How Does a Buy-to-Let Mortgage Work?
A buy-to-let mortgage is a loan secured on a property you rent out, and the lender sizes it on the rent the property will earn rather than on your salary. Most are interest-only, most need a 25% deposit, and the rent has to clear a stress test set well above the rate you will actually pay.
That stress test is where most applications come unstuck. Landlords routinely find at valuation stage that their ceiling is £30,000 below what they offered on the property.
This guide runs the numbers as they stand in September 2026, including a worked coverage calculation and the fee arithmetic that makes the cheapest headline rate the most expensive deal. It also covers the two conditions landlords forget: buy-to-let insurance in force from exchange, and lender permission before anyone moves in.
A buy-to-let mortgage is sized on the rent the property will earn rather than on your salary, and most are interest-only with a chunky deposit behind them. The interest coverage ratio stress test is where applications come unstuck, because the rent has to clear a rate well above the one you’ll actually pay. Once you have several mortgaged properties you move into portfolio underwriting, and borrowing through a limited company changes both the rates and the admin. Your lender will require buildings cover from completion, and letting it lapse breaches the mortgage conditions.
Compare buy-to-let insurance quotes to meet your lender’s conditions.
- What makes a buy-to-let mortgage different from a residential one?
- Why are almost all buy-to-let mortgages interest-only?
- What deposit and loan-to-value do lenders expect?
- How does the interest coverage ratio stress test work?
- What changes when you have four or more mortgaged properties?
- Should you borrow personally or through a limited company?
- Why is the lowest headline rate rarely the cheapest deal?
- Do you need consent to let on a residential mortgage?
- What insurance does your lender require, and what if it lapses?
- Frequently asked questions (FAQs)
What makes a buy-to-let mortgage different from a residential one?
Affordability. A residential lender multiplies your income, while a buy-to-let lender divides the expected rent by a coverage ratio and works backwards to a loan.
How lenders size the loan
A residential offer usually lands between four and four and a half times income, after your commitments are deducted. A buy-to-let lender barely looks at your salary once you clear its minimum, which is normally £25,000 a year.
What moves the number is the rent, the stress rate and your tax band. Two landlords buying the identical flat can be offered loans £24,000 apart purely because one is a higher rate taxpayer.
What the mortgage conditions stop you doing
You cannot live in the property, and you cannot let it to a close family member on a standard product. Both breach the terms, and the lender can call in the loan.
Most lenders also restrict the tenancy type, the length of the term and whether you can let room by room. Check the offer conditions against how you plan to run the let property before you exchange.
| Test | Buy-to-let mortgage | Residential mortgage |
| What the loan is sized on | Rent, divided by a coverage ratio | Income, usually 4 to 4.5 times |
| Typical minimum deposit | 25%, a few lenders at 20% | 5% to 10% |
| Standard maximum LTV | 75%, occasionally 80% | Up to 95% |
| Repayment basis | Interest-only on most products | Capital and interest |
| Rate the loan is tested at | 5.5% floor, or 2 points above the pay rate | The lender’s own affordability rate |
| Personal income needed | Usually £25,000, some lenders none | The entire basis of the loan |
| FCA regulation | Only if it is a consumer buy-to-let | Always regulated |
| Interest and tax | 20% tax reducer for individuals | Not deductible |
Why are almost all buy-to-let mortgages interest-only?
Because paying interest only keeps the monthly cost down, which leaves more rent as cash flow and makes the deal work at a price that a repayment mortgage would not support.
The monthly difference on a £150,000 loan
At 4.79% over a 25 year term, interest-only costs £599 a month and capital repayment costs £859. That gap of £260 a month is £3,120 a year of cash flow.
On a property renting at £1,100 a month, interest-only leaves room for voids, management fees and repairs. Repayment on the same loan leaves almost nothing.
What interest-only costs you at the end
You still owe the full £150,000 on the day the term ends. Lenders expect a stated repayment strategy, normally selling the property, remortgaging again or clearing it from other assets.
The bet is that capital growth and inflation shrink the debt in real terms. That has worked for most of the past thirty years, but it is a bet rather than a plan.
When repayment is worth the extra
Choosing repayment does not reduce what you can borrow, because the coverage test is run on interest either way. It only changes what leaves your account each month.
