Buy to Let Mortgage Guide

Buy to let property can be very different from buying a home to live in.

The mortgage is different, the way affordability is assessed can be different, tax considerations can be important, and landlords have additional responsibilities that residential homeowners don't normally face.

You may also need to decide whether to purchase a property personally or through a limited company.

Whether you're considering your first rental property, expanding an existing portfolio or refinancing a property you already own, understanding how buy to let mortgages work is an important starting point.

This guide explains the main areas to consider before arranging a buy to let mortgage.

What Is a Buy to Let Mortgage?

A buy to let mortgage is designed for a property that will normally be rented to tenants rather than occupied by you as your main home.

This is different from a standard residential mortgage.

With a residential mortgage, affordability is usually heavily based on the applicants' income, expenditure and financial commitments.

With buy to let, lenders will commonly also assess the expected or existing rental income from the property.

However, the precise assessment varies considerably between lenders.

How Much Deposit Do I Need for a Buy to Let?

Buy to let mortgages typically require a larger deposit than many residential mortgages.

The maximum loan-to-value available depends on factors including:

• The lender

• Property type

• Rental income

• Applicant circumstances

• Whether you're an experienced landlord

• Whether you're purchasing personally or through a company

• The type of tenancy

• The mortgage product

A larger deposit means a lower loan-to-value.

Lower LTV borrowing may provide access to different mortgage products, but you should also consider how much capital you want to commit to one property.

What Is Loan-to-Value?

Loan-to-value, usually shortened to LTV, compares the mortgage amount with the property's value or purchase price used by the lender.

For example:

Property value: £200,000

Mortgage: £150,000

Loan-to-value: 75%

The remaining £50,000 would represent the buyer's contribution towards the purchase price before considering taxes, fees and other transaction costs.

How Do Buy to Let Lenders Assess Affordability?

Buy to let affordability is often assessed differently from a standard residential mortgage.

The expected rental income can play an important role.

Lenders commonly assess whether the rent provides sufficient coverage relative to the mortgage interest using their own rental calculations.

This is often referred to as rental stress testing or an Interest Coverage Ratio (ICR) assessment.

What Is an Interest Coverage Ratio?

The Interest Coverage Ratio compares rental income with an assumed mortgage interest cost.

A lender may require the rent to cover more than simply the actual monthly mortgage payment.

The lender's calculation can depend on factors including:

• The mortgage interest rate

• An assumed stress rate

• Applicant tax status

• Mortgage type

• Fixed-rate period

• Whether the property is personally or company owned

• The lender's own criteria

There isn't one universal ICR calculation used by every lender.

A property that passes one lender's rental calculation may therefore produce a different result with another lender.

Does My Personal Income Matter?

Potentially.

Although rental income is important, lenders may still have minimum personal income requirements or consider your wider financial circumstances.

Some lenders may be comfortable with relatively modest personal income, while others apply different requirements.

Your employment status, existing properties, credit commitments and overall financial position can also be relevant.

This is one reason buy to let lender selection involves more than comparing interest rates.

What Is Top Slicing?

Some lenders may use a process commonly known as top slicing.

This can potentially allow personal income to be considered where the property's rental income doesn't fully meet the lender's normal rental stress calculation.

Not every lender offers top slicing, and those that do have their own affordability requirements and criteria.

It shouldn't therefore be assumed that personal income will automatically compensate for a rental shortfall.

Repayment or Interest-Only?

Many buy to let mortgages are arranged on an interest-only basis, although repayment mortgages can also be available.

With an interest-only mortgage, your contractual monthly mortgage payment generally covers the interest charged rather than reducing the capital balance.

This can produce a lower contractual monthly payment than an equivalent repayment mortgage.

However, the original mortgage capital still needs to be repaid.

You therefore need an acceptable repayment strategy.

What Happens at the End of an Interest-Only Mortgage?

At the end of the mortgage term, the outstanding capital remains payable.

Some landlords intend to repay the mortgage from the eventual sale of the property, while other strategies may be considered depending on lender requirements and individual circumstances.

Property values aren't guaranteed to increase.

You shouldn't therefore assume that future property growth will automatically solve any repayment shortfall.

Make sure you understand how the mortgage will ultimately be repaid before proceeding.

Should I Buy Personally or Through a Limited Company?

