How lenders work out a buy-to-let loan
Lenders use an interest cover ratio (ICR). The rent must cover the mortgage interest at a stress rate by 125% or 145%.
- 125% usually applies to limited companies and basic-rate taxpayers.
- 145% usually applies to higher and additional-rate taxpayers.
- The stress rate is often 5.5% or the pay rate plus 2%. Five-year fixes are often tested at the pay rate.
Formula: maximum loan = yearly rent / ICR / stress rate. With £1,500 a month rent, a 125% ICR and a 5.5% stress rate, the maximum loan is about £261,818.
Deposit
Most buy-to-let mortgages need a 25% deposit. Some lenders go to 80% LTV at higher rates.
Costs to plan for
- Stamp duty with the 5% surcharge. Use our stamp duty calculator.
- Lender fees, often £995 to £1,999 or a percentage of the loan.
- Letting agent fees, typically 10% to 15% of rent plus VAT for full management.
- Landlord insurance, gas safety, EICR and EPC certificates, repairs and empty periods.
Frequently asked questions
How much rent do I need for a buy-to-let mortgage?
For a £200,000 loan at a 5.5% stress rate and 125% ICR, the rent must be at least about £1,146 a month. At 145% it is about £1,329.
Are buy-to-let mortgages interest only?
Most are, which keeps payments low. You repay the loan when you sell or refinance.
Can I get a buy-to-let mortgage through a limited company?
Yes. Many landlords buy through an SPV limited company, which often gets the 125% ICR.
Looking for a home in London?
Homes for saleTo rentThis calculator gives an estimate for guidance only. It is not financial or tax advice. Check the figures with your solicitor, mortgage broker or HMRC before you commit.