Mortgage Rental Cover
What is Mortgage Rental Cover?
Rental cover is a restriction that's now used on all buy-to-let mortgages to limit the loan amount based on the rental income.
The idea is to ensure there's at least a little "spare" in the rent, above and beyond the mortgage payment (or more likely a "stress rate" mortgage payment).
To pass a rental cover check, the monthly rent must be at least a certain multiple of the monthly mortgage payment (using a standard interest rate).
The interest rate used varies between lenders, mortgage products and the applicants situation (eg a "portfolio landlord" will typically face a tougher test).
The require multiple is normally expressed as a percentage (over 100%) and also varies on all the same factors.
Rental cover restrictions are always calculated for individual properties but they are normally also calculated at a portfolio level for landlords with multiple properties.
How do you calculate mortgage rental cover?
There are a few different rental cover calculations you might want to do, below is a single summary and example. You can find complete details on mortgage rental cover calculations, including Excel formulas here.
To workout what the rental cover is for a given rent and mortgage, the formula is:
([monthly rent] / ( ([mortgage] * ([stress rate] / 100) ) / 12) ) * 100 = [rental cover]
For example, using:
- Mortgage: £120,000
- Stress rate: 5%
- Monthly rent: £800
| (800 / ( (120000 * (5 / 100) ) / 12) ) * 100 | = (800 / ( (120000 * 0.05) / 12) ) * 100 | = (800 / (6000 / 12) ) * 100 | = (800 / 500) * 100 | = 1.6 * 100 | = 160%
Ie a rental cover of 160%. If that's higher than your mortgage requirement (typically around 150%) then you would satisfy the mortgage rental cover requirement.
You can use the free PaTMa buy-to-let profit calculator to do this calculation for you.