Banks that allow rental income to cover first mortgage

[pauric]

I'm considering buying another house in an area not reasonably commutable to Dublin, but would like to rent my existing family home in Dublin and use that to cover the cost of the mortgage. The mortgage is about €1600/month and the rent in the area for a 4bed in Dublin is in the €2.5k to €3k range.

I've tried to get a 2nd mortgage with UB but they won't accept the rental income as a means to pay of the mortgage on that property. The person who done the application said the policy is

"Potential/Projected rental income must not be included when a customer is retaining their existing PDH as a potential BTL"

As a result I don't qualify for enough to allow me to buy or build the type of house I would like.

Have a few questions here.

1) What banks will allow rental income to be accepted as an income pay the mortgage on the rental property?
2) If I was to fix my existing family home with Avant now for 7 years at 1.95% or even longer at a higher rate, would this cause me any issues with getting a homeowner rate with a different bank on the new home?
3) Let's say I remortgage my own home with Avant, have €310k outstanding, home value is in the €650-700k range, I'd be paying €1306/month over a 25 year term. The interest in the first year is about €6k, let's say I get €2,500/month or €30k a year in rent. When it comes to paying the tax-man, do I pay 40% tax on the €30k or can you get mortgage interest relief and just pay 40% tax on the €24k? Is it just 40% you pay, as in you don't pay USC or other taxes?

 

[Alkers86]

I'm not aware of anyone doing this the way you're saying, but if you rent out the house and then re-apply when you have proof of rental income coming in, they will look upon it more favourably. Problem is, you need to live somewhere in the meantime.

 

[Leo]

1) What banks will allow rental income to be accepted as an income pay the mortgage on the rental property?

Bank of Ireland will allow a percentage of expected rental income, KBC did as well. You need an estate agent to provide likely rental income guidance on headed paper. They will not allow all the expected rent as income due to the risk of vacant periods. I got mortgage approval from both the above on the basis that I would rent out the existing house after completing the new purchase. I had to show I had sufficient cash to cover the 20% deposit and both mortgages for a few months.

2) If I was to fix my existing family home with Avant now for 7 years at 1.95% or even longer at a higher rate, would this cause me any issues with getting a homeowner rate with a different bank on the new home?

The lender for the new property will offer you a standard home owner rate so long as you state you will be living in the new property.

You will be paying income tax on the rental income along with the other costs associated with managing a rental property. You can only claim relief on the mortgage originally taken out to purchase the property.

€2.5k to 3k rent will likely leave you short of covering all expenses and that will affect the affordability calculations for the new mortgage. Also, the outstanding balance of the first mortgage will be deducted from the 3.5 loan to income limit.

You don't state what price you expect to pay for the new property, but let's assume it's €300k. With €310k outstanding on the first mortgage, in order to come in under the 3.5 LTI rule, you will need to show income of >€174k. If you get an agent to state €3k rental is likely, and the bank allow 50% of this as income, you'll need other income of €156k. If you're close you might get an exemption.

 

[NoRegretsCoyote]

There are very few circumstances where it makes sense to hold on to your hold on to your old property.

If you have a cheap tracker and the rental will be your main source of income it can make sense. But not likely in your circumstances.


There is a key post on this I think (I can't find it).

 

[pauric]

You will be paying income tax on the rental income along with the other costs associated with managing a rental property. You can only claim relief on the mortgage originally taken out to purchase the property.

Can you expand on this part where you can only claim relief on the mortgage originally taken out to purchase the property? I've switched multiple times, and intend to switch to Avant for a long term fix if I was to keep the house after buying another one.

€2.5k to 3k rent will likely leave you short of covering all expenses and that will affect the affordability calculations for the new mortgage. Also, the outstanding balance of the first mortgage will be deducted from the 3.5 loan to income limit.

You don't state what price you expect to pay for the new property, but let's assume it's €300k. With €310k outstanding on the first mortgage, in order to come in under the 3.5 LTI rule, you will need to show income of >€174k. If you get an agent to state €3k rental is likely, and the bank allow 50% of this as income, you'll need other income of €156k. If you're close you might get an exemption.

I'm in the market for a new house and have a budget of approx 600k, so the mortgage will be 480k to allow for the 20% deposit. If I understand you correctly you saying that regardless if the other house is rented out and the rent is covering that mortgage that the most I will be able to get is 3.5 our combined income. Let's say our income is 200k as an example, then 700k is the total mortage amount minus the outstanding of 310k so 390k mortgage is the most we would get. Is that a central bank restriction or a mortgage lender restriction?

There are very few circumstances where it makes sense to hold on to your hold on to your old property.

If you have a cheap tracker and the rental will be your main source of income it can make sense. But not likely in your circumstances.


There is a key post on this I think (I can't find it).

I didn't think this would be the case, in my simple view I looked at it that in say 25 years time my house doubled it's current value to around 1.5M after initially buying for 500k. I understand that I would have to pay CGT on the gain so that would leave 670k plus the original house price of 500k. A 25 year mortgage with Avant would be €1414 a month or €424.2k, let's say that after rent and expenses I have to pay €500/month to cover the shortfall then after 25 years I've paid 150k and would be left with a house that is now worth 1.5M. Can you explain more why this is a bad idea?

