Buy to Let Mortgages

The size of a buy to let loan is set by the rent, tested against a notional interest rate. This is the interest cover ratio, or ICR. The lender takes the expected rent, confirmed by their own valuer rather than your letting agent, and checks it covers the interest at a stressed rate by a set margin.

Typical requirements are 125% cover for a basic rate taxpayer or a limited company, and 145% for a higher rate taxpayer, tested at around 5.5% or the pay rate plus a margin, whichever is greater. Five year fixed rates are commonly tested at the actual pay rate instead, which is why a five year fix will often support a larger loan than a two year fix on the same property.

When the rent does not stretch far enough

Some lenders allow top slicing, where surplus personal income is used to make up a shortfall in rental cover. It is not universal and it usually requires you to demonstrate a comfortable margin on your own finances. If the numbers still do not work, the realistic options are a larger deposit, a different lender, or a different property.

Expect to put down at least 25%. Some lenders go to 20%, occasionally 15%, but pricing at those levels is usually poor enough to make the larger deposit worth finding. Below 75% loan to value the rate steps improve much as they do on residential lending.

Fee structures are worth watching closely. Alongside flat fees you will see percentage based product fees of 2% to 3% of the loan, attached to rates that look very low. On a 200,000 loan a 3% fee is 6,000, and once added to the balance you pay interest on it for the rest of the term. Sometimes those products still win on total cost, particularly where the fee helps the rental calculation stretch. Often they do not, and we work it out on your actual numbers first.

Property held personally no longer gets full tax relief on mortgage interest. Relief is given as a basic rate tax credit instead, which means a higher rate taxpayer pays tax on rental income calculated before the mortgage interest is deducted. Property held in a limited company is taxed on profit after interest at corporation tax rates, with further tax when you extract the money.

That is why much new buy to let lending now goes through special purpose vehicle companies. It is not automatically the better route. Company rates are generally higher, lender choice is narrower, personal guarantees are standard, and there are accountancy costs every year. Moving an existing property into a company counts as a sale and purchase, so stamp duty and potentially capital gains tax become payable.

The tax position depends entirely on your circumstances and we would want you to take advice from your accountant on the tax side. Our part is telling you what each structure will cost to finance and which lenders will support it.

Most buy to let lending sits outside the Financial Conduct Authority’s mortgage rules. It is treated as a business transaction, so the protections that apply to your own home, including the complaints route to the Financial Ombudsman Service, may not apply. We advise on it the same way regardless, but you should know where you stand.

There is an exception. Consumer buy to let is regulated, and it catches situations where you did not set out to be a landlord. Letting a property you inherited, or keeping and letting the home you used to live in rather than selling it, will usually fall into this category. Letting to a close family member is also regulated and needs a specific type of lender, as most standard buy to let lenders will not allow it.

Yield calculations often ignore running costs. Budget for:

• The additional rate of stamp duty on second and subsequent properties
• Void periods, which is rent you do not receive between tenancies
• Letting agent fees, commonly 10% to 15% of rent for full management
• Landlord insurance, gas and electrical safety checks and the required energy performance standard
• Selective or additional licensing where the local authority operates a scheme
• Repairs and redecoration between tenants

If you own four or more mortgaged buy to let properties you are a portfolio landlord, and lenders will assess your whole portfolio rather than just the property you are buying. That means a property schedule, an assets and liabilities statement and often a business plan, with background stress testing across everything you own.