How much can I borrow on a rental property?

This is a common question which does not have that many straight answers, the usual response is “it depends”

Loan to value

This is the easy part. Some lenders can currently offer up to 80% of the property value but in doing so will charge much higher rates and fees. The standard is 75% loan to value but it can be reduced for new build properties especially flats.

Interest Cover Ratio (ICR) or Stress Rate

This is a calculation nearly all lenders apply to a Buy To Let (BTL) application. A lot of lenders require a BTL mortgage to have an ICR of 145% at a pay rate of 5.5%. If the rent is lower than this figure the amount the lender can offer will reduce

Example - if you needed a mortgage of £100,000 the property would need rental income of £665pm

100,000 x 5.5% = 5500

5500 ÷ 12 = 458.33

458.33 x 145% = 664.58

Even if the mortgage payment was only £200pm and the rental income was £500pm so clearly self funding, if it could not achieve £665 you could not obtain the full £100,000 loan.

The rental figure used is normally taken from an independent valuer the lender instructs. If the property has a history of a higher amount than the valuer estimates some lenders can use the higher figure (but not many)

There are many variables that can improve what ICR percentages the lender uses.

  • Lower rate taxpayers

  • Like for like borrowing

  • Limited Company BTLs

  • 5 year fixed rates

This means that purchases, equity releases and higher rate tax payer application will normally result harsher ICRs and pay rates

What if I can meet the lender’s “shortfall” in their calculation with my own money?

There will be options when your earned income can top up the perceived rental shortfall. This type of application starts to resemble a residential mortgage as it looks at the holistic affordability of the situation including your debts and outgoings. Lenders are more likely to consider this for applicants with higher incomes.

Best Practise

  • If you are looking at a BTL purchase you should have a good idea of the potential rental income that property can achieve in its current state. This will allow your mortgage broker to help give more accurate advice

  • Lenders prefer tenancy agreements to be in the name of the tenant and landlord. Third party lets that guarantee a rental income are tricky to place

  • One Assured Shorthold Tenancy (AST) agreement per property is also preferred.

  • Any property let to 3 or more unrelated people will probably be viewed as a Home Multiple Occupancy (HMO) and most high street lenders will not allow these

  • Check the EPC rating, you will need a rating of E in place before it is valued

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