This is one of the most important questions for many property investors.

A buy to let property can potentially be purchased:

• In your personal name

• Jointly with another person

• Through an appropriate limited company

The mortgage options, tax treatment, administration and costs can differ depending on the ownership structure.

There isn't a universal answer that makes limited-company ownership better for every landlord.

What Is a Limited Company Buy to Let?

A limited company buy to let mortgage is arranged where the borrowing entity is a company rather than an individual purchasing personally.

Many lenders operating in this area prefer companies established specifically for property-related activity.

These are commonly referred to as Special Purpose Vehicles, or SPVs.

Lenders can have specific requirements concerning the company's activities, structure, directors and shareholders.

What Is an SPV?

SPV stands for Special Purpose Vehicle.

In buy to let lending, the term commonly describes a limited company established primarily for holding and renting property.

Lenders may check the company's registered activities and structure before accepting an application.

Not every company will necessarily meet every lender's requirements.

If you're considering establishing a company specifically to purchase investment property, obtain appropriate tax and legal advice before deciding on the structure.

Is Limited Company Buy to Let More Tax Efficient?

It can be tax-efficient in some circumstances, but it isn't automatically more tax-efficient for everyone.

Tax treatment depends on individual circumstances and can change.

Factors can include:

• Your personal tax position

• How many properties you own

• Whether profits will be retained or extracted

• Financing costs

• Corporation tax

• Income tax

• Capital gains considerations

• Future plans for the portfolio

Mortgage advice and tax advice are different.

A mortgage adviser can explain mortgage availability for different ownership structures, but the tax implications should be discussed with an appropriately qualified accountant or tax adviser before making an ownership decision.

Can I Transfer an Existing Property Into a Limited Company?

Potentially, but this isn't normally as simple as changing the name on the mortgage.

Moving a personally owned property into a company can constitute a transfer of ownership and may have significant legal, mortgage and tax consequences.

A new mortgage may be required.

Tax and transaction costs could also arise depending on the circumstances.

Speak to your accountant or tax adviser and solicitor before proceeding.

Are Limited Company Mortgage Rates Different?

They can be.

Limited company buy to let mortgages operate within a specialist part of the mortgage market.

Rates, product fees, lender requirements and rental calculations can differ from mortgages available to individual landlords.

The lowest headline interest rate shouldn't be considered in isolation.

The overall cost and suitability of the mortgage should be assessed.

Do Directors Give Personal Guarantees?

Some limited company buy to let lenders may require directors or other relevant individuals to provide personal guarantees.

Requirements vary between lenders and applications.

If a guarantee is required, you should understand the legal implications before signing it and obtain independent legal advice where appropriate.

First-Time Landlords

You don't necessarily need to own an existing rental property before obtaining a buy to let mortgage.

Some lenders accept first-time landlords.

However, criteria can be more restrictive depending on your circumstances.

The lender may consider matters including:

• Whether you currently own your own home

• Your personal income

• Your credit history

• Property type

• Expected rental income

• Deposit

• Previous landlord experience

Being a first-time landlord doesn't automatically prevent you from obtaining a mortgage, but lender selection can become particularly important.

Can a First-Time Buyer Get a Buy to Let Mortgage?

Some lenders may consider applicants who don't currently own another property, subject to their criteria.

However, the number of potential lenders may be more limited and additional requirements can apply.

The lender may want to understand why you're purchasing an investment property rather than a home for yourself.

Your circumstances should be reviewed before assuming a particular lender or product will be available.

What Is a Portfolio Landlord?

Mortgage lenders may apply additional underwriting requirements where an applicant owns multiple mortgaged buy to let properties.

The precise definition and assessment process depends on applicable regulatory definitions and individual lender policy.

Portfolio underwriting can involve looking beyond the property being mortgaged and considering the wider property portfolio.

The lender may request information about:

• Property values

• Mortgage balances

• Rental income

• Monthly mortgage payments

• Lenders

• Ownership structure

• Portfolio loan-to-value

A property portfolio spreadsheet can therefore be useful when preparing an application.

What Property Types Can Be Mortgaged?

Standard houses and flats are commonly considered for buy to let mortgages, but property characteristics can affect lender choice.

