Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
How on Earth do lenders assess Self-Employed income for Buy to Lets?
We love helping our clients with their Buy to Let properties. Getting a mortgage for an investment property should be the easiest thing in the world. We generally tell people that if they can provide a 25% deposit, they can apply for a Buy to Let mortgage.
In this blog, we’re going to look at what the lenders request when it comes to income for a Buy-to-Let, specifically looking at the self-employed.
We’ve recently had a very interesting Buy to Let application where we spoke to three different lenders and each one used a different income figure.
The client in question did have a unique situation, but it wasn’t outrageous.
For a number of years, he has been running a successful business and has several years of accounts to prove this. Despite everything that happened during the pandemic he was able to keep his business afloat, and not only that, he had purchased another franchise of the same business up the road in Gloucester. That business had also been running for years and had several healthy years of accounts.
Our client wasn’t looking to purchase anything unusual and simply had a 25% deposit that he wanted to put down.
When it comes to how much income is needed for an investment property we would normally answer, that you need £25,000 per annum, but if you don’t earn that, there is still a small pool of lenders who can help below this amount.
The lenders are more interested in the rental yield and want to make sure that the rent the property will generate is enough to support the mortgage requested.
It’s going to get a bit numbers heavy here so bear with me.
The first lender we approached was The Mortgage Works (TMW) which is part of Nationwide. As long as you have an income they can help. The way they stress test the mortgage changes depending on whether you are a higher rate taxpayer or a basic rate taxpayer. If you earn between £12,571 and £50,270, you are a basic rate taxpayer and will pay 20% tax. If you earn between £50,271 and £150,000, you will pay a higher rate of tax of 40%.
If you are a basic rate taxpayer, TMW will stress the rent at 125%.
If you are a higher rate taxpayer, TMW will stress the rent at 145%.
To give you an example, if the rent is £1,000 per month, and the interest rate they use is 5%, then you would be able to borrow (£1,000 x 12 months) / 125% / 5% = £192,000 as a basic rate taxpayer.
As a higher rate tax payer you would be able to borrow (£1,000 x 12 months) / 145% / 5% = £165,517.24.
You can see that despite earning more, higher rate taxpayers can borrow £26,482.76 less in this example.
Our client was just below the higher rate tax bracket and as such, we used the lower stress rate of 125%. The rental figure was £850 per month and as such he was able to borrow £181,333.
TMW came back to us and said they would take 75% of the rental income and add that to his income. The extra £637.50 per month made him a higher rate taxpayer and with the new stress rate of 145%, TMW could only lend him £156,321.
Due to TMW being more cautious, our client could borrow £25,012 less.
If the rent had been £800 per month, he would still be a basic rate taxpayer and he would have been able to borrow £170,666.
Unfortunately, we were unable to use TMW.
Barclays were the next lender we investigated.
Rather than using a stress test like TMW, they use a traditional affordability model that you would find on a residential mortgage.
As mentioned before the client now owns two businesses that have been running for many years, but the second business he had owned for just over one year. As he hadn’t owned the business for two years, Barclays ignored the income from the business and used an average of the last two years’ salary and dividends from his older business. This meant that his income was roughly half of what TMW were using. Barclays told us that unfortunately, using only half of his income, he would be unable to cover the mortgage payments should the property not be let out, on top of his day-to-day outgoings.
Finally, we arrived at Skipton Building Society. A sensible lender!
Skipton asked for the client’s last 2 years’ Tax Calculations (also known as SA302s) and used an average of this. This was just less than the higher rate tax threshold. As such, they would use a calculation of 125% x 4.5% as our client wanted a 5-year fixed rate.
Skipton was happy to lend our client £181,333. The same as what we initially thought TMW were able to offer, but without any of the stress.
What is the moral of the story?
There are many ways to assess self-employed income. The best thing to do is give yourself plenty of time and to speak to us before you want to proceed. We can then have these conversations with the lenders on your behalf so that when we are ready to apply for a mortgage, the process is as simple as possible.
It also goes to show that just because you are a big lender, it doesn’t mean that you have particularly good service or use common sense. It can sometimes be worth picking someone with a marginally higher interest rate who either has an element of flexibility or just sensible criteria.
It can be quite hard to understand how lenders underwrite applications for investment properties, especially if you have complicated income. The best thing to do is use our experience to make sure the application is as stress-free as possible.
Next Steps
If you are looking to discuss a potential investment property, the best thing to do is to book in an appointment and we can run you through your options.
Do give us a call on 0117 332 5197. Our initial conversations usually last around 15 minutes.
Alternatively, you can email enquiry@lloydwellsmortgages.co.uk and let us know how we can help you.
We will discuss:
- How much you can borrow
- What that will cost
- What fees can you expect
- How Lloyd Wells Mortgages work
- What insurances you will need
- What documentation you will need to provide
- Next steps
Your home may be repossessed if you do not keep up repayments on your mortgage.
