Why is rental income no good for residential mortgages?

by Readers Question

10:16 AM, 17th April 2014
About 7 years ago

Why is rental income no good for residential mortgages?

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Why is rental income no good for residential mortgages?

Can one of your many learned members explain to me why rental income can’t be used to get a mortgage on my main residence?

Over the past few years I’ve reduced my other business to build up the rental side of things. Hubby is on a reasonable wage for working 3 days a week but on trying to re-mortgage our fixed rate deal now over several lenders say they don’t include rental income.

Surely this is crazy, our rents far exceed any mortgages on them, 2 we own outright bring in over 25k pa between them. I’ve tried to explain that being a landlord is my business and main income but they don’t want to know. I actually think that rental income is far more likely to be reliable than paid employment these days.

I just hoped those in the know could explain this thinking.

Many thanks Gillianresidential mortgage


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Neil Patterson

10:21 AM, 17th April 2014
About 7 years ago

The simple answer is that taking rental income into account is just outside a lot of lenders normal criteria and they make the choice as to how and why they lend.

A possible reason for this is that they see it as a self financing business and not part of your earned income eg you could if you wished take out 2 BTL loans on your unencumbered properties at 80% LTV the day after you completed on your main residence.

If you are self employed and the rental income forms part of your submitted accounts showing a profit and tax paid then I would have thought some lenders may take it as earned income with enough history.

There probably is not enough detailed information (which you would not want to publish anyway) for one of our broker readers to give you a definitive answer, but hopefully they can give us some general criteria for lenders that will consider rental income of some form.

Don't forget this is being additionally complicated by MMR on the 26th of April!

Jeremy Smith

10:33 AM, 17th April 2014
About 7 years ago

If you have two unencumbered properties, why not take out some equity from them, as far as I know, you can take as much as you have purchased them for and have that as tax deductable from their rental incomes, and the rest you cannot use as tax deductable, but then your main residence mortgage would not have been anyway.
So this should be a more tax efficient way to do it.

I am not a tax advisor, these are my own opinions, take advice.

Steve From Leicester

10:38 AM, 17th April 2014
About 7 years ago

Self-cert loans were originally intended to cater for exactly this type of situation, where a sensible and responsible borrower didn't tick the standard boxes but had the means to pay the mortgage.

Unfortunately, as we all know, abuse was widespread and they got withdrawn so we're now back to box ticking.

Neil Patterson

10:41 AM, 17th April 2014
About 7 years ago

Reply to the comment left by "Jeremy Smith" at "17/04/2014 - 10:33":

Good point Jeremy about releasing the equity from the BTLs as you then don't need the rental income.

Laura Delow

10:46 AM, 17th April 2014
About 7 years ago

Reply to the comment left by "Neil Patterson" at "17/04/2014 - 10:21":

Neil is spot on however much it might not make sense.
Can I ask who your current lender is and whether you've inquired directly with them about product switching to one of their other deals? Some lenders do restrict existing customers to certain product transfer deals that aren't as sexy as those on offer to new customers but most lenders allow access to all products within the loan to value (LTV) range you're in ie LTV is what you owe vs the value of your home the lender feels your place is now worth using whatever index they use.
Otherwise Neil's idea of remortgaging/capital raising on one or both of your buy to lets is an idea if the above is not a goer, as long as you deal with a buy to let lender whose criteria you fit eg minimum earned income between you of £XX,XXXpa (every lender is different) or a lender who doesn't stipulate any min earned income (few of these around) then you could pay off your residential mortgage with the amount raised on the buy to let(s) and although the interest rates & lenders arrangement fees are higher than residential rates, if you don't raise more than 60% loan to value, there's some good buy to let rates out there with Arr Fees not that high & free legals & valuation fees. Also, if your accountant can justify the capital raising on the buy to lets as being a tax deductible business expense eg funds raised originally on the residence were for the purpose of buying or refurbishing the buy to let(s), then you'll get tax relief on the interest payable on the buy to let mortgage(s), the net effect of which may end up making it cheaper borrowing than the residential route.

Howard Reuben CeMap CeRER

10:55 AM, 17th April 2014
About 7 years ago

The MMR looms over BTL once again ... and it hasn't even formally started yet!

Affordability is the key issue now for every lender and the big 'what if' question is 'what if you have a void period (ie no tenant) but of course the mortgage still needs to be paid? If you only rely on rental income how are you going to service your debts that you have an obligation to pay every month?'

Reasonable question, of course, however most lenders are now under the cosh to be far more careful than ever before and so, yes, you will come up against many who say no ..... unless you work with a whole of market Broker who can help you.

Capital raising against existing BTL's to help the scenario could work, but I can also confirm that I do know of (at least) one lender who may possibly be of help for your resi mortgage, based on affordability calculated on rental income only.

They have restrictions (of course) as follows;

* you must own at least 5 properties in your BTL portfolio
* you must have owned them for at least 3 years
* there will be a LTV cap on your resi at 75%
* you must pass their credit searches and their credit scoring
* the rental income assessed will be the net / surplus income after the BTL mortgage payments have been deducted

As always, it pays to work with a professional mortgage Adviser from day one. In your case, if you have applied directly ("several lenders say they don’t include rental income") each time they may be DIP'ing you and possibly leaving footprints on your credit file.

Hope this helps.

Howard

Kevin Thomson

12:04 PM, 17th April 2014
About 7 years ago

Reply to the comment left by "Howard Reuben" at "17/04/2014 - 10:55":

that sounds like a great option Howard.

We're not at the stage of moving house yet, but could be soon. Main problem is that my wife and I are now both self-employed, relying mostly on rental income.

In the familiar position for self-employed people of trying to minimise income for self-assessment whilst need evidence of far more income for a suitable mortgage.

Jeremy Smith

15:12 PM, 17th April 2014
About 7 years ago

It seems a no-brainer to raise capital which is tax deductible before you raise cash from non-tax deductible sources.

This way you can reduce your self-assessed tax bill at the end of the year too.

Gillian Schifreen

15:28 PM, 17th April 2014
About 7 years ago

Thanks for all the advice. One thing I do have an issue with is that rentals are deemed to be unsafe either because you may borrow on then the day after you get your mortgage or because you may have void periods. However you may give your normal employment as well or be sacked or made redundant. I think those of us who have insulated ourselves against the vagaries of today's job markets need to be rewarded no penalised.

Also we have made the decision to pay off all our BTL mortgages prior to our retirement in about 10yrs so don't really want to go down the route of borrowing against them again. The most ridiculous thing about all of this is that we only want a mortgage of 20% on our residence. You'd think that alone would give any lender peace of mind.

Re: MMR I hope they don't ask about pets as our flippin' emus cost a fortune to feed and keep in jewellery ! 🙂

DC

15:36 PM, 17th April 2014
About 7 years ago

You are of course asking a very valid question about criteria that makes no sense at all.

I would say that releasing capital from your investment properties to pay off your residential mortgage is a little bit back to front. I would assume that your residential mortgage interest rate is far better than the majority of BTL mortgage rates, so it makes more sense to maximise your borrowing on the lower interest rate. Also, the mortgage fee that you would be hit with on a BTL is much more costly as well so I would do the sums first before pursuing that course of action.

I have just found out that my residential lender, who already have their new MMR criteria in place, will now consider rental income when applying for a residential mortgage. This will be by means of production of your Self Assessment statement showing a profit.

If you need to find BTL lenders that do not have a minimum income criteria then look at The Mortgage Works, Aldermore and BMS to name but a few.

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