Can I include projected rental income in my mortgage application?

Projected rental income is a fundamental component of Buy-to-Let (BTL) mortgage applications in the UK. Lenders rely heavily on this potential income stream to assess the viability and affordability of the investment property, primarily using a metric called the Interest Cover Ratio (ICR). While crucial, lenders will not rely solely on the applicant’s personal projections; they typically require a conservative estimate based on independent, professional valuations to ensure the property can comfortably generate enough income to cover the mortgage interest payments.

Can I include projected rental income in my mortgage application?

The ability to include projected rental income is one of the key distinctions between a standard residential mortgage and a Buy-to-Let (BTL) mortgage in the UK. For a BTL application, the projected rent is often the most significant factor determining how much a lender is willing to advance, moving the focus away from the applicant’s personal earned income.

Understanding Projected Rental Income in Mortgage Applications

When you apply for a residential mortgage on the home you intend to live in, affordability is calculated strictly based on your personal earned income, such as salary, bonuses, or self-employment profits. Projected rental income is generally irrelevant in this scenario.

However, for investment properties, the dynamics change entirely. Lenders view the investment property as a business venture, and they primarily assess the property’s ability to generate income sufficient to service the debt.

Buy-to-Let (BTL) vs. Standard Residential Mortgages

In the UK, BTL lending is regulated differently from residential lending. Lenders are primarily concerned with two key areas when considering projected rental income:

• The Property’s Viability: Does the location, condition, and type of property command the rent necessary to make the investment profitable and secure the loan?
• Regulatory Compliance: Since changes to taxation and regulation (such as the reduction in tax relief for mortgage interest), lenders must stress-test the income to ensure the loan remains viable even if interest rates rise or costs increase.

There are some niche scenarios where projected rental income might be considered for a residential application, such as porting a mortgage or seeking a ‘Consent to Let’ while temporarily moving out of your home. However, these are exceptions, and the primary mechanism for using projected rent remains the BTL market.

The Interest Cover Ratio (ICR) Explained

The key metric used by BTL lenders to assess projected rental income is the Interest Cover Ratio (ICR). This ratio calculates whether the projected gross rental income comfortably covers the theoretical interest payments on the mortgage.

Since 2017, lenders typically do not assess the ICR based on your actual initial mortgage interest rate. Instead, they apply a “stress rate”—a theoretical, higher interest rate—to account for potential rate hikes during the mortgage term. This ensures the investment remains affordable even in adverse economic conditions.

Typical ICR requirements usually fall within these ranges:

• Basic Rate Taxpayers (20%): Lenders typically require the rent to cover 125% of the stressed interest payment.
• Higher or Additional Rate Taxpayers (40% or 45%): Due to stricter tax treatment on rental profits, lenders typically require the rent to cover 145% (and sometimes up to 160%) of the stressed interest payment.

The stress rate itself generally ranges from 5.5% to 8%, depending on the lender and whether the product is a fixed rate (e.g., fixed for 5 years might attract a lower stress rate) or a variable rate.

How Lenders Verify Rental Projections

Lenders treat the income figures you provide as estimates. To approve the loan, they must verify these figures independently, ensuring that the property can realistically generate the required income.

Professional Valuations and Conservative Estimates

Verification is almost universally achieved through a professional valuation instructed by the lender. When the surveyor visits the property to assess its market value, they also provide a separate assessment of the expected market rent. This independent assessment is the figure the lender will use for their ICR calculation.

Lenders typically use conservative estimates. If a surveyor estimates the rent could be between £1,000 and £1,200 per month, the lender is likely to use the lower figure (£1,000) for their ICR calculations to protect against void periods or unexpected market dips.

The Role of Personal Income and Stress Testing

While BTL affordability primarily hinges on the property’s projected income, this does not mean the applicant’s personal financial situation is ignored. Most lenders will still perform background affordability checks, particularly if the projected rental income only marginally meets the ICR requirement.