That makes repayment sensible if you want the property unencumbered by retirement and the rent can absorb the difference. Many landlords compromise with a part and part product.
What deposit and loan-to-value do lenders expect?
A 25% deposit, so 75% loan to value, is the working standard across the mainstream market. A small number of lenders stretch to 80%, and the sharpest pricing starts at 40% down.
Why 75% is the default
Lenders treat rental income as less predictable than a salary, so they hold back more equity as protection against a fall in values. The deposit also does the heavy lifting in the coverage test, because a smaller loan needs less rent to pass it.
First-time landlords with no existing buy-to-let track record are often asked for 30% to 40%. Expect a tighter product range and a rate premium of 0.2 to 0.5 percentage points on top.
What a bigger deposit buys you
- 80% LTV: a short panel of lenders, higher rates and the tightest coverage tests.
- 75% LTV: the widest choice of products and the standard against which rates are quoted.
- 65% LTV: materially lower rates and easier coverage, often the point where a marginal deal starts working.
- 60% LTV or below: best-buy territory, usually with a percentage product fee attached.
Property types that need a specialist lender
Standard houses and flats finance easily. Shared houses need a lender that writes HMO business, and short-stay letting needs a holiday let product rather than a standard buy-to-let.
Flats above shops, non-standard construction and new-build apartments all narrow the panel. Leasehold flats also need the freeholder’s block of flats policy evidenced before completion, which is a common cause of last-minute delay.
How does the interest coverage ratio stress test work?
The lender takes your expected monthly rent, divides it by a coverage ratio of 125% to 145%, and treats what is left as the most interest you can afford at a stress rate rather than at the rate you will pay.
What the pra requires
The rules come from the Bank of England’s Prudential Regulation Authority in supervisory statement SS13/16. Lenders must assume a borrower rate of at least 5.5% across the first five years, and no less than 2 percentage points above the initial rate.
The 5.5% floor falls away where the rate is fixed for five years or more. An updated version of SS13/16 was published on 20 January 2026 and takes effect on 1 January 2027, so the 2016 statement is what lenders apply today.
The coverage ratio itself is set by each lender, not by the PRA. Basic rate taxpayers and limited companies are usually tested at 125%, higher and additional rate taxpayers at 145%.
A worked calculation at september 2026 rates
The Bank of England held Bank Rate at 3.75% on 30 July 2026, and two-year fixes at 75% LTV have been sitting broadly between 4.3% and 5.3% depending on the fee. Rates move at every Monetary Policy Committee meeting, so treat these as a snapshot rather than a quote.
Take a £150,000 loan stressed at 5.5%. That is £8,250 of notional annual interest, or £687.50 a month, which a higher rate taxpayer must cover with £997 of rent.
| Loan amount | Monthly interest at the 5.5% stress rate | Rent needed at 125% | Rent needed at 145% |
| £100,000 | £458 | £573 | £665 |
| £120,000 | £550 | £688 | £798 |
| £150,000 | £688 | £859 | £997 |
| £180,000 | £825 | £1,031 | £1,196 |
| £225,000 | £1,031 | £1,289 | £1,495 |
| £300,000 | £1,375 | £1,719 | £1,994 |
Why a five-year fix lets you borrow more
Because the 5.5% floor does not apply to a five-year fix, the lender can test the rent against the rate you are paying. On the same rent that difference is worth tens of thousands of pounds of borrowing.
| Product and tax status | Coverage ratio | Rate the rent is tested at | Maximum loan on £1,000 rent |
| Two-year fix, higher rate taxpayer | 145% | 5.5% stress rate | £150,500 |
| Two-year fix, basic rate or company | 125% | 5.5% stress rate | £174,500 |
| Five-year fix, higher rate taxpayer | 145% | 4.59% pay rate | £180,300 |
| Five-year fix, basic rate or company | 125% | 4.59% pay rate | £209,100 |
What happens if the rent stops
The coverage ratio is a lending test, not a safety net. If a tenant stops paying, the mortgage is still due on the first of the month, which is why rent guarantee insurance matters more on a mortgaged property than on one you own outright.
What changes when you have four or more mortgaged properties?
At four mortgaged buy-to-let properties you become a portfolio landlord under PRA rules, and every new application is then underwritten against your whole portfolio rather than against the property in front of you.
