Can you use rental income to qualify for a mortgage?

If you own an investment property and are thinking of buying another one, you may want to use the rental income you receive from your tenants to help pay for your next mortgage. However, not all mortgage lenders will take all of your rental income into account when assessing your mortgage application.

What counts as income when applying for a home loan?

To qualify for a mortgage, you’ll need to show the lender that you can comfortably afford the loan repayments. Lenders typically focus on a borrower’s primary source of income, such as wages or salary earned from their job. However, they may also take secondary income sources into account, such as money earned from second jobs or side projects, commissions, as well as income received from investments, including rental income from an investment property.

A bank or mortgage lender may not include all of your secondary income when calculating if you can afford a mortgage. For example, a lender may use 100% of your primary income, plus 75% or 80% of your secondary income to work out your mortgage budget. This is because secondary income sources are typically considered less reliable than your primary source, which could limit how much you earn each year.

Lenders account for the fact that part of your rental income will likely go toward covering the cost of expenses, such as property maintenance and landlord insurance. Additionally, lenders account for the risk that your investment property may not always be earning income – there may be fallow periods between tenants moving in and out, and there’s a chance your property could sit unoccupied for a lengthy period, depending on the market.

What if most of your income comes from rents and investments?

If too high a percentage of your overall income comes from rent, you may be considered a “rent reliant” borrower. This means you may be seen as a higher risk to a mortgage lender, as it’s more likely that circumstances beyond your control could leave you short of income to pay a mortgage. Your loan application could be declined if you’re too rent reliant, or you could have to pay a higher interest rate, fees, or pay a higher upfront deposit to help offset the risk.

It’s also important to remember that if you already have a mortgage on your one investment property, a lender may be reluctant to lend you more money to purchase a second one. The more debt you take on, the higher the risk that you could end up unable to afford the repayments on one or both loans if your financial circumstances change suddenly.

A mortgage broker may be able to help you break down your income sources and find you a lender with an offer that meets your goals and suits your financial situation, rental income and all.

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