Understanding the Role of Rental Income in a Buy-to-Let Mortgage Application
Rental income is important when applying for an Expat Buy to Let mortgage in the UK. The lenders will assess whether the rental income expected from the property will cover the mortgage costs and all other associated costs. Understanding how rental income affects your affordability when you’re a expat or foreign national is essential for securing the best UK expat mortgage deals.
What Do Lenders Look for in an Expat Mortgage Application?
Lenders will always conduct a strict affordability test to ensure the borrower can repay the mortgage – this is an essential requirement which all lenders must adhere to for regulatory purposes. Expat BTL mortgage UK appraisals, however, are distinctly different from residential mortgage lending checks since they focus primarily on the property’s rental income, rather than the borrower’s personal income.
Lenders’ key mortgage criteria:
- Projected Rental Income: The estimated monthly rental income the property is likely to generate.
- Rental Coverage Ratio: The lender needs the rental income to exceed the mortgage payment by a certain percentage, usually 125% – 145% of the monthly mortgage payment.
- The Interest Coverage Ratio (ICR): Is used to determine whether rental income adequately compensates for interest, typically by a stress-test factor greater than the actual mortgage interest rate.
- Type of Tenant: A few lenders have specific requirements for the tenant, such as professionals, students, or housing benefit recipients.
- Property Location: Rental prices are resilient in terms of location and retail sales, as demand for a second location of a property and neighbouring rental requirements increases.
How Rental Income Affects Mortgage Affordability Assessments
Rental Coverage Stress Tests
Lenders will assess rental income against the risks of the ability to pay, similar to the fluctuation of the interest rate, or any potential void period when the property might be left unoccupied. Usually, the lender requires the rental income to be approximately 125% to 145% of the mortgage payments, together with a “stress test” to build in extra slack / cover. The fact that rental prices should still cover all the mortgage costs even if mortgage interest rates rise is a sign of this.
For example, if you have a BTL mortgage with a loan of £200,000 and an interest rate of 5%, the monthly mortgage interest only payment would be £833. Your monthly rental income would therefore need to be a minimum of £1,208 if the lender requires a 145% rental coverage.
Importance of Rental Yield
The rental yield increases as a percentage of property value. Lenders are more inclined to prefer to lend on properties with a high rental yield, typically exceeding 5%. The higher the rental yield, the more attractive the property is to the mortgage lender. In the case of an expat securing finance a UK property, the selection of a high-yield location can be optimal in securing a mortgage.
Rental Yield Example Calculation:
- Property Price: £250,000
- Annual Price Income: £15,000
- Rental Yield: (£15,000 / £250,000) × 100 = 6%
How Lenders Verify Rental Income
Lenders will seek to verify rental income through various sources:
- A surveyor’s independent assessment of the rental market to verify the approximated rental profits and trade patterns.
- Assuming the property is already rented out, the lender is likely to request to see the current Rental Agreement along with bank statements as proof of income.
- If the property is vacant, the lender may accept a rental projection from a reputable Lettings Agent.
Challenges for Expat and Foreign National Property Investors
In the UK, expat and foreign national property investors often face additional obstacles when applying for a BTL mortgage. We summarise these as:
- Limited UK credit history: Several UK lenders are reluctant to lend money to a borrower who does not have a recognised UK credit profile.
- Foreign currency income: Lenders may apply currency exchange stress tests, thereby reducing borrowing potential.
- Complex legal and tax implications: Buy-to-let taxation varies for non-UK residents, requiring expert guidance.
How to Improve Your Expat Buy-to-Let Mortgage Eligibility
1. Choose a High-Yielding Property
Regions with strong demand for rental accommodation will always boost the rents achievable and therefore produce higher yields. In contrast to London, properties in Manchester, Birmingham, and Liverpool often produce higher rental yields, which often surprises a lot of investors.
2. Work with a Specialist Expat Mortgage Broker
With the all complexities entailed in securing a UK expat mortgage, acting as a specialist mortgage agent, Expat Mortgages UK have access to all lenders, including the specialist lenders to ensure you secure the best possible mortgage terms and flexibility.
3. Maintain a Good Credit Profile
Even though your UK credit history might be somewhat limited if you live overseas, your chances of securing an expat mortgage in the UK are greatly increased by your having a good credit score and clean credit report in your country of residence.
4. Provide a Larger Deposit
A higher deposit, usually 25% – 40%, would reduce the lender’s risk significantly and typically lead to much lower buy-to-let mortgage rates UK.
5. Have a Contingency Fund
The lender will determine your overall economic stability by checking your availability of funds and backup funds, to secure the mortgage loan. The more funds you have available, ultimately the less risk to the lender and therefore the greater your chances of mortgage approval.
The Buy to Let Mortgage Rates UK: What to Expect
The expat buy-to-let mortgage rates UK will vary based on Loan to Value (LTV), property type and borrower profile. Usually, expats and foreign national investors usually have a slightly higher interest rate in order to cover the increased lender risks.
Typical Interest Rates and Terms:
- Fixed-rate BTL mortgages: 3.5% – 6.5%
- Tracker-rate mortgages: 4.0% – 7.0%
- LTV requirements: 60%-75%
- Minimum rental coverage ratio: 125%-145%
Conclusion: Secure the Best Buy-to-Let Mortgage with Expat Mortgages UK
For expats and foreign nationals investing money in UK property, insight into the way rental income affects the buy-to-let mortgage is essential. You can increase your chances of obtaining a competitive mortgage deal by focusing on strong rental income, working with a specialist mortgage lender and maintaining sound financial records.
We specialise in helping expats and foreign nationals navigate the complex UK mortgage market. Our independent and highly experienced mortgage professionals have access to ALL UK expat lenders, including the specialist lenders who recognise the unique challenges faced by foreign investors.
Are you ready to discover your buy-to-let mortgage option? Now you can use our Free Expat Mortgage Calculator to find out how much you can borrow!
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