Is the rent sufficient to cover the mortgage?

Surveyors undertaking inspections and preparing reports on properties subject to buy-to-let applications will normally be required to provide both a capital valuation of the property and an assessment of the likely rental income. The mortgage lender will then look at the loan-to-value (LTV) in relation to the capital valuation and also check to see whether the rental income will be sufficient to service the loan.

For many residential surveyors this requirement to provide rental valuations is a fairly recent development which has arisen as a consequence of the buy-to-let boom. And some mortgage lenders have yet to develop robust paradigms for dealing with the rental calculations.

If a buy-to-let application is to be effectively stress tested against both current interest rates and long-term average interest rates then the income stream from the buy-to-let property has to be realistically calculated.

Surveyors can provide an assessment of the likely gross rental income. They will know what comparable flats and houses in the area let for and they will have a transaction database to provide comparables.

Gross and net income

But surveyors are rarely asked to provide an assessment of the net rental income which is, in effect, what is actually available to service the loan. And the difference between gross and net income can be significant and will vary depending upon the type of property and its location.

With freehold houses the deductions from gross to net rental income will include managing agent’s fees (or the landlord’s costs if the landlord manages personally), repairs, depreciation and voids. A void allowance reflects those periods when the property may be vacant and therefore not producing any income between lettings.

Allowance for voids and repairs

The allowance for voids will be low in an area where there is very good demand for rentals. For a more unusual property, perhaps with a peculiar accommodation layout or in an isolated location, the voids deduction will be higher.

The allowance for repairs needs to reflect the age and style of property and many landlords find it necessary to redecorate between tenancies or refit kitchens and bathrooms so that the property is presented well for re-letting in order to obtain the best rent and a good quality tenant. In a typical case the net income may only be 75% of the gross income.

Leasehold flats

When it comes to assess the net rental income for leasehold flats there are more deductions to be made for ground rent and service charges which the landlord, rather than the tenant, will have to pay. Service charges can be very high especially for older blocks of flats needing extra maintenance or the modern blocks with facilities such as concierge, gym, swimming pool etc. A mortgage lender dealing with an application for a buy-to-let loan on a flat would be advised to ask to see a set of management accounts in order to confirm the actual and potential level of service charges and ground rent payable to ensure that these are taken into account.