How does a lender calculate what they will lend?
A mortgage lender will arrange for a valuation of the property to be undertaken as part of the application. As well as providing a figure for the valuation of the property, they will also give you an estimate of the property's potential rental income. This figure will be then be used to decide what you can borrow. Every lender will calculate this amount differently and this means the amount available to borrow will vary from lender to lender. A typically lender calculation would be to calculate what interest would be payable on a mortgage at 5.5% to allow for rate rises in the future, and then use 145% of this figure to allow for costs of upkeeping the property, tax and periods when the property may be empty. This would then be the required rental income for the year.
As an example:
£300,000 mortgage x 5.5% stress rate x 145% = £23,925 required rental income for the year (£1,994 per calendar month)