Rental yield when applying for mortage?

Set31

Hey folks.

I currently own an apartment in Dublin city centre outright, so no mortgage or any kind of finance. Estimated rental yield would be approx €1300 a month.

Myself and my wife currently live there, but we're looking to apply for a mortgage in the next few years and rent the apartment out. Get the apartment working for us and contributing towards a mortgage on a second place.

Does anyone know how banks are with adding rental yield to the total borrowing amount?

Would it be Salary A & Salary B & Rental income X 3.5?

I am guessing that we would need to move out of the apartment for 6 months to show rental income before they would even entertain this idea?

Liam D Ferguson

It would be (Salary A + Salary x 3.5. Bank aren't very keen on rental income, particularly for first-time landlords like yourselves. If you're looking for greater than 3.5 x combined salaries, you could possibly use the rental income as an argument to get an exception but to be honest I think you'd be better off budgeting for 3.5 x salaries. Get a mortgage that you can afford on your salaries alone and use any excess income that your apartment generates to pay off the mortgage faster.

Don't forget that you're subject to Rent Pressure Zone rules and also that your rental income will be subject to Income Tax and levies without any offsetting for mortgage interest. In addition, once it ceases to be your own home, it enters the realms of Capital Gains Tax on any eventual sale, with the gain starting from the price you originally paid for it (not the price today) with a reduction based on your years living in it as your home.

Fol20

Liam D Ferguson wrote: »

It would be (Salary A + Salary x 3.5. Bank aren't very keen on rental income, particularly for first-time landlords like yourselves. If you're looking for greater than 3.5 x combined salaries, you could possibly use the rental income as an argument to get an exception but to be honest I think you'd be better off budgeting for 3.5 x salaries. Get a mortgage that you can afford on your salaries alone and use any excess income that your apartment generates to pay off the mortgage faster.

Don't forget that you're subject to Rent Pressure Zone rules and also that your rental income will be subject to Income Tax and levies without any offsetting for mortgage interest. In addition, once it ceases to be your own home, it enters the realms of Capital Gains Tax on any eventual sale, with the gain starting from the price you originally paid for it (not the price today) with a reduction based on your years living in it as your home.

RPZ doesn’t apply to them for their first let if they have lived there for over 2 years. Depending on the banks you apply to, some take rental partially on board such as 50pc of expected amount. If you are trying to get a mortgage, try and get as much as possible on your apartment as the interest you pay would be tax deductible and more tax efficient compared to getting a personal mortgage. Personally I’d youbought your apartment during the bad times and it’s doubled in price as the other poster has mentioned, you would be liable for capital gains tax on a pro rata amount and if you think you have a decent gain, I would just sell it and use your equity to get your new place.

Liam D Ferguson

Fol20 wrote: »

RPZ doesn’t apply to them for their first let if they have lived there for over 2 years.

Because the property has not been let in the past two years, they can be exempted from the initial caps. But the rent set for the property must be in line with other properties in the area. Other RPZ rules apply.

Fol20 wrote: »

If you are trying to get a mortgage, try and get as much as possible on your apartment as the interest you pay would be tax deductible and more tax efficient compared to getting a personal mortgage.

Tax deduction against rental income is only allowed if the borrowing was used for the purchase, repair or improvement of the property itself. So even if the apartment is used as part of the security on a new mortgage, the interest can't be claimed against rent as the purpose wasn't to buy, repair or improve the apartment.

Set31

Thanks guys! Really appreciate the input.

I'm a bit reluctant to sell/mortgage the apartment as the security it brings knowing it's there for the rest of my days (I'm 32) with the potential to live there rent free (worse case scenario!) is really worth a lot to me personally.

i think the 3.5 times our joint salaries and using the rental income to chip off more of the mortgage each month is probably the way to go alright.

Fol20

Liam D Ferguson wrote: »

Because the property has not been let in the past two years, they can be exempted from the initial caps. But the rent set for the property must be in line with other properties in the area. Other RPZ rules apply.



Tax deduction against rental income is only allowed if the borrowing was used for the purchase, repair or improvement of the property itself. So even if the apartment is used as part of the security on a new mortgage, the interest can't be claimed against rent as the purpose wasn't to buy, repair or improve the apartment.

Since it hasnt been let out in the past 2 years, He can set it at market rate, He can only achieve market rate for his area as people wont pay over market rate. For example there was some place in dublin advertised at 10000pm and they dropped it to 9000pm, even then people were saying its worth about half that.

What i said is that he applies for a refinance/BTL mortgage towards his existing apartment and then use the refinanced funds to purchase his house with a smaller loan used on his PPR. so for example lets say his apartment is worth 300k and the house he wants is 500k. Since he owns the apartment outright, he could refinance that apartment at 80pc which equates to 300x.80 = 240k. That plus is cash reserves plus a smaller loan on his PPR would be much more tax efficient.This way then based on the above calculation, his interest part of his loan would be tax deductable at 85pc of give or take 800-1000 a month. Have a chat with a mortgage broker to see what they say but thats what i would be doing.