Lenders need confidence that the borrower can cover running costs, initial void periods, and potentially any shortfall if the rent fails to materialise or if they face delays in finding a tenant. They will assess your personal credit history and overall financial stability.

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Some lenders apply a minimum income requirement (e.g., £25,000 per year) even for BTL applicants, ensuring they have income resilience outside of the property portfolio.

What Documentation Will I Need?

To substantiate your projected rental income and overall BTL application, you will need to provide various documents:

• Mortgage Application Forms: Where you state your expected rental income based on your own research (e.g., comparing local rental listings).
• Professional Valuation Report: This is commissioned by the lender and verifies the market rent.
• Proof of Deposit: Documentation showing the source of the funds for the deposit (typically 25% of the property value for BTL).
• Proof of Identity and Residence: Standard KYC (Know Your Customer) documents.
• Personal Income Proof: Usually payslips or accounts, even if the application is serviceability-tested based on rent, especially if you fall into the higher tax bracket or the lender has a minimum income requirement.
• Portfolio Summary (If applicable): If you already own rental properties, evidence of the current rent received and mortgage statements for those properties.

It is important to understand your obligations as a landlord regarding rental income tax. Rental income, even projected, forms part of your total taxable income. You can find up-to-date guidance on rental income and expenses via the UK government’s official resources, such as Gov.uk guidance on paying tax on rental income.

The Impact of Low Projected Income

If the projected market rent, verified by the surveyor, does not meet the lender’s required ICR threshold at the stressed rate, the loan amount offered may be capped or the application may be declined.

If the projected income is slightly too low, you typically have two options:

1. Increase the Deposit: By increasing the cash deposit you put down, you reduce the overall borrowing amount, thus lowering the interest payment required. A smaller loan means the rent needed to satisfy the ICR is also smaller.
2. Explore Specialist Lenders: Some lenders have different stress rates or ICR requirements depending on the product type (e.g., Houses in Multiple Occupation, or HMOs, often have different criteria) or if you are a professional portfolio landlord.

Seeking advice from an experienced mortgage broker who specialises in the BTL sector is highly recommended, as they can accurately calculate the maximum borrowing capacity based on various lenders’ specific ICR tests.

People also asked

Can projected rental income be used for second homes or holiday lets?

Yes, but under specialised criteria. Lenders typically offer specific mortgages for holiday lets (often called Furnished Holiday Let mortgages) or multi-unit dwellings. Affordability for these products is usually calculated based on projected income, but the ICR and stress rate applied may differ significantly from standard long-term BTL models.

Do I need an active tenancy agreement before applying for a BTL mortgage?

No, you do not usually need an active tenancy agreement in place when applying for the mortgage to purchase the property. Lenders rely on the independent valuation report to determine the realistic market rent. However, you will need to provide proof of a tenancy agreement (or proof that the property is being advertised) before the mortgage funds are released upon completion.

How does the “stress rate” affect the actual payments I make?

The stress rate (e.g., 5.5% or 6%) used in the ICR calculation is purely theoretical and for affordability testing only. It does not affect the actual monthly payments you make, which are calculated based on the genuine interest rate of your chosen mortgage product (e.g., a 2-year fixed rate at 4.0%).

What happens if the verified rental income is lower than I projected?

If the independent valuation reports a lower projected market rent than you estimated, the lender will use the lower verified figure for their ICR calculations. This may result in the lender offering you a smaller mortgage amount than you initially requested, requiring you to increase your deposit to cover the shortfall.

Are interest-only mortgages more common for BTL applications?

Yes, the vast majority of BTL mortgages in the UK are structured on an interest-only basis. This structure keeps monthly payments lower, making it easier for the projected rental income to satisfy the lender’s stringent ICR requirements.

In conclusion, including projected rental income is standard practice for BTL financing, providing the primary mechanism for assessing affordability. However, the calculation is highly complex, governed by the Interest Cover Ratio, conservative stress testing, and verification by independent surveyors. Always ensure your projections are realistic and that you factor in potential tax implications and operating costs when planning your investment.