Buy-to-let
A residential lender asks what you earn. A buy-to-let lender asks what the property earns, then tests whether that rent would still cover the interest at a rate considerably higher than the one you would be paying.
That single difference — the interest cover ratio — decides most buy-to-let cases, and it is the reason two landlords with identical incomes can be offered very different loans.
The central test
The interest cover ratio is the amount by which the expected monthly rent must exceed the monthly interest, calculated not at your actual rate but at a stressed rate set by the lender. It is a regulatory expectation rather than a lender's preference, and it applies across the market.
Two things drive the required ratio: whether you are borrowing personally or through a limited company, and — if personally — your income tax band. Higher-rate and additional-rate taxpayers face a higher required ratio than basic-rate taxpayers, because the tax treatment of mortgage interest leaves them with less of the rent. Company borrowing is generally assessed at the lowest ratio.
The stressed rate is the other half of the calculation, and lenders reduce it for longer fixed periods. A five-year fix is commonly stress-tested at or near its actual pay rate rather than at a notional higher one, which is why a longer fix frequently supports a materially larger loan than a two-year fix on the same property and the same rent.
The practical effect is that maximum borrowing on a buy-to-let is a function of rent, tax band, ownership structure and product term — four inputs, none of which is your salary. Salary matters mostly as a minimum income threshold, which many lenders set and few advertise.
Where the rent will not stretch to the loan you want, some lenders allow top-slicing — using surplus personal income to bridge the gap.
The rental figure used is the valuer's assessment of achievable market rent, not what you hope to charge or what a tenant has agreed to pay.
Structure
A genuine fork in the road with consequences well beyond the mortgage. What follows is how the two differ from a lending perspective — the tax position is a matter for an accountant, and the right answer differs from person to person.
| Personal name | Limited company (SPV) | |
|---|---|---|
| Rental cover required | Depends on your income tax band — higher for higher-rate taxpayers. | Generally assessed at the lowest ratio, whatever you earn. |
| Interest as an expense | Relief is restricted for individual landlords. | Interest is a company expense against rental profit. |
| Lender choice | The widest field, including the mainstream names. | A smaller but well-established field of specialist lenders. |
| Product pricing | Typically keener at the same loan to value. | Usually a little higher, with fees to match. |
| Personal exposure | You are the borrower. | Personal guarantees are standard, so the exposure does not disappear. |
| Running cost | None beyond the tax return. | Company accounts, filings and an accountant, every year. |
| Taking the money out | The rental profit is already yours. | Extracting profit is a second, separately taxed step. |
Moving a property you already own into a company is a sale from you to the company: purchase tax is payable and capital gains may be too. It is not a restructuring exercise, and it is rarely worth doing on the mortgage arithmetic alone. Take tax advice before, not after.
Criteria
Beyond the rental cover calculation, these are the conditions that most often decide whether a case is placeable at all.
Practicalities
Questions
Considerably more than for a residential purchase. Buy-to-let products sit at lower maximum loan-to-values, and the rental cover test often bites before that limit does — so the deposit is frequently set by what the rent will support rather than by the lender's headline maximum. Work back from the rent, not from the price.
The margin by which the expected rent must exceed the mortgage interest, tested at a stressed rate rather than at the rate you would pay. The required margin is higher for higher-rate and additional-rate taxpayers borrowing personally, and generally lowest for limited company borrowing. It is the calculation that determines maximum borrowing on most buy-to-let cases.
It depends almost entirely on your tax position, your plans for the rental profit and how long you intend to hold. Company borrowing is usually assessed on the most favourable rental cover ratio, which can support a larger loan, but products price a little higher and there are real running costs. It is a question for an accountant with your figures in front of them; we can tell you what each structure does to the borrowing, not what it does to your tax.
No. Occupying a buy-to-let property yourself, or letting it to a close family member, breaches the terms of essentially every buy-to-let mortgage. Letting to a family member is a regulated arrangement needing a specific product — a family buy-to-let — from one of the small number of lenders that offer it.
Many lenders require it, though not all. First-time landlords who do not already own their own home face a much narrower market and tighter criteria, because from the lender's point of view there is no track record of managing a mortgage. It is possible; it just needs the case placed with a lender that permits it.
Most buy-to-let lending is not. The exception is consumer buy-to-let — broadly, letting a property you did not buy as an investment, such as an inherited home or a former residence — which is regulated and carries the protections that go with it. Establishing which category you fall into is one of the first things to settle, because it changes both the products available and your recourse.
Keep reading
Your home may be repossessed if you do not keep up repayments on your mortgage. Figures shown on this site are illustrative estimates and do not constitute advice or an offer of credit. Most buy-to-let mortgages are not regulated by the Financial Conduct Authority.
Next step
Give us the property, the expected rent and your tax position, and we will tell you what the rental cover test supports — personally and through a company.