What the underwriter asks for
Expect a full portfolio schedule listing every property, its value, its loan, its rent and its lender. Most lenders also want a cash flow forecast, an assets and liabilities statement and your last two years of tax calculations.
The count is across all lenders, not just the one you are applying to, and it includes properties held jointly. A partner’s mortgaged rentals can tip you over the threshold without you realising.
How it changes rates and timescales
Most lenders impose an aggregate portfolio limit, commonly 65% to 75% loan to value across everything you own, and a background coverage test on the whole book. A single property carrying too much debt can block a purchase that stands up perfectly on its own.
Underwriting takes four to six weeks rather than two to three, and the product range narrows to specialist lenders. It is also the point at which a portfolio landlord policy or a multi-property policy starts to beat a stack of separate contracts on price and admin.
Should you borrow personally or through a limited company?
Section 24 is the reason company lending grew from a niche into the standard route for higher rate taxpayers buying new stock. Individuals get only a 20% tax reducer on mortgage interest, while a company deducts it in full.
What section 24 changed
Since the 2020 to 2021 tax year, individual landlords cannot deduct mortgage interest from rental income before tax. HMRC gives a basic rate tax reduction worth 20% of the finance cost instead, as set out in the guidance on tax when you rent out a property.
Basic rate taxpayers are broadly where they were. Higher and additional rate taxpayers pay tax on turnover they never see, and heavily mortgaged landlords can face a tax bill larger than their actual profit.
The rate differential you pay for it
Special purpose vehicle lending prices roughly 0.3 to 1.0 percentage points above the equivalent personal product, and percentage fees of 3% to 7% are far more common. On a £150,000 loan a 5% fee is £7,500 added to the debt.
The offset is the coverage test. A company is usually assessed at 125% rather than 145%, which can hand a higher rate taxpayer around 16% more borrowing on the same rent.
The cost of moving existing properties in
Transferring a property you already own is a sale to a separate legal person. The company pays the higher rates of Stamp Duty Land Tax, currently a 5 percentage point surcharge on top of the standard bands, and you may face capital gains tax on the way out.
Add early repayment charges on the existing mortgage and legal fees on both sides. Incorporating a portfolio you already hold rarely pays unless the numbers are large.
| Factor | Personal name | Limited company or SPV |
| Mortgage interest relief | 20% basic rate tax reducer | Deducted in full as a business expense |
| Tax on rental profit | 20%, 40% or 45% income tax | Corporation tax, 19% to 25% |
| Typical coverage ratio | 125% basic rate, 145% higher rate | 125% |
| Typical rate difference | Lowest available | Around 0.3 to 1.0 points higher |
| Product fees | Flat fees of £999 to £1,999 common | Percentage fees of 3% to 7% common |
| Lender choice | The whole market | A smaller specialist panel |
| Personal guarantee | Not required | Directors normally give one |
| Taking the profit out | It is already yours | Salary or dividend, taxed again |
| Annual running cost | None | Accounts and filings, roughly £600 to £1,500 |
| Moving a property in | Not applicable | Counts as a sale, SDLT and CGT apply |
Why is the lowest headline rate rarely the cheapest deal?
Product fees. A 3% fee on a £150,000 loan is £4,500, and spread over a two-year fix it adds around 1.5 percentage points to what the money genuinely costs you.
How to compare fee-loaded products
Add the fee to the interest payable over the fixed period, then divide by the years and by the loan. That gives a true annual cost you can rank, and it frequently reverses the order of the best-buy table.
| Two-year fix on £150,000 | Product fee | Interest over two years | Fee plus interest | True annual cost |
| 4.29% with a 3% fee | £4,500 | £12,870 | £17,370 | 5.79% |
| 4.79% with a flat fee | £1,999 | £14,370 | £16,369 | 5.46% |
| 5.29% with no fee | £0 | £15,870 | £15,870 | 5.29% |
When a large fee still wins
Percentage fees scale with the loan, so they punish small borrowers and stay neutral on large ones. Flat fees work the other way, which is why a £999 fee is poor value on an £80,000 loan and excellent on a £400,000 one.
Fees are usually added to the loan rather than paid up front. That is convenient, but you then pay interest on the fee for the whole remaining term.
