Glossary · UK
What is Buy-to-Let Mortgage?
A mortgage for purchasing a property to rent out rather than live in, typically assessed on rental income coverage rather than the landlord's personal salary alone.
Full Definition
A buy-to-let (BTL) mortgage is a loan for purchasing residential property that will be let to tenants rather than lived in by the borrower. Lenders assess affordability primarily using an Interest Coverage Ratio (ICR) test, requiring the expected monthly rental income to cover the mortgage interest payment by a set margin -- commonly 125% to 145%, calculated using a stressed interest rate rather than the actual pay rate, to ensure the property would still cover payments if rates rose. Deposits are typically higher than for residential mortgages, often a minimum of 20-25% of the property value, and interest rates and arrangement fees also tend to be higher. Most buy-to-let mortgages are interest-only, so the borrower pays only the interest each month and repays the capital when the property is eventually sold or refinanced. Since April 2020, landlords can no longer deduct mortgage interest from rental income before calculating tax; instead, they receive a basic-rate (20%) tax credit on finance costs under the Section 24 mortgage interest restriction, which increases the effective tax rate for higher and additional-rate taxpayer landlords.