More specialist examples can include:

• HMOs

• Multi-unit properties

• Flats above commercial premises

• New-build flats

• Holiday lets

• Properties requiring refurbishment

• Properties with unusual construction

• Properties with short leases

A standard buy to let lender may not necessarily accept every property type.

Send the property details to your mortgage adviser before assuming finance will be available.

What Is an HMO?

HMO stands for House in Multiple Occupation.

Broadly, this can involve a property occupied by multiple people who aren't all part of the same household and who share certain facilities.

The legal definition, licensing requirements and planning position can be more detailed than this and can depend on the property and local authority requirements.

HMO mortgages are a specialist area of buy to let lending.

If you're considering an HMO, check the licensing and planning requirements with the relevant local authority and obtain appropriate professional advice.

What Is a Holiday Let Mortgage?

A holiday let mortgage is designed for a property intended to be let to short-term holiday guests rather than under a conventional longer-term residential tenancy.

Lenders may assess expected income differently from a standard buy to let property.

Location, property type, letting demand and management arrangements can also be relevant.

A standard buy to let mortgage shouldn't automatically be assumed to permit holiday letting.

Can I Use a Residential Mortgage for a Rental Property?

You shouldn't rent out a property in breach of your residential mortgage conditions.

If you have a residential mortgage and want to let the property, contact your lender or mortgage adviser before doing so.

Depending on your circumstances, potential routes might include obtaining the lender's consent to let or arranging an appropriate buy to let mortgage.

The lender's permission and mortgage conditions matter.

What Is Consent to Let?

Consent to let is permission from a residential mortgage lender allowing a borrower to rent out their home under specified circumstances.

It isn't necessarily permanent and the lender may impose conditions, fees or changes to the interest rate.

Not every lender or situation qualifies.

If you intend to become a landlord on a longer-term basis, your mortgage arrangements should be reviewed.

Buy to Let Mortgage Fees

Buy to let mortgage products can have different fee structures from residential mortgages.

Potential costs can include:

• Product or arrangement fees

• Valuation fees

• Legal fees

• Mortgage adviser fees

• Accountancy costs

• Property management costs

• Insurance

• Maintenance

• Letting agent fees

Some specialist mortgage products can have product fees calculated as a percentage of the mortgage amount rather than as a fixed monetary amount.

This makes it particularly important to compare the overall cost rather than focusing only on the interest rate.

Don't Forget the Costs of Being a Landlord

The mortgage payment is only one expense associated with owning a rental property.

A landlord should also consider potential costs such as:

• Repairs

• Maintenance

• Insurance

• Safety requirements

• Letting-agent charges

• Property management

• Service charges

• Ground rent where applicable

• Periods without a tenant

• Tax

• Accountancy

• Licensing where applicable

• Legal and regulatory compliance

A property producing £1,200 per month in rent doesn't mean the landlord is making £1,200 per month in profit.

What Is a Rental Void?

A rental void is a period when the property doesn't have a paying tenant.

Your mortgage and many other property costs may still need to be paid during that period.

When assessing whether a buy to let investment is financially sustainable, it is sensible to consider what would happen if the property were empty for a period.

Landlord Insurance

Standard home insurance may not be appropriate for a property that is being rented to tenants.

Landlord insurance can provide cover specifically designed for rental properties.

Depending on the policy selected, cover can include areas such as buildings, contents belonging to the landlord, property-owner liability and other insured risks.

Policies vary considerably, so check exactly what is and isn't covered.

Buy to Let Remortgages

Landlords can also review and remortgage existing buy to let properties.

Reasons might include:

• An existing fixed deal ending

• Reviewing the interest rate

• Raising capital

• Changing the mortgage term

• Restructuring borrowing

• Portfolio planning

Early Repayment Charges and other costs should be checked before changing an existing mortgage.

Can I Release Equity From a Buy to Let?

Potentially, subject to the lender's criteria, property value, rental assessment and your circumstances.

For example, a landlord might consider releasing equity for further property investment or another acceptable purpose.

However, increasing the mortgage also increases the property's borrowing and can affect cash flow.

The lender will normally reassess the loan-to-value and rental coverage.

What Is Buy to Let Rental Yield?

Rental yield provides a simple way of comparing annual rent with a property's value or purchase price.

A basic gross rental yield calculation is:

Annual rent ÷ Property value × 100

For example:

Property price: £200,000

Monthly rent: £1,000

Annual rent: £12,000

Gross rental yield: 6%

However, gross yield doesn't account for mortgage costs, maintenance, insurance, management fees, tax, void periods and other expenses.

