How does the affordability calculation work for a buy to let mortgage today?

Golden rule – assume £155,850 of lending per £1,000 pcm of rent.

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A few years ago it was very easy to explain affordability to the buy to let investor. Lenders would typically lend directly against the rental income by seeing how that rental income compared with the potential mortgage payment.

If the rental income exceeded the mortgage payment by 25%, this was satisfactory for most lenders.

What has changed?

Much has changed, as a result of regulatory changes in the buy to let mortgage market, and changes to taxation rules for landlords lenders now have increasingly complex models to assess maximum affordability.

What does this mean?

In short it means it’s difficult for the layman to understand exactly what they can borrow from each lender. So many factors now make a major difference to what the buy to let investor may be able to borrow that only experienced mortgage brokers are well placed to understand how it works.

A simple guide

We will assume that our investor is buying a property for £260,000 that will rent for £1,000 per calendar month.

Figures we use here are based on calculations from criteria relevant to one of the largest buy to let lenders in the market. Each buy to let lender has their own rules, but this guide should give you an idea what is important.

Key issues are:

  • Monthly rental income
  • Tax status of the borrower(s)
  • Total properties owned by the borrower(s)

Why?

Monthly rental income is still the best indication of the funds available to borrow to pay the buy to let mortgage.

Since tax relief on mortgage interest is being limited a higher rate taxpayer will make less profit net of tax and a basic rate taxpayer and can therefore borrow less

Lenders owning four or more buy to let properties are now considered portfolio landlords which means a particular set of rules.

Most generous lending figure £192,385

Available to a basic rate taxpayer taking a five-year fixed rate buy to let mortgage

Least generous lending figure £155,850

Available to a higher rate taxpayer on a short-term fixed-rate or tracker rate buy to let mortgage

Rule of thumb

If an investor who is a basic rate taxpayer assumes they can borrow £174,500 per thousand pounds of monthly rental income, that will be accurate enough for initial planning
(a higher rate taxpayer should work on a figure of £155,850).

Other points to note

Mainstream lenders offering the more attractive buy to let mortgage rates will be the most conservative when it comes to affordability. A number of the mainstream lenders will do a full affordability calculation based on the borrowers main income and outgoings as well as the rental. In effect they will be underwriting them in the same way as a residential deal.

The majority of lenders still look for a minimum provable personal income of £25,000.

Some lenders will cap the maximum buy to let lending available as a multiple of the personal income.

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