Buy to let and investment
The property has to earn its own mortgage.
A residential lender asks what you earn. A buy-to-let lender asks what the property earns, then stress-tests that rent against a rate far above the one you will actually pay. Understand that one test and the whole market makes sense.
The interest cover ratio, in plain English
A lender takes the monthly rent, annualises it, and asks whether it covers the mortgage interest by a comfortable margin - calculated not at your real rate but at a stress rate, commonly around 5.5%, or your pay rate plus two points, whichever is higher.
The margin it wants depends on your income tax band, because a higher-rate taxpayer keeps less of the rent:
- Basic-rate taxpayer: rent must cover roughly 125% of the stressed interest.
- Higher or additional-rate taxpayer: roughly 145%.
- Limited company: often 125% regardless of your personal band, because the company pays corporation tax instead.
A worked example. You want to borrow £150,000, you are a higher-rate taxpayer and the lender stresses at 5.5%.
| Loan | £150,000 |
|---|---|
| Stressed interest at 5.5% | £8,250 a year |
| Cover required at 145% | £11,963 a year |
| Rent the lender needs to see | £997 a month |
Why deals fail on paper
Notice that nothing above mentions your salary. A landlord earning £120,000 can be declined on a property that a lower earner is approved on, purely because of the tax-band cover requirement. If a deal is marginal, the fix is almost never a bigger salary - it is a bigger deposit, a different lender, a five-year fix (which many lenders stress more gently), or a limited company structure. Test your own numbers.
Personal name or limited company?
Since the phased change to mortgage interest relief, an individual landlord can no longer deduct mortgage interest from rental income before tax. Instead you get a tax credit worth 20% of the interest. For a higher-rate taxpayer that is a significant difference, and it is why most new buy-to-let purchases now go into a limited company - usually a special purpose vehicle set up only to hold property.
| Personal name | Limited company | |
|---|---|---|
| Tax on rental profit | Income tax at your marginal rate | Corporation tax on profit |
| Mortgage interest | 20% tax credit only | A deductible business expense |
| Typical rate | Lower | Higher, plus more fees |
| Lender choice | Wider | Narrower, but growing fast |
| Getting money out | It is already yours | Dividends or salary, taxed again |
| Personal guarantee | Not applicable | Almost always required from directors |
| Moving existing property in | Counts as a sale. Stamp duty and possibly capital gains tax apply |
Get advice before you incorporate
Whether a company beats personal ownership depends on your tax position, how long you will hold, and whether you need the income now or are reinvesting it. It is a question for an accountant as much as a broker, and transferring properties you already own into a company is an expensive mistake if done without advice. We will happily work alongside your accountant, and we will tell you when the answer is that you do not need a company at all.
The specialist corners
- HMOs. Higher yields, more regulation. Expect licensing requirements, room-size rules and article 4 planning restrictions in some areas. Valuations may be done on a commercial basis rather than bricks and mortar, which changes the loan completely. A smaller lender panel and higher rates, but the rental maths is often dramatically better.
- Holiday lets and short-term rentals. Assessed on low, medium and high season projections from a letting agent rather than an assured shorthold tenancy. Fewer lenders, and rules on how many days you may occupy it yourself.
- Portfolio landlords. Four or more mortgaged buy-to-let properties makes you a portfolio landlord in regulatory terms. Lenders will then stress-test the whole portfolio, not just the property you are buying, and want a business plan, an asset and liability statement and a portfolio schedule. Being organised here is worth a lot.
- Let to buy. Keeping your current home as a rental while buying a new one to live in. Two mortgages, and the 5% surcharge on the purchase - reclaimable if you sell the former home within three years.
- New builds and flats above commercial premises. Both narrow the lender panel sharply. Check before you reserve, not after.
Costs and tax, in the order you meet them
- Stamp duty. Standard rates plus a 5% surcharge on the entire purchase price, on anything from £40,000 up. On a £200,000 flat that surcharge alone is £10,000.
- Deposit. 25% is the working assumption. Some lenders go to 20%, and the rates get materially better at 40%.
- Interest only. Most buy-to-let mortgages are interest only, which maximises monthly cash flow. You still have to repay the capital eventually, and the plan for that should exist on day one.
- Ongoing. Letting agent fees, insurance, maintenance, void periods, gas safety, electrical checks and the EPC rating you are legally required to maintain. Model at least a month of voids a year.
Regulatory note
Some buy to let mortgages are not regulated by the Financial Conduct Authority. Where a property is or will be occupied by you or a close family member, it is instead a regulated consumer buy to let, and different rules apply. We will tell you which category you are in before you apply, because it changes your protections.
Common questions
Buy-to-let questions
Can I get a buy to let as a first-time buyer?
It is possible but the panel is small, because lenders worry you are really buying somewhere to live. Expect a larger deposit and a requirement to show a plausible reason. You will also lose first-time buyer stamp duty relief for a future home purchase, which is often the bigger cost. Worth modelling carefully before you commit.
Do I need to own my own home first?
Most buy-to-let lenders prefer it and many require it. There are lenders who will consider non-homeowner landlords, particularly where you have a strong income and a large deposit, or where you are buying through a limited company. It narrows the choice rather than closing the door.
What rate should I expect?
Buy-to-let rates sit above residential ones, and limited company rates above personal ones. Product fees are also larger and are often charged as a percentage of the loan rather than a flat amount - which means the headline rate on its own tells you very little. Always compare the true cost over the fixed period including fees, which is exactly what we do on every case.
How many buy-to-let mortgages can I have?
There is no legal ceiling, but individual lenders cap their own exposure - commonly three to five properties with them, or a total borrowing limit across all lenders. Once you pass four mortgaged properties you are a portfolio landlord and the assessment becomes more thorough. Growing a portfolio is largely an exercise in sequencing lenders sensibly, which is where a broker earns their keep.
Can I live in my buy to let?
Not without telling the lender. Occupying a property on a standard buy-to-let mortgage breaches the terms and can make the whole loan repayable. If your plans change, speak to the lender about a consent to let in reverse, or remortgage onto a residential product. It is a straightforward conversation before the fact and a serious problem after it.
Start here
Send us the deal and we will stress-test it.
Purchase price, expected rent and your tax band. We will tell you what a lender would lend, what it would cost and whether the numbers actually work.
- The first conversation is free
- No credit check, no hard search
- A reply within one working day
Prefer to talk now? Call 0333 339 7301 or email [email protected].