The costs that sit outside the rate
Budget £300 to £700 for valuation, £800 to £1,500 for conveyancing and £300 to £600 for a broker, though many brokers take a lender procuration fee instead. Check any firm on the FCA register before you pay anything.
Do you need consent to let on a residential mortgage?
Yes, every time. Letting a mortgaged home without telling your lender breaches the mortgage terms, and the lender can impose a penalty rate or demand the balance in full.
What consent to let costs
Lenders typically charge a one-off administration fee of £0 to £300, or add 0.5 to 1.5 percentage points to your rate for the period of the consent. Permission usually runs for six to twenty-four months and is reviewed at the end.
Consent is normally refused inside the first six months of a residential mortgage. It is also unlikely to be granted twice, because lenders read a repeat request as a permanent change of use.
When you need a full buy-to-let remortgage
If letting is the long-term plan, move to a buy-to-let product rather than renewing consent. The rate will be higher, but the coverage test replaces the income test and your lending is on the correct footing.
Your insurance has to change on the same day. A home insurance policy excludes let property, and the difference between landlord and home cover is what decides whether a claim is paid.
Where FCA regulation bites
Ordinary investment buy-to-let is not regulated by the Financial Conduct Authority, because it is treated as a business loan. Consumer buy-to-let is regulated, and that covers accidental landlords and lets to close family.
The distinction matters if something goes wrong. On an unregulated loan you have narrower complaint rights and no Financial Ombudsman route in most disputes.
What insurance does your lender require, and what if it lapses?
Buildings insurance for the full rebuild cost, in force from exchange and maintained for the life of the loan. If it lapses, your lender can buy a policy in your name and add the premium to your mortgage.
What the mortgage condition says
Almost every offer requires landlord buildings insurance noting the lender’s interest, with a sum insured at rebuild cost rather than market value. Your solicitor will ask for the schedule before exchange.
Rebuild cost is normally well below the purchase price, so insuring for what you paid is the most common way landlords overpay. Our guide to landlord buildings cover explains how the figure is worked out.
What force-placed insurance costs
If the policy lapses, the lender exercises its right to insure and charges you. Force-placed cover routinely costs two to three times a policy you would have arranged yourself, and it protects the lender’s interest rather than yours.
You are also in technical breach until it is reinstated. That can trigger a default notice and, in the worst case, a demand for repayment.
The cover your lender does not ask for
Property owners‘ liability, loss of rent and legal expenses cover are all optional as far as the mortgage is concerned and all worth having since possession claims got slower. A landlord policy bundles them into one contract.
Tell your insurer the day a property empties between tenancies, because most policies restrict cover after 30 to 45 days and longer gaps need unoccupied property cover. A void is also when a mortgaged property is at its most exposed.
Frequently Asked Questions (FAQs)
A handful of lenders allow it, but expect a 30% to 40% deposit, a higher personal income requirement and a rate premium. Most mainstream lenders still want you to own a home first.
£25,000 a year is the usual threshold, counted separately from rental income. Some specialist lenders have no minimum at all, though they price for it.
No. Occupying it yourself breaches the mortgage conditions, and you would need to remortgage onto a residential product first.
There is no legal cap, but most lenders limit an individual to around ten mortgaged properties or a total exposure of £2m to £5m across their own book.
Nothing immediate, as long as you keep paying. The problem arrives at remortgage, when the rent is re-tested and a shortfall can leave you stuck on the standard variable rate.
Fixed and discounted products almost always do, typically 1% to 5% of the balance and tapering over the deal period. Tracker products more often let you leave without one.
Yes, from specialist lenders rather than the high street. Expect a lower maximum loan to value, a higher rate and a valuation based on the property’s rental business.
Buildings insurance is a condition of virtually every offer. Contents, liability and rent guarantee are not required by the lender but protect the income the loan depends on.
Investment buy-to-let is not, because it counts as a business loan. Consumer buy-to-let is regulated, which mainly captures accidental landlords and family lets.
For a simple purchase you can go direct, but portfolio lending, limited company structures and non-standard property really need whole-of-market access. Fees run from £300 to £600 where the broker charges you at all.
Only by selling it to the company, which usually means stamp duty at the higher rates, possible capital gains tax and an early repayment charge. Model the full cost before you commit.
No, it is general information current at September 2026. Rates, thresholds and reliefs change, so check your own position with an accountant or a qualified mortgage adviser.