Your Minimum Income Requirements
A common concern for property investors contemplating a new buy-to-let investment is if they earn enough income. Now you will know the answer!
Unfortunately, due to industry terminology, the answer is often misunderstood. The advice received from our friends in the pub, that you don't need any income for Buy-to-Let Mortgages.
When we say "No Minimum Income" we do not mean "No Income Required".
The use of "No Minimum Income" is to allow flexibility (instead of £25,000 or more). Instead, the lender requires you to have an income that supports your lifestyle. £24k, £21k or £15k whichever, as long as your personal financial situation is self-sustainable. You can meet your commitments and have some disposable cash to live your life.
If you have no income, lenders will see you as high risk. The potential is that instead of paying the mortgage the funds from rent may be used elsewhere to support your living.
"No Minimum Income" comes into play well, perhaps you are living on a pension or disability payments, etc.. You can support your own living even if not employed / self-employed.
I hope, we've helped clarify the difference between "No Minimum Income" and "No Income".
Though not all mortgage lenders operate that criteria. Out of the 60 Buy-to-Let Mortgage lenders, we surveyed:
- 08 Mortgage Lenders have complex income criteria.
- 04 Mortgage Lenders require £30,000 minimum income.
- 19 Mortgage Lenders require £25,000 minimum income.
- 07 Mortgage Lenders require £20,000 minimum income.
- 03 Mortgage Lenders require £18,000 minimum income.
- 19 Mortgage Lenders have no minimum income.
As you can see 68% of mortgage lenders have a set minimum income, of which just 32% offer "no minimum income".
Those lenders that have a set minimum income can often go further, such not including rent from your other properties in the minimum requirement. This rules out a lot of professional landlords with a portfolio.
There is also some weird juxtaposed positions on income. We have lenders that require £25,000 minimum income unless you're an experienced landlord then they have no minimum.
Whilst others have £30,000 minimum income which increases to £75,000 if you have 4 or more buy-to-let properties.
Some will have lower income requirements; if you are not an ex-pat, if you owned a BTL for more than 12 months if you have no children if the mortgage is under £1m and a variety of other reasons.
There are a few takeaways from this topic:
- The value of a specialist mortgage adviser in ensuring your income requirements match the best mortgage available for your circumstances.
- The value of keeping your job is to keep your mortgage options open.
- There are more lenders requiring a set minimum income than those that have no minimum.
- If you're a professional landlord, with no other income. You could limit your options.
Minimum Rent Required
The new rules will prevent lending institutions from self-pricing risk as the PRA aims to impose:
- mortgage interest coverage ratio (ICR)
- personal income affordability test
- interest rate stress test over five years
The PRA outlines that businesses that borrow to invest in rented accommodation "could see an impact on their ability to obtain a buy-to-let-mortgage" as it aims increase buy-to-let underwriting standards.
Portfolio Landlords (landlords with four or more properties) are described as "inherently more complex" and to expect a full assessment including:
- training/competence as a landlord
- assets and liabilities assessment
- tax assessment
- overall btl portfolio assessment and
- historical and future cash flow assessment
Landlords trying to escape the mortgage interest relief via a Limited Company would not be surprised that the PRA outlines the minimum standards will be enforced "regardless of whether the borrower is an individual or a company".
The prevention of lending institutions to self-price risk moves towards reducing competition for buy-to-let business - as the PRA intends to implement a standard "interest coverage ratio" formula across the buy-to-let lending industry.
The Financial Planning Committee at the Bank of England commented that growth of buy-to-let mortgage lending is likely to slow in Q2 as changes to stamp duty take effect. Looking ahead, the combination of forthcoming changes to mortgage interest tax relief and the implementation of the PRA Supervisory Statement will probably dampen the growth of buy-to-let mortgage lending relative to lenders’ plans.
What rental income is needed?
New regulations limit borrowing based on the rent deemed achievable by the lender's valuer. The minimum is assessed at a rate of 5.5% ensuring a 125% coverage. As such for a £100,000 mortgage you would need at least £572 rent. Put simply you need £5.72 rent at a minimum for every £1,000 borrowing. That demonstrates the minimum - mortgage lender criteria may be tougher.
