Rental calculation​

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It is important to find a lender with a favourable rental calculation. Every lender will calculate the maximum borrowing based on the rental amount. 

For instance, if you own a property or purchasing a property that can be rented out for £1000 a month - the maximum borrowing will be based on the £1000 a month. However, not every lender has the same approach to this calculation. Also, it depends on a number of factors, such as your tax band and the lender's stress rate. 

High street lenders will offer a better rate than specialist lenders, however they will normally add a 2% stress rate to their rental calculation, which will cap your lending. Many landlords are struggling to borrow 75% - 80% LTV in the current market. Therefore, many are choosing to go with lenders that will not apply a stress rate. 

If you are a higher rate or additional rate tax-payer, many lenders will reduce your maximum mortgage amount as the property income will be subject to a high rate of tax (relative to a basic rate tax payer). We have lenders that will not alter their rental calculation - even if you are a higher / additional rate tax payer. 

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Choose the right product

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The type of mortgage product is very important when calculating the maximum mortgage amount. Although a shorter term product, such as a two year fixed rate or two year variable rate could be more attractive (as rates are expected to reduce in the coming years), a 5 year fixed will likely enable you to borrow more. This is because there is a stress test applied to a shorter term product or variable product as payments could increase over the next 5 years. 

It is also important to consider the product fee. Many lenders will charge their product fee as a percentage. 

 

A lender will often offer products with lower rates and high fees, and vice versa. For instance, a lender may offer a product with a 5% interest rate (with a product fee of 2%) and another product with a 4% interest rate (with a product fee of 5%). You will be able to borrow more using their products with higher fees and a lower rate, but it will typically end up costing you more over a 2 or 5 year period. 

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Consider 'Top Slicing'

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Most lenders will only consider rent when determining your mortgage affordability. However, there are some lenders that will also consider your personal circumstances. If you could afford to borrow extra and you meet the lender's minimum income threshold (typically £40,000 household income), you may be able to boost your borrowing.

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Find a high yielding property

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If you are struggling to borrow enough, you may want to consider finding a new property. The market rental amount depends on a number of factors, such as location, size of the property, number of bedrooms, etc. the value of the property doesn’t always correlate to the rental amount. Student lets, HMOs and MUFB tend to fetch higher a rental compared to standard lets. 

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Personal name vs limited company

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If you are a higher rate or additional rate tax payer, you may want to consider purchasing a property in a limited company rather than in your personal name. It is almost always possible to borrow more through a limited company compared to buying in your personal name, and often there are tax advantages of using a limited company. However, the interest rate tends to be higher when purchasing in a limited company.