The difference between a buy to let and a residential mortgage
Buy-to-let and standard mortgages are similar in lots of ways, but there are a few crucial differences. Learn all about them here.
Last updated on
May 9, 2025 15:24
1. Like standard mortgages, you have a choice of mortgage type - repayment, interest only or a combination of both (known as a part and part mortgage). If you choose a repayment mortgage, it will be repaid in full at the end of the term. A part and part mortgage will mean that there will still be a portion of the loan outstanding at the end of the term, which needs to be repaid.
However, most landlords still opt to take interest-only mortgages, although lenders have started tightening the availability of these deals for new landlords. If you do, that means your monthly payments will be lower, but they won’t make a dent in the loan itself. That means at the end of the loan term, you’ll still owe the same amount you borrowed at the beginning.
Usually, if the property is on an interest-only mortgage, landlords end up selling their property at the end of their term. Hopefully, its value will have gone up, so they pay off their loan in one go and pocket the profit (after paying their capital gains tax, of course). It’s important to remember, however, that property values can fall as well as rise, meaning there is a risk that the property may not cover the outstanding loan.
Otherwise, you can choose a repayment or part and part mortgage - there’s nothing to stop you doing that.
It’s important you get professional advice when deciding whether buy-to-let is worth it for you, as there are lots of legislation and tax considerations. An accountant can help you make the right decision.
2. What you can borrow is based less on what you earn and more on the rent you charge tenants.
So, before they offer you a loan, lenders will check similar properties in the area to see what the demand is like. If there’s a similar property that’s been on the market for quite a while, or lots of available properties waiting for tenants, that might affect their valuation of the rental income. Lenders typically want to make sure your rent will cover at least 125–145% of the interest you pay, though some lenders may now require a higher coverage, especially for limited company borrowers. This is known as the ICR (interest cover ratio).
If you have a higher salary, some lenders will take that into account and lower their ICR requirements – the idea being you’d be able to cover any rental shortfalls from your own income.
Before you approach lenders, you might like to do some market research of your own. Talk to letting agents in the area and look at listings to find out how much similar properties are being rented out for.
That doesn’t mean your salary isn’t important. Many lenders require you to earn more than £25,000 a year, and show you’ll still be able to make payments if interest rates rise… or the property sits empty for a few months.
If you’re a portfolio landlord (ie you let out 4 or more properties), lenders will look at your finances with more scrutiny, and how each one of your properties is performing.
3. You need a bigger deposit than a standard mortgage, usually 25% or higher.
That’s because lenders see buy-to-let loans as a bigger risk.
Talk to an expert about sorting your mortgage today.
Last updated: 28/04/2025
[Disclaimer] This content is intended for general guidance and is not a substitute for personalised mortgage advice.
Here's all you need to know about converting a residential mortgage into a buy-to-let mortgage.
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