A buy-to-let mortgage is a loan secured against an investment property
What is a buy-to-let mortgage?
A buy-to-let property (sometimes referred to as 'buy to rent' or 'BTL') is a type of property investment, in which the investor becomes a landlord and rents out the property for profit. A buy-to-let mortgage is a loan secured against one of these properties.
Like any form of investment, there's a lot to consider before you make the jump, as there’s no guarantee you will make any money. This page has been designed to explain buy-to-let mortgages in a simple way, so if you're a first time buyer of a buy-to-let property, this guide should help you get things started.
Do I need a buy-to-let mortgage to rent out a property?
Yes (unless of course you're a cash buyer and don't need a mortgage at all). It's a special type of mortgage based on the fact that you will not be the permanent resident, and so is assessed differently to a normal mortgage. Unlike a residential mortgage, where how much you can borrow is based on your own income (among other things), a buy-to-let mortgage is assessed mainly on how much rent the property can generate.
How much could I borrow on a buy-to-let mortgage?
Unlike a residential mortgage, where the amount you can borrow is based on your salary and your outgoings, a buy-to-let mortgage is assessed on the rental income that the property is likely to generate. Lenders will typically need the rental income to be at least 125% of the monthly mortgage payments (on an interest only basis), or even up to 145%, depending on a lender’s criteria.
Most lenders will also require you to be earning an income yourself.
What is interest coverage ratio?
The Interest Cover Ratio is part of the basic affordability calculation that is typically applied to buy-to-let mortgage applications. The ICR is the minimum ratio between the expected rental income of the property and a notional interest rate of 5.5% ("Stress Test"). For example, a typical buy-to-let mortgage product for a limited company applicant might require that the property can yield rent worth at least 145% of the notional interest rate of 5.5%. If the expected yield does not sufficiently exceed the notional interest rate, lenders may also choose to examine additional sources of income to assess affordability.
What is the difference between a buy-to-let mortgage and a standard mortgage?
A buy-to-let mortgage differs from its residential counterpart in that it is largely assessed on the property's profitability, i.e. how much rent it can generate vs. the cost of the mortgage – rather than on your own personal financial circumstances.
That said, many buy-to-let lenders will require you to have a minimum salary, typically £20,000 or £25,000.
Once approved, your buy-to-let mortgage enables you to rent out the property to tenants, whereas you cannot do this with a residential mortgage.
Other notable differences include:
It's common for the interest rates on buy-to-let mortgages to be higher than residential mortgage rates.
Deposit and property value
The minimum deposit you need to put down for a buy-to-let mortgage is higher than it is for a normal residential mortgage. Typically, you will be required to cover at least 20% of the property value yourself on a BTL mortgage.
Arrangement fees on a BTL mortgage can be higher than on a conventional mortgage. You may also come across more arrangement fees that are calculated as a percentage of the amount you're borrowing, rather than just a flat fee. It is also common for conveyancing costs to be slightly higher for a rental property.
This buy-to-let mortgage calculator is designed to give you a quick idea of the likely mortgage amount you can borrow based on rental income coming in, however this amount is subject to lots of different things such as your credit history, monthly outgoings and deposit. For a firmer idea it's best to speak to a financial adviser or mortgage broker who can run through your circumstances and help give you a more definitive figure.
Check out our related blogs around financing your buy-to-let investment property
All information contained in this website is provided as a guideline only, is based on estimates and assumptions, may not be accurate or complete, and is subject to change. We make no representations or warranties with regards to this information, expressed or otherwise. A buyer who relies on such information does so at their own risk. Buyers are advised to seek independent financial advice and should undertake their own due diligence.
Your capital is at risk. Property values may decline and the property might not be able to be rented at amounts sufficient to cover debt interest costs, operating expenses and liabilities, and might not result in a positive cash flow. Property is an illiquid asset and should not be viewed as a short-term investment.
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