How Buy-to-Let Mortgages Work: Deposits, Rental Cover and Stress Tests
A buy-to-let mortgage is assessed mainly on the rent the property can earn. That changes how much you need to put down and how much you can borrow.
What to know
- Buy-to-let lenders usually want a deposit of at least 20% to 25%.
- Many buy-to-let mortgages are interest-only, so you’ll need a plan to repay the loan at the end.
- Lenders check that rent covers the mortgage interest by a margin, often 125% to 145%, at a stressed interest rate.
- Most buy-to-let mortgages aren’t regulated by the FCA, though some lets to close family are.
A buy-to-let mortgage is designed for property you plan to rent out. Lenders still look at you, but the main question is whether the rent can support the loan.
Deposits and loan-to-value
Buy-to-let lenders typically lend up to 75% or 80% of the property’s value, so expect to put down at least 20% to 25%. A larger deposit usually opens up better rates, just as with residential loan-to-value bands.
Interest-only repayment
Many buy-to-let mortgages are interest-only. Your monthly payment covers the interest, and the full loan is due at the end of the term. You’ll need a plan to repay it, such as selling the property or using other savings. Repayment mortgages are also available.
Rental cover and stress tests
Lenders use an interest coverage ratio (ICR): the rent must exceed the mortgage interest by a set margin, calculated at a stressed interest rate rather than the rate you’ll actually pay.
- Common ICRs are around 125% for basic-rate taxpayers and limited companies and 145% for higher-rate taxpayers.
- Prudential Regulation Authority rules require lenders to allow for rising rates. Many use a stressed rate of at least 5.5%, or the actual rate on fixes of five years or longer.
For a £200,000 interest-only loan stressed at 5.5%, the yearly interest would be £11,000, or about £917 a month.
| ICR | Monthly rent needed |
|---|---|
| 125% | £1,145.83 |
| 145% | £1,329.17 |
Good to know
Our guide to rental yield shows how to check whether a property’s rent covers its costs, not just the lender’s test.
What lenders check about you
- your credit history and existing borrowing
- often a minimum personal income
- your experience as a landlord, for some lenders
- for portfolio landlords with four or more mortgaged lets, a review of the whole portfolio, its rents and its debts
Buying in your name or a company
Many landlords now buy through a limited company, which changes the rates on offer and how profits are taxed. Our guide to mortgage interest and tax for landlords explains the difference.
Regulation
Most buy-to-let mortgages are business lending and aren’t regulated by the Financial Conduct Authority. Some, such as letting to close family members or so-called accidental landlords, fall under consumer buy-to-let rules with extra protections.
Watch out
Rent can stop during void periods or if a tenant doesn’t pay, but the mortgage still has to be paid. Your property may be repossessed if you do not keep up repayments on your mortgage.
Running the numbers before you buy
Add up the deposit, Stamp Duty Land Tax, legal fees, mortgage fees and any refurbishment. Then test the rent against the mortgage at a higher interest rate, allowing for empty months and repairs. If the property only works when everything goes to plan, it may not be the right one.
Your questions
Do I need a minimum income for a buy-to-let mortgage?
Some lenders set a minimum personal income alongside the rental assessment. Criteria vary, so check with the lender or a broker.
Can I let out my home without a buy-to-let mortgage?
You’d usually need your lender’s consent to let. Letting without it can breach your mortgage terms.
What is a portfolio landlord?
Lenders generally treat landlords with four or more mortgaged rental properties as portfolio landlords and assess the whole portfolio in more detail.
This guide explains how UK borrowing works in general terms and isn’t financial advice. Rates, rules and lender criteria change, so check the details with the lender, GOV.UK or the Financial Conduct Authority before you decide. For advice on your own circumstances, speak to an FCA-authorised mortgage or financial adviser. If you borrow against your home, it may be repossessed if you do not keep up repayments.