Chris_5339762

The bank will not consider the rent at all in the mortgage calculation as they assume worst case, that it'll be empty. They may even treat it as a negative on your income, not a positive.

Fol20

Chris_5339762 wrote: »

The bank will not consider the rent at all in the mortgage calculation as they assume worst case, that it'll be empty. They may even treat it as a negative on your income, not a positive.

It depends on each bank credit policy. They can vary dramatically depending on bank.

Liam D Ferguson

Fol20 wrote: »

What i said is that he applies for a refinance/BTL mortgage towards his existing apartment and then use the refinanced funds to purchase his house with a smaller loan used on his PPR. so for example lets say his apartment is worth 300k and the house he wants is 500k. Since he owns the apartment outright, he could refinance that apartment at 80pc which equates to 300x.80 = 240k. That plus is cash reserves plus a smaller loan on his PPR would be much more tax efficient.This way then based on the above calculation, his interest part of his loan would be tax deductable at 85pc of give or take 800-1000 a month. Have a chat with a mortgage broker to see what they say but thats what i would be doing.

As he has used the funds to purchase a house, he cannot claim any tax deduction against his incoming rent so this doesn't work and it's not more tax efficient.

Fol20

Liam D Ferguson wrote: »

As he has used the funds to purchase a house, he cannot claim any tax deduction against his incoming rent so this doesn't work and it's not more tax efficient.

He will be paying interest on a mortgage towards a rental property. The mortgage will be attached to the rental property. So the loan amount he took out will be completely used to finance debt on a rental property.on paper, it will be a btl mortgage so yes you could expense it. You could burn the money or do whatever you want with the refinanced cash but the loan amount is targeting the rental so you can use it as an expense. To answer your point, it doesn’t matter what he does with the excess funds, he specifically took out a loan as a btl which would be expensive toward said property. People regularly refinance properties and do you really think they can’t expense it when it is refinanced towards a btl.

Trish56

The majority of lenders will take into consideration 50% of the rental income, you can use one of their calculators online to see how much of a mortgage you qualify for including the rental income.

Chris_5339762 wrote: »

The bank will not consider the rent at all in the mortgage calculation as they assume worst case, that it'll be empty. They may even treat it as a negative on your income, not a positive.

Liam D Ferguson

Fol20 wrote: »

He will be paying interest on a mortgage towards a rental property. The mortgage will be attached to the rental property. So the loan amount he took out will be completely used to finance debt on a rental property.on paper, it will be a btl mortgage so yes you could expense it. You could burn the money or do whatever you want with the refinanced cash but the loan amount is targeting the rental so you can use it as an expense. To answer your point, it doesn’t matter what he does with the excess funds, he specifically took out a loan as a btl which would be expensive toward said property. People regularly refinance properties and do you really think they can’t expense it when it is refinanced towards a btl.

Revenue is very clear on this. "The interest must be from a mortgage that is used to purchase, improve or repair your rental property."

If you want to advise the OP to lie to Revenue to claim tax relief that s/he's clearly not eligible for and come up with "expenses" to support this fraudulent claim, then good luck to you.

Fol20

Liam D Ferguson wrote: »

Revenue is very clear on this. "The interest must be from a mortgage that is used to purchase, improve or repair your rental property."

If you want to advise the OP to lie to Revenue to claim tax relief that s/he's clearly not eligible for and come up with "expenses" to support this fraudulent claim, then good luck to you.

The interest portion of the mortgage is for a rental property

Liam D Ferguson

Fol20 wrote: »

The interest portion of the mortgage is for a rental property

No, it's SECURED on a rental property. The purpose of the loan would be to buy the OP a new home. As such, the OP cannot legitimately claim interest relief against his rent, as the loan was not used to purchase, improve or repair the rental property. It's the purpose of the loan that's relevant here; not the security used to raise it.

Fol20

Liam D Ferguson wrote: »

No, it's SECURED on a rental property. The purpose of the loan would be to buy the OP a new home. As such, the OP cannot legitimately claim interest relief against his rent, as the loan was not used to purchase, improve or repair the rental property. It's the purpose of the loan that's relevant here; not the security used to raise it.

The money you take out is being used to fund a rental property. Some people might use cash up front and then refinance later. What your saying basically means that I’d the place is ever bought with cash you can never put a mortgage down and expense it

Liam D Ferguson

Fol20 wrote: »

The money you take out is being used to fund a rental property. Some people might use cash up front and then refinance later. What your saying basically means that I’d the place is ever bought with cash you can never put a mortgage down and expense it

No - the money is being borrowed to fund a new home, not a rental property. That's what the OP said s/he wanted to do from the start. And in those circumstances, you cannot borrow to buy a new home and claim tax relief against rental income from another property, regardless of how you secure the new loan, unless you're willing to go down the road of false claims and declarations to Revenue.