If you use a buy-to-let mortgage to purchase a rental property, your mortgage lender will insist that the rental income from the property covers the debt by a certain amount.
To calculate this amount, lenders use the following figures:
- The debt service coverage ratio (DSCR), the percentage by which your income must cover your mortgage repayments; and
- The stress rate, a (usually) notional interest rate at which your lender calculates the repayments
These figures represent an individual lender’s perception of certain risk factors both specific to your application and in general. Lenders take into account the possibility of lost income, rising interest rates and more when assessing rental cover. Thus, the DSCR and stress rates used could be higher or lower than usual depending on your circumstances and goals.
When your rental income may be insufficient
- You are investing in an expensive area. Premium locations, such as Greater London, tend to have lower rental yields because of the higher property values.
- You trade as a limited company. Some buy-to-let mortgage lenders increase the percentages in their DSCR calculations for limited company borrowers.
- You are buying a house in multiple occupation (HMO). Lenders may also require higher income from HMO properties or multi-unit blocks.
- The property you are buying needs renovation. Even if it is habitable, the property you wish to buy may be too dilapidated to attract the best possible rent.
- You are borrowing for a shorter deal period or at a higher loan-to-value (LTV) ratio. Lenders view larger loans and/or loans with shorter deal periods as riskier for the borrower.
- You have little experience renting property. First-time or inexperienced landlords may be subject to firmer rental cover checks to help minimise risk.
How we might be able to help
We have an excellent understanding of the buy-to-let market and the different criteria that lenders set. If you have been declined elsewhere due to insufficient rental income, we can take a look at your application to determine why this may be, and see if we can match you with a more suitable lender.
‘Pay rate’ rental calculation: Some lenders offer products where the rental cover is calculated against the actual interest payable, rather than a higher notional rate. Applying for one of these products may increase your chances of acceptance.
Looser criteria: Other lenders may simply set more favourable lending criteria than the firm you first applied with. We will look at your circumstances in full and always recommend the most suitable product.
To see if we can help you with your buy-to-let mortgage application, get in touch with us for free using the number above or enquire online today.