It shouldn't therefore be confused with actual investment profit or return.

Is a High Rental Yield Always Better?

Not necessarily.

Yield is only one part of a property investment.

A higher-yielding property could also involve:

• Higher maintenance

• Different tenant demand

• Greater management requirements

• More frequent tenant turnover

• Different property risks

• Different potential for capital growth

Likewise, future rent and property values aren't guaranteed.

Property investment should be considered as a whole rather than selecting a property solely because it has a high headline yield.

Buy to Let and Tax

Property taxation can be complex and depends on individual circumstances.

Potential considerations can include taxation when purchasing the property, taxation of rental profits and taxation when eventually disposing of the property.

Different considerations can also apply depending on whether property is owned personally or through a company.

Tax rules can change.

For this reason, obtain advice from an appropriately qualified tax professional before making significant property investment or ownership-structure decisions.

Is Buy to Let Regulated by the FCA?

The regulatory position depends on the circumstances.

Many buy to let mortgages entered into wholly for business purposes are not regulated in the same way as standard residential mortgages.

However, some buy to let arrangements can fall into different regulatory categories depending on the circumstances, including certain consumer buy to let situations.

Your mortgage adviser can establish the relevant position based on your circumstances.

Buy to Let Mortgage Checklist

Before looking for a rental property, consider:

☐ How much deposit do I have?

☐ Am I buying personally or through a limited company?

☐ Have I obtained appropriate tax advice?

☐ What is my target property price?

☐ What rent could the property realistically achieve?

☐ Does the rent meet potential lender calculations?

☐ Will the mortgage be repayment or interest-only?

☐ If interest-only, what is my repayment strategy?

☐ What are the mortgage fees?

☐ What are the expected landlord costs?

☐ Can I afford periods without a tenant?

☐ What insurance will I need?

☐ Does the property require licensing?

☐ Are there unusual property characteristics?

☐ What is my longer-term investment strategy?

Before Making an Offer

If you've found a potential investment property, send the details to your mortgage adviser before assuming that it will be suitable for the mortgage you want.

Useful information can include:

• Full property address

• Purchase price

• Expected monthly rent

• Property type

• Number of bedrooms

• Tenure

• Remaining lease term where applicable

• Whether it's currently tenanted

• Proposed ownership structure

• Your available deposit

This allows the mortgage position and property criteria to be investigated before you become too committed to a particular property.

Building a Buy to Let Portfolio

Your first investment property may eventually become part of a larger portfolio.

If that is your intention, thinking ahead can be valuable.

Decisions made on the first purchase — including ownership structure, deposit, mortgage type and borrowing level — can affect future plans.

As your portfolio grows, lenders may increasingly consider the wider portfolio rather than assessing each property completely independently.

Good record keeping also becomes increasingly important.

Is Buy to Let Right for Me?

A buy to let property is an investment, not a guaranteed source of profit.

Property values can rise or fall.

Rental income can change.

Properties can remain empty.

Unexpected repairs can occur.

Mortgage rates and taxation can change.

The relevant question isn't simply:

“How much rent will I receive?”

You should understand the borrowing, costs, responsibilities, risks and potential returns before proceeding.

Professional mortgage, tax and legal advice can all play different roles in that decision.

Need Help With a Buy to Let Mortgage?

Cambs Ely Mortgages helps landlords and property investors understand their mortgage options, whether they're purchasing their first rental property, expanding an existing portfolio, buying through a limited company or reviewing an existing buy to let mortgage.

We can help with areas including standard buy to let, limited company buy to let, HMO mortgages, holiday lets and buy to let remortgages, subject to individual circumstances and lender criteria.

We work with clients in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.

Building Blocks for a Brighter Future.

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Important Information

This guide is for general information and educational purposes and shouldn't be treated as personalised mortgage, investment, financial, legal or tax advice.

Tax treatment depends on individual circumstances and may change. Seek appropriate professional tax and legal advice when deciding how to structure a property investment.

Property values and rental income can fall as well as rise, and periods without rental income may occur.

Some forms of buy to let mortgage are not regulated by the Financial Conduct Authority.

Your property may be repossessed if you do not keep up repayments on your mortgage.