Buy to Let Mortgage affordability is calculated by ensuring that the rent payable is over the minimum mortgage that will be required to be paid AND in most cases your personal income.
Their are three variables to formula mortgage lenders use - the Rent/the Loan, the Multiplier and the Rate.
- the Rent: is what rent can be achieved at the property. Often this value comes not from the Tenancy Agreement but what a valuer may think you can achieve.
or the Loan: how much you can borrow.
- the Multiplier is a percentage of which the Rent of the property must exceed. The bank does not just want the rent to cover the mortgage, with £0 leftover. They may want the mortgage plus 20%, therefore 120% multiplier.
- the Rate is an interest rate the lender decides to stress test by. Sometimes a rate a lenders risk department decides but more often the lenders Standard Variable Rate (SVR).
The Two Buy to Let Affordability Formulas
You can use the formula in two ways:
Rent to Max Loan Formula
Given the Rent you can achieve what is the maximum loan a lender will offer:
theRent (divide) theMultiplier (divide) theRate (multiply) 12 months
Rent Required for Loan Formula
Given the Loan you want to borrow, what is the minimum rent a lender will require:
theLoan (divide) 12 months (multiply) theRate (multiply) theMultiplier
New PRA Buy-to-let Regulation (January 2017)
Buy to Let Mortgage Lenders (that are regulated by the PRA) from 1 January 2017 will have to implement restrictions on lending criteria.
These changes include stricter affordability tests including Interest Cover Ratio including the impact of recent Tax Changes and a stress test on interest rate rises.
Other restrictions such as regulatory burdens on portfolio landlords will be implemented by 30 September 2017.
The regulatory changes come into effect for new Purchases or Capital Raising - remortgage buy to let properties remain unaffected.
Other loans including Holiday lets, bridging loans, property investment lending and corporate lending are exempt from the underwriting standards.
The PRA has required lenders to implement into their criteria an Interest Coverage Ratio Test (and/or) a personal income affordability test.
The lenders in such affordability test must take into account any tax liability.
While the PRA outlines minimum requirements, it does not set a minimum Interest Coverage Ratio threshold, this move bank lending into a justification of their procedures under the rules.
Except for the future interest rate test, in which the PRA prescribes that a lender must have a minimum test of 5.5% during the first five years of a buy-to-let mortgage.
The affordability test must include a set of variables including income affordability test, all costs associated with renting a property, tax liability, income net of tax, national insurance payments, credit commitments, committed expenditure, essential expenditure and living costs. Your personal affordability will hold more weight in affordability if you require on personal income to support the rent.
Lenders are now allowed to base affordability assessment on the equity in the property used as security. This is a viability of business test and not lenders security.
The PRA does not expect it to drop further than 125% and a minimum rate of 5.5%.
The formula to find Maximum Loan:
theRent (divide) theMultiplier (divide) theRate (multiply) 12 months
With expected minimums:
theRent (divide) 125% (divide) 5.5% (multiply) 12 months
So with £500 per month rent the maximum loan, on the VERY MINIMUM requirements is: £87272
Many lenders are currently above the current minimum (and expected minimums).
The PRA is to require from Lenders a special underwriting process for Landlords with four or more mortgaged BTL properties.
This is because the PRA has found that arrears rates increase as portfolio size increases.
The PRA does not prescribe a requirement but outlines lenders should take into consideration a Landlords Experience and record their full portfolio, rent and outstanding mortgages. In addition to assets and liabilities and tax liabilities.
Lenders should also take into consideration the merits of any new lending in accordance with the landlords business plan.
In addition to historical and future expected cash flows.
PRA not concerned with tax changes and this combining effect.
PRS not concerned that some lenders wont have to implement this change, as they have asked for more powers from govt.
When it comes to affordability requirements many lenders already have such minimum requirements above and beyond current requirements. Many lenders have increased these stress test recently in anticipation of the PRA requirements or as a consequence of the Tax Changes. Its not much of a change but can effect total borrowing.
Portfolio Landlords may be in for a harder process on the next purchase after September 2017. The specialist process will require a lot more information and may include as the PRA suggests Cash Flow Forecasts, Business Plan and Portfolio Spreadsheets. Nothing new to anyone undertaking business loans.
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