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 a minimum personal income requirement.)
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 left over. They may want the mortgage plus 20%, therefore 120% multiplier.
the Rate: is a 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
What MULTIPLIER and RATE do Lenders Use?
Each lenders risk department decides different rates - depending on there risk profile and how much market share they target for. The multipliers range from 110% to 150% and the Rates range from 5% to 6%