How Is Rental Income Used in Mortgage Applications?

On the face of it, using earnings from let properties to support a mortgage application seems straightforward. But in practice, mortgage lenders will want to see more than just the rent being paid into your account.

In this article, we explain the criteria on how rental income can be used in mortgage applications, what documentation is required, and the differences between residential and buy-to-let mortgage applications. Let’s begin.

What Types of Property Revenue Are Considered for a Mortgage?

It is very common for rental earnings to be included within a residential mortgage application. However, before any income can be taken into account, lenders will want to see that these earnings have been consistent over a period of time and evidenced through supporting tax documentation.

In most cases, lenders will want to see a minimum of at least two years of tax records to demonstrate that these payments have been received consistently and declared to HMRC.

This will provide your lender with enough income history to verify how much property income has been declared. At this point, your chosen lender will then apply their own criteria to assess how much of this income can be included within the overall affordability assessment.

As a general rule, lenders will favour a longer track record before accepting rental revenue as part of a residential mortgage application. As such, landlords who have only recently started receiving tenant rent could find their mortgage options more limited.

What Documents Are Required to Prove Rental Earnings?

Understanding exactly what documents are needed to prove the rental profits can be an important part of preparing for a mortgage application.

While the exact documents required will depend on your circumstances and the lender’s criteria, lenders will typically want to see evidence of how much income is received, how consistently it has been earned, and the property’s rental history.

To help build this picture, lenders will often request a combination of documents that can be used as proof of rental income, including:

• Tenancy Agreements
• Recent Bank Statements Showing Rental Payments
• Tax Calculations (SA302)
• Tax Year Overviews
• Rental Accounts or Property Income Statements
• Evidence of Property Ownership

Ultimately, the more evidence you can provide, the easier it will be for lenders to assess the total earnings received and how much of this income stream can be used to support your mortgage.

How Much Rental Income Can Be Used in a Residential Application?

How much of your letting revenue can be factored into your application will depend entirely on your lender’s affordability criteria. For example, some lenders may include 100%, while others may only take a proportion of it into account as part of their affordability assessment.

The total percentage included can vary between lenders for several reasons, including:

• The lender’s individual affordability criteria
• Your overall income and financial circumstances
• The consistency of your rental profits
• The amount of rental profit shown within your tax records
• Existing mortgage commitments and financial liabilities

It is important to note that it is entirely possible for two lenders to receive exactly the same mortgage application but arrive at different borrowing amounts.

This is one of the many reasons why comparing lenders can be a crucial factor in deciding your overall borrowing power and securing a mortgage that works best for your specific circumstances.

For those whose rental income forms a significant proportion of their overall earnings, working with a trusted mortgage broker can help to identify lenders who are most likely to accept all of your income to help maximise your borrowing potential.

What Tax and Expense Considerations Apply to Property Income?

Tax and expenses can have a direct impact on the rental profit used to assess your mortgage application. This is because the amount of rent collected each month will not always reflect the rental profit shown on your tax records.

While a property may generate a healthy level of income each month, allowable expenses such as letting agent fees, maintenance and repairs, insurance, and other property costs can reduce the rental profit available for lenders to assess.

The table below outlines some of the most common tax and expense considerations that can affect the rental profit reported on your tax records and used by mortgage lenders to assess affordability:

One of the most important points for landlords to understand is that a property generating a high rental income will not always generate a high rental profit. This is because the costs of owning, maintaining, and managing a property can reduce the rental profit shown on your tax records.

Ultimately, mortgage lenders will usually assess the rental profit evidenced through your tax documentation when deciding how much property income can be included within your affordability assessment.

How Do Buy-to-Let and Residential Mortgage Applications Differ?

A key difference between buy-to-let and residential mortgage applications is the way in which affordability is assessed.

Buy-to-Let Mortgage Application

Affordability is primarily driven by the property’s rental income, although some lenders may also take the applicant’s personal income into account.

In addition, the type of rental property in a buy-to-let mortgage can significantly influence which mortgage products are available. For example, lenders often have different criteria for standard residential lets, HMOs, holiday lets, and other specialist properties.

Residential Mortgage Application

Affordability is primarily based on the applicant’s personal income, such as salary, self-employed income, rental profit, overtime and commission in order to determine whether that individual can afford the mortgage repayments.

It is important to note that when rental income is included within a residential mortgage application, lenders will usually place a greater emphasis on the income declared through your tax calculations, rather than on the type of rental property generating it.

How Can a Mortgage Broker Help You Use Rental Income?

Using rental income in a mortgage application involves more than simply proving how much rent you receive. As every lender applies its own affordability criteria, the amount of income accepted and the evidence required can vary significantly.

A mortgage broker can help identify lenders whose criteria best match your circumstances and guide you through the application process.

At Boon Brokers, we provide fee-free mortgage advice and access to a wide range of UK lenders. Our advisers regularly help landlords and property owners understand lender requirements, organise supporting evidence, and identify mortgage options that reflect their rental income circumstances.

If you’re applying with more than one source of income, understanding the proof of income needed for a mortgage can help you prepare for the application and understand how different income types are assessed.