Lending criteria and eligible income

3conomist

I recently approached my local building society to enquire how much I could borrow - in addition to my existing mortgage - to help with the purchase of another property.

I was surprised to learn few lenders accept income earned by way of utilising the government rent-a-room scheme as additional income - despite in many cases openly advertising this scheme to would-be first time buyers and people looking to re-mortgage as a means of making it affordable.

Does anyone have experience of this or is in a position to offer some reasoned explanation other than "that's our policy"as to why income from letting a room is ineligible as a means of income when other forms of ('non-guaranteed') income are (I am thinking of commission based payments, income from letting a property in its entirety etc.). It seems some *may* entertain it where the income is declared via self assessment, although if the income is less than £4250 then there is no obligation on the part of the home owner to do this (which is the case here).

I was also surprised to learn where an application is made in joint names and one applicant is in receipt of child tax credit that this income too is ineligible where the child tax credit is not in the name of both applicants. I can at least understand the reasoning here a little more, although in today's society, it is not uncommon for co-habitants with children from another relationship to live together and desire to buy a home without putting things such as child tax credit in joint names.

I appreciate lenders have a greater responsibility to lend responsibly, but I do question their reasoning behind some of the decisions they take with regards their lending criteria.

I find it incredibly frustrating under these new affordability guidelines that many seemingly reasonable forms of income are discounted.

Your views / experience would be very much appreciated.

Thanks : )

Let_Us_See

As you have already identified, it is down to "responsible lending." Rent-a-Room is not guaranteed income, you could lose your tenant tomorrow and not be able to find a replacement. The one item you have identified are no two lenders have the same lending criteria, and therefore if you are struggling to find a suitable mortgage, go and talk to a broker.

ACG

Rent a room will not be taken into account with any lenders as far as im aware.

Tax credits - this is much more down to the lender and some are more lenient than others. You would need to consult a broker or check with the lender(s) directly to see what they will accept and whether they would accept in single/joint names.

3conomist

Thanks for your response 'Let Us See'. I accept and applaud responsible lending, and know no two lenders have the same criteria.

It is ironic, however, that a lender would suggest using the Rent-a-Room scheme as a means of earning additional income on their website and in guides for first time buyers yet go on to discount this in their own lending criteria when looking to borrow.

I could lose my lodger tomorrow, and, yes, it could take a few weeks to find a suitable replacement, but surely the same could be said of letting a property. The only significant difference in terms of the two as far as I can see from a lending point of view is that as a landlord letting an entire property you would not always be responsible for the utilities and council tax.

It would be helpful if lenders took a less black and white approach, and at least considered where someone has evidence of long term room letting, and also the amount of income earned versus current mortgage commitment (in my situation the income received meets my own mortgage commitment).

I am exploring options with a broker in addition to looking at other means of reducing my existing mortgage to enable a successful outcome.

Thanks again : )

3conomist

Thanks for your response ACG. It would appear to the case, although if I recall the lending criteria for at least one provider I have reviewed (HSBC?), their lending criteria did not explicitly discount income from lodgers.

Some may very well be more lenient on the tax credit front. Time well tell.

Thanks again : )

ACG

HSBC do not deal with brokers so they are one the lenders I do not know the criteria of. Although they are one of the fussier lenders so I would be surprised if they do actually allow it - I would double check before making any applications.

With regards to your comments on landlords, lenders have a calculation they work off. Again it varies but typically the rent would need to be equivalent to:
125% of the interest only repayment at 6%.

So firstly, the calculation is at 6% rather than say 4-5% that they are typically at now. It also needs to be 125%. So there is a buffer built in to hopefully protect against void periods.

3conomist

Thanks for the explanation ACG. That makes sense.

I'll have to revisit my notes as I'm not 100% certain it was HSBC. I've read a lot of lending criteria lately and I've probably reached a point where I'm amalgamating criteria across lenders into a "wouldn't it be nice if..." list, and forgetting which lender is more amenable on each criteria.

Thanks for your time : )

ACG

No problem. Its hard work knowing them all and does take time.

I put a spreadsheet together and periodically review it with a lot of common things including - income from various benefits. The difference across the board is amazing from not accepting anything to 50% of benefit/tax credits to even more.

I think a lot of brokers have something similar.

The crazy thing is, you may find a lender who does not accept it but are lenient on affordability assessment - so it fits without the need for it anyway. So dont discount the lender just because they do not accept it.

Thrugelmir

3conomist wrote: »

It would be helpful if lenders took a less black and white approach,

With the mainstream lenders processing mortgages on an industrial scale. There has to be black and white rules. Overall lending policy is set at board level and this will be filtered down through risk management to the underwriters.