Buy-to-let mortgages explained

A buy-to-let mortgage is assessed on what the property can earn, not only on what you earn. That single difference shapes how much you can borrow, how the deposit works and why interest rates matter so much to the numbers. This guide explains how lenders assess buy-to-let borrowing, using the Prudential Regulation Authority's underwriting standards, and what to have ready before you speak to a broker. It does not quote lender rates, which change too often to be useful in a guide.

How buy-to-let mortgages differ

The Prudential Regulation Authority (PRA), part of the Bank of England, sets minimum underwriting standards for buy-to-let lending by the firms it regulates in supervisory statement SS13/16. The statement applies to buy-to-let lending that is not already regulated by the Financial Conduct Authority. Two kinds of buy-to-let lending are regulated by the FCA instead: lending where the property will be let to a related person, and consumer buy-to-let, meaning a buy-to-let mortgage not taken out wholly or predominantly for the purposes of a business.

The PRA's standards apply whether the borrower is an individual or a company. Its core expectations are that lenders:

• test whether the rent is enough to cover the monthly interest using an interest coverage ratio, and/or test the borrower's personal income where it is used to support the payments;
• do not base affordability on the equity in the property or on future house price growth;
• allow for future interest rate rises; and
• apply a specialist approach to portfolio landlords.

The PRA has published a revised version of SS13/16, effective from 1 January 2027, as part of its Basel 3.1 changes. It keeps the affordability, stress test and portfolio landlord expectations described in this guide.

Interest-only or repayment

Buy-to-let mortgages can be arranged on an interest-only or a repayment basis. The lender's rental cover test is built around the interest, but both structures have a place, and the right one depends on your plan for the loan at the end of the term.

For individuals, mortgage interest is not deducted from rental profit for income tax. Instead it earns a tax reduction at the basic rate of 20%. Our landlord tax calculator shows the effect on your profit.

Deposits and loan to value

Loan to value (LTV) is the mortgage as a percentage of the property's value. Each lender sets its own maximum LTV for buy-to-let, and the deposit is the gap between the loan and the price. A larger deposit lowers the LTV and changes the deal in several ways:

Lenders also verify the rent. The PRA expects expected rental income to be verified by a suitably qualified valuer independent of the borrower, an automated valuation model or evidence of an existing tenancy.

Interest cover ratios and stress rates

The interest coverage ratio (ICR) is the expected monthly rent divided by the monthly interest payment, calculated at a stressed interest rate rather than the rate you will actually pay. The PRA sets out how that stress should work:

• Lenders consider likely interest rates over at least the first five years of the mortgage, unless the rate is fixed or capped for five years or more, or for the whole term if that is shorter.
• They have regard to market expectations and to a minimum increase of 2 percentage points in buy-to-let mortgage rates.
• Even if that produces a lower figure, they assume a borrower interest rate of at least 5.5% during the first five years.
• Any assumed rent growth used to offset rate rises should not exceed 2% a year.

When setting a minimum ICR, lenders are expected to consider the landlord's costs, including management and letting fees, council tax, service charges, insurance, repairs, voids, utilities, gas and electrical certificates, licence fees and ground rent. They must also take account of tax, including the restriction on mortgage interest relief, and may assume every borrower pays higher rate tax. When the PRA published SS13/16 in 2016 it noted that the industry standard minimum ICR was 125%, and said these factors could lead to higher thresholds. Each lender now sets its own.

What that means for borrowing

The ICR test turns into a simple formula: maximum loan equals annual rent divided by the ICR multiplied by the stress rate. As an illustration only, using a 125% ICR and the PRA's 5.5% floor, with hypothetical rents:

A higher ICR or a higher stress rate reduces these figures, which is why the same property can support very different loans with different lenders and products. Where rent alone falls short, the PRA allows lenders to use personal income to top up affordability, subject to a full assessment of income, credit commitments and living costs. Run your own figures in the buy-to-let mortgage calculator, then test the whole cash flow in the buy-to-let calculator.

Fees

The rate is only part of the cost of a mortgage. Fees to compare include:

• Arrangement or product fees, which may be a flat amount or a percentage of the loan.
• Valuation fees, payable whether or not the valuation matches the price.
• Legal fees, including any separate representation the lender requires.
• Broker fees, where they apply.
• Early repayment charges, if you sell or refinance during a fixed or discounted period.

A lower rate with a higher fee can cost more overall on a smaller loan, and the reverse can be true on a larger one. Adding a fee to the loan avoids paying it upfront but means paying interest on it, and can affect the ICR test. Compare the total cost over the product period rather than the headline rate.

Portfolio landlords

The PRA treats borrowers with four or more distinct mortgaged buy-to-let properties, counted together or separately and across all lenders, as portfolio landlords. Lending to them is expected to go through a specialist underwriting process, because the debt, cash flows and concentration risks are more complex. Lenders may ask for:

• your experience as a landlord, your full portfolio and its outstanding mortgages;
• your assets and liabilities, including tax;
• a business plan, and how the new loan fits the existing portfolio; and
• historical and expected cash flows for every property.

Those requests are easier to meet when the information already lives in one place. PROXERA keeps each property's mortgage, rent, costs and documents together, which makes a portfolio review simpler to prepare.

Remortgaging

The PRA's affordability expectations do not apply to a buy-to-let remortgage with no additional borrowing beyond the amount currently outstanding, whether with the same lender or a new one. Arrangement, professional and administration fees can be excluded when working out the borrowing. Raising extra capital on remortgage brings the full assessment back into play.

Companies, expats and foreign nationals

Some lenders offer buy-to-let mortgages to limited companies, such as special purpose vehicles set up only to hold property, and the PRA's standards apply to them in the same way. Our limited company buy-to-let guide covers the tax side.

Some lenders also offer buy-to-let mortgages to UK expatriates and foreign nationals. Criteria vary with your country of residence, the currency of your income, your residency status and your deposit. Our overseas investors page explains how PROXERA Wealth coordinates a purchase from abroad, including where mortgage advice fits in.

How mortgage advice works with PROXERA Wealth

Mortgage advice comes from an FCA-authorised mortgage broker. The broker reviews your income, deposit, existing borrowing and the property, then recommends a product. Lending is always subject to eligibility, valuation and lender approval. PROXERA Wealth keeps the finance lined up with the purchase timetable, which matters most on off-plan purchases where completion can be months away. To start, get in touch or read our guide to investing in UK property.