also answer the question “How important is rental income to a buy-to-let mortgage?'”

How buy-to-let lenders calculate what they will lend to you

The most important factor that buy-to-let lenders take into account when determining how much they will lend you is the rental income of the property.

The lender wants to know that the rent will be high enough to cover your repayments and the associated costs of letting the property.

Lenders then want there to be a 'cushion' between the rent and what you pay each month. Most lenders require the rental income to be around 125-130% of your monthly mortgage repayments.

In simple terms, this means that if your monthly mortgage repayment is £1,000 they will need the rent to be around £1,250 to £1,300 per month.

You can find out what the rental income of the property is by:

• Asking the estate or letting agent if it is already let
• Looking at online property portals to find out the rent that similar properties in the local area are achieving
• Speaking to a qualified surveyor. The lender will generally use the rental income provided by their surveyor to determine the amount they will lend

A worked example

You want to buy a property and the surveyor has estimated the monthly rental income at £800. The lender uses an interest rate of 5% to calculate the borrowing and they need the rental income to be 125% of your mortgage payments.

First, you divide the monthly rent by 1.25 to work out your maximum monthly repayment. In this case, that would be £800 divided by 1.25 = £640.

You then multiply this rent by 12 to give total annual interest payments £640 x 12 = £7,680.

Then, divide this number by the interest rate (five) and multiply it by 100. £7,680 divided by 5 = £1,536 and multiplied by 100 gives you £153,600.

£153,600 is the amount you can borrow with this lender based on a monthly rent of £800.

Other factors a buy-to-let lender will take into account

While the rental income is the key factor a buy-to-let lender will take into account, they will also look at some other areas when considering your application. These include:

• Your credit score - they will carry out a credit check to ensure your credit rating is good
• Your income - some lenders have a minimum income requirement for buy-to-let mortgages and you may have to prove you earn more than this threshold
• Your assets - some buy-to-let lenders will want details of any other rental properties you own