Mortgages.scot

A recent question for a visitor sent in trying to understand whether or not they will need to pass an affordability test when applying for a BTL.

Hi, we are thinking about applying for a BTL mortgage, the property is close by and we want to have an investment property in the hope it will return more than we can earn in interest over the next 15-20 years. We already have a mortgage and some other loans. Not struggling but an affordability test may say otherwise. Just looking for some advice on what tests we need to pass.
Markus

The short answer is that there isn't an affordability test for a BTL mortgage in the same way as there still is for a regulated mortgage if you were buying a home to live in. However, there is still a test that varies from lender to lender.

Interest Coverage Ratio (ICR)

A common test for BTL with most lenders is the Interest Coverage Ratio or ICR. Essentially you need to demonstrate that the gross rent you are expected to receive from renting the property will cover the mortgage payments by at least x%.

Depending on the lender it can range from between 125% - 175%.

So if your mortgage payments are £1,000 per month lenders will expect the gross rent to be between £1,250 and £1,750 per month.

Why?

The thinking behind this is that if the rent is at least 125% of the mortgage payment, there is enough not only to cover the mortgage payment but also to cover associated costs such as agent fees and repairs.

Assuming you meet that test then subject to all other lender requirements it should be fine.

Income Affordability Test (IAT)

But, what if that doesn't work? The Mortgage payments are £1,000 and the rent is only £850. You are £150 short each month. Does that mean no mortgage? Not always.

In some cases, lenders may allow you to make up that shortfall of £150 each month using your own income. But for that, there is a different test.

The Income Affordability Test (IAT) uses a method which is fairly similar to the affordability test used if you were applying for a mortgage to buy a property to live in.

Essentially what the lender does is look at the income of all applicants including the estimated rental from the BTL property being purchased. They also look at all commitments the applicants have. So other mortgages, loans, credit card debts and so on.

Assuming the final position is that there is more than £150 of excess income left which could cover the BTL mortgage then that may be acceptable.

Again, this is subject to all other lender requirements being met.

As I mentioned, similar to the affordability test used for regular mortgages but not quite as difficult to meet.

Hopefully, that covers it for you. I have emailed the above to you, come back to me if you have any other questions.