Any good links to this would be much appreciated as I may need to change my mind on this, it would certainly make the mortgage application alot simpler if I was to sell my own house.

 

[dereko1969]

But your house could also be worth 50% of its current value in 25 years time!

 

[NoRegretsCoyote]

Can you explain more why this is a bad idea?

Because house prices sometimes fall.

 

[RedOnion]

Have you done any level of calculations on this idea?

I'd imagine you'd be in breach of your Avant mortgage if you rent out the house. If you can't borrow at 1.95%, it makes no sense.

Your tax rate on rental profit is 52%. Renting at 2,500 would be marginally cash flows negative, but profitable.

Hiwever, you'd also have an additional 340k mortgage on your new home that wouldn't have if you released the equity. So keeping the house is hitting your pocket for approx 1500 every single month.

On top of that, there's the risk of being exposed to 1.3m worth of property assets. What portion of your wealth would that represent?

You'll get some ideas here:

Key Post - Keep Apartment as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...

www.askaboutmoney.com

It's terms of getting a mortgage, it should be straight forward. Just try another bank.

 

[Leo]

Can you expand on this part where you can only claim relief on the mortgage originally taken out to purchase the property? I've switched multiple times, and intend to switch to Avant for a long term fix if I was to keep the house after buying another one.

Remortgaging should be fine, so long as loan wasn't topped up along the way.

I'm in the market for a new house and have a budget of approx 600k, so the mortgage will be 480k to allow for the 20% deposit. If I understand you correctly you saying that regardless if the other house is rented out and the rent is covering that mortgage that the most I will be able to get is 3.5 our combined income. Let's say our income is 200k as an example, then 700k is the total mortage amount minus the outstanding of 310k so 390k mortgage is the most we would get. Is that a central bank restriction or a mortgage lender restriction?

The 3.5 times loan to income limit applies to all your mortgage borrowing, and it is a central bank imposed rule. The banks have scope to allow some exemptions, but you need to be close to the numbers to get one of those.

With €310k outstanding on the current house, to borrow another 480k, the total borrowing you are looking at is €790k. Income of €226k will be required to support that without an exemption. If the bank allow 50% of 3k pm rental income, you need to have €208k.

 

[pauric]

But your house could also be worth 50% of its current value in 25 years time!

Because house prices sometimes fall.

I realise house prices can fall, but ultimately this is an investment just like any other which also have risks and there are no guarantees. Is there any other reason why it's a bad idea?

Over any 25 year time frame have we ever seen prices lower at the end compared to what they were at the start?

 

[pauric]

Have you done any level of calculations on this idea?

I'd imagine you'd be in breach of your Avant mortgage if you rent out the house. If you can't borrow at 1.95%, it makes no sense.

Your tax rate on rental profit is 52%. Renting at 2,500 would be marginally cash flows negative, but profitable.

Hiwever, you'd also have an additional 340k mortgage on your new home that wouldn't have if you released the equity. So keeping the house is hitting your pocket for approx 1500 every single month.

On top of that, there's the risk of being exposed to 1.3m worth of property assets. What portion of your wealth would that represent?

You'll get some ideas here:

Key Post - Keep Apartment as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...

www.askaboutmoney.com

It's terms of getting a mortgage, it should be straight forward. Just try another bank.

I need to do some calculations for sure, this is very early stage thinking. I don't even have a house lined up to buy or build, but I'm starting to look at mortgage applications.

Having 1.3m of property assets is a huge % of my wealth, like 90%.

I'm trying to figure out if it would be a good investment or not.

If I sell my own house I will have lets say 350-400k to put into a new house and depending on the house I buy I could be mortgage free and invest that 1500/month elsewhere. The question is what is a better investment than keeping my existing house. Will take a read of the link you shared to see if I can find some answers and try and do some work on a financial model.

 

[pauric]

Remortgaging should be fine, so long as loan wasn't topped up along the way.

What's the best source to find out if I can definetly claim interest relief on the mortgage payments or not? That is a bit of a deal-breaker!

 

[NoRegretsCoyote]

Over any 25 year time frame have we ever seen prices lower at the end compared to what they were at the start?

Yes, in real terms. Also life happens, and you may need to sell sooner than 25 years.

Is there any other reason why it's a bad idea?

I'm not sure you know how CGT works on a house that converts from PPR to rental.

This is a bit out of date but is a useful guide.

 

[Leo]

What's the best source to find out if I can definetly claim interest relief on the mortgage payments or not? That is a bit of a deal-breaker!

If you've just been refinancing you're fine. Revenue also publish guidance.

 

[presidenttttt]

Thread diverging into the hold or not hold debate.

Going back on topic, I'd also appreciate more info on what banks recognise rental income.

 

[RedOnion]

Going back on topic, I'd also appreciate more info on what banks recognise rental income.

Pretty much all of them, with varying rules.

Thread diverging into the hold or not hold debate

Just pointing out the elephant in the room.