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I'm interested to know whether mortgages in the UK are ever given by taking into account any rent that the owner may acquire, rather than simply the owner's salary. My understanding of standard mortgages is that the total amount available to borrow is typically proportional to your current salary. But suppose that your salary alone will not give you the necessary mortgage for a property. Can you add the expected extra rental income to your salary for the mortgage calculation?

Specifically, I would like to know about three scenarios:

  1. If you are a live-in landlord and rent out a second room. Can you add the expected rental income to your salary to get a mortgage?

  2. If you are married and your spouse lives in the same room as you and pays you rent, but the mortgage is only in your name. Can you add that rental income to your salary?

  3. If you are purchasing a property with buy-to-let intentions. Can you use the rental income exclusively to fund the mortgage repayments?

My gut instinct is "no" to all of these. But I feel like I've heard of stories where somebody has two mortgages -- one for their own place, with mortgage repayments covered by their salary, and one for a buy-to-let place, with mortgage repayments covered by the rent.

  • Getting a mortgage with aarried partner not on the mortgage or title might be difficult since the bank will be concerned about the spouse taking title without being on the mortgage in the case of death or divorce. I don't think it's impossible, but it's not trivial. – Glen Pierce May 11 '18 at 14:06
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The decision as to what counts as income is up to the bank. You'll need to ask them whether or not rental income can be included in the total.

I can offer some anecdotal evidence: when I applied for a mortgage to buy my home, I already had a rental property with a buy-to-let mortgage on it. Initially the bank regarded that property as a liability, not an asset, because it was mortgaged! However, once I was able to show that there was a good history of receiving enough rent, they chose to ignore the property altogether -- i.e. it wasn't regarded as a liability, but it wasn't regarded as a source of income either.

More generally, as AakashM says, residential mortgages are computed based on affordability, which is more than just a multiple of your salary.

To answer your specific questions:

  1. Covered above; it's up to the bank.

  2. If you're married, and you don't have a written tenancy agreement, and you're not declaring the "rent" on your tax return, then it seems unlikely that this would be regarded as income at all. Conversely, if your partner is earning, why not put their name on the mortgage application too?

  3. Buy-to-let mortgages are treated differently. While it used to be the case that they were assessed on rental income only, nowadays lenders may ask for proof of the landlord's income from other sources. Note that a BTL cannot be used for a property you intend to live in, and a residential mortgage cannot be used for a property you intend to let to tenants -- at least, not without the bank's permission.

4

I can answer Scenario #3.

If you are purchasing a property with buy-to-let intentions […] can you use the rental income exclusively to fund the mortgage repayments?

  1. First just to point out that if you have buy-to-let intentions, you need a buy-to-let mortgage which is a different ballgame. Most residential mortgage contracts forbid letting out the property (as do most home insurance contracts btw), meaning you'll have to switch deal if you want to get a tenant.
  2. Yes – this is exactly how buy-to-let mortgage applications are evaluated. Lenders generally expect you to fund the mortgage payments with rent. They look for the anticipated monthly rent income to cover a minimum of 125% of the monthly mortgage payment. This is to make sure you can allow for vacant periods, maintenance, compliance with rules and regulations, and still be in profit (i.e. generate a positive yield on your investment).

    • A crucial point: I said mortgage payments not repayments. Usually buy-to-let mortgages are interest-only. Your deposit is your investment; you pay interest on the loan and receive income from the rent minus costs. You don't actually repay the mortgage: since you don't live there, you are free to sell it when you want your investment to mature. Worth noting that, for this reason, minimum deposits on buy-to-let are much higher than buy-to-own. You need to have around 25% of the purchase price as your initial investment, compared to 10-15% for buy-to-own. (You might get away with 20% but these mortgages are far less competitive on rate).
  3. However, buy-to-let (BTL) mortgage lenders also generally expect you to own your own home to begin with. It's up to them, but rare is the lender who will provide a buy-to-let mortgage to a non-owner-occupier. This is because of point 2 above. The lender doesn't want you to end up living in the property because then you'll need to repay the loan capital, since you'll always need somewhere to live. This makes the economics of BTL unfavourable. They look at your application as a business proposal: quite different to a residential mortgage application, which is what your question seems to be addressing.

Bottom line: You're right about scenario #3 but it sounds like you're trying to afford a home first, whereas BTL is best viewed as an investment for someone who already has their main residence under ownership (mortgaged or otherwise).

As for Scenarios #1 and #2 I can't offer first hand answers but I think Aakash M. and Steve Melnikoff have covered it.

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I am in Australia, but I think the banks in the UK would use similar wrkings. Your options 1 and 2 are basically no. Why would the bank consider your wife to be paying you rent when you live together. These are the type of practices that led to the GFC, and since then practices have been tightened.

Regarding option 3, yes banks do take into consideration rent in their analysis of your loan. However, they would not include the full rent in their calculations, but about 70% to 75% of the full rent. This allows for loss of rent during vacant periods and adds a safety factor in their caluclations. But they will not include the rent itself, you would have to have other income as well to support your loan.

Saying that, we do have Low Doc Loans in Australia (loans with little documentation required to get a loan). With these loans you basically have to make a declaration that you are telling the truth regarding your income sources and you can only usually borrow a lower LVR as these loans are seen as a bigger risk. These type of loans have also been tightened up since the GFC.

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The days are long gone when offered mortgages were simply based on salary multiples. These days it's all about affordability, taking into account all incomes and all outgoings. Different lenders will have different rules about what they do and don't accept as incomes; these rules may even vary per-product within the same lender's product list.

So for example a mortgage specifically offered as buy-to-let might accept rental income (with a suitable void-period multiplier) into consideration, but an owner-occupier mortgage product might not.

Similarly, business rules will vary about acceptance of regular overtime, bonuses, and so on.


Guessing at specific answers:

#1 maybe, if it's a buy-to-let product, Note that these generally carry a higher interest rate than owner-occupier mortgages; expect about 2% more

#2 in my opinion it's extremely unlikely that any lender would consider rental income from your cohabiting spouse

#3 probably yes, if it's a buy-to-let product

  • If you are a live-in landlord (q1), it would not be a buy-to-let mortgage – AndyT Jan 27 '16 at 16:13

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