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Buy-to-let loans have other rules, rates, and needs than home loans. Knowing these helps you get the right finance for a let home.
Buy-to-let (BTL) loans are for homes you plan to let out, not live in. Rates, fees, and rules change often. Use current lender quotes or a broker to know today's costs.
Key gaps from home loans:
- Higher deposits (usually 25-40%)
- What you can borrow is based on rental income, not your salary
- Coverage Ratio (ICR) rules apply
- Rates usually 0.5-1.5% higher than home loans
- Tax treats loan interest in a new way
Knowing BTL rules and using expert brokers can boost your returns.
The 30-Second BTL Truth
BTL loans are NOT home loans. Other rules, lenders, rates, and needs.
Key Gaps:
- Higher deposits: 25-40% (vs 5-10% for homes)
- Higher rates: Usually 0.5-1.5% above home rates
- Rental test: Rent must cover 125-145% of loan pay
- If you can pay: Based on rental income, not your salary
- Companies: Many BTL lenders now prefer or need this
- Many homes: Special rules if you own 4+ homes with loans
Here is what 72% of first-time BTL buyers find out too late: Your home loan broker likely does not know BTL loans. The products differ. The lenders differ. How they say yes differs. You need a BTL expert, or you are losing money.
BTL Mortgage Rates
Rates vary by lender, loan-to-value, rental cover, and your profile. Focus on total cost (set-up, valuation, legal fees) and compare APRC. A BTL broker can access more options than high-street banks.
Coverage Ratio (ICR) - The Rental Test
BTL "can you pay" is mainly based on rental income, not your salary. Lenders use the ICR to check if the deal works.
How ICR Works:
The rent must cover a set amount above the stressed pay (often 125%-145%, based on lender rules and your tax band). This uses a stress rate chosen by the lender.
Example:
- Loan: £135,000
- Real rate: 4.5%
- Stress test rate: 5.5%
- Monthly pay at stress rate: £619
- Needed rent at 125% ICR: £774/month
- Needed rent at 145% ICR: £897/month
ICR Rules Vary By:
- Tax status: Basic rate payers often need 125%, higher rate 145%
- How many homes: Larger groups may need higher ICR
- Home type: HMOs often need 145%, normal homes 125-130% (see our HMO property investment guide for details on HMO yields and requirements)
- Credit history: Poor credit may raise needs
- What you earn: Some lenders lower ICR for high earners (£75k+)
Note: Rules differ by lender and your tax status. A broker can match your case to the right lender.
Why This Matters: A home might pass with one lender (125% ICR) but fail with another (145% ICR) at the same rent. Expert brokers know which lenders match your case. This avoids turned down apps that hurt your credit score.
Interest-Only vs Payback (The Cash Flow Choice)
Interest-Only BTL:
- Pay only interest monthly (main sum stays the same)
- Lower monthly pay = better cash flow
- You rely on home rising in value for profit
- You must have a payback plan (new loan, sell, or other income)
- 95% of BTL loans use this
Example: £135,000 loan at 4.5% interest-only = £506/month
Payback BTL:
- Pay interest + main sum monthly (loan shrinks)
- Higher monthly pay = worse cash flow but building equity
- Lower rates (usually 0.2-0.3% less)
- Loan cleared at end of term
- 5% of BTL loans use this
Example: £135,000 loan at 4.2% payback over 25 years = £738/month
The Maths: Interest-only: £506/month, building £0 equity via pays Payback: £738/month, building £231/month equity
Which is better? Rests on your plan. If home rises 3% yearly, you are building equity anyway. The £232/month cash flow edge (interest-only) can fund more homes, boosting returns.
Here is what the facts show: Interest-only speeds how many homes you get. Payback gives safety and cuts risk. Pros use interest-only. Careful landlords use payback. Neither is "wrong," as they are varied risk/return types.
Company BTL vs Your Name (The Tax Choice)
Your Name BTL (Old Way):
- Loan interest help given as a 20% tax credit (England & Wales)
- Higher-rate taxpayers may face bigger tax bills on let profits
- Capital gains tax on sale (check current rates and amounts)
- Easier to get a yes (more lenders, set market)
- Lower fees
Company BTL (Growing Trend):
- Loan interest can be taken off from company profits
- Company profits face company tax (rate rests on profit; check current rates)
- Profits can stay in company to buy more; taking them out may trigger share tax
- Other lenders, pricing, and fees vs your own borrowing
- Harder to get a yes (fewer lenders, rates 0.3-0.5% higher)
- Higher fees (£1,500-£2,500 typical)
Break-Even: Higher-rate taxpayers (40%+): Company almost always better Basic-rate taxpayers (20%): Your name usually better Many homes landlords (4+ homes): Company helps to grow
Example (Higher-Rate Taxpayer):
Your Name: Let profit: £8,000 Tax at 40%: £3,200 Net: £4,800
Company: Let profit: £8,000 Company tax at 19%: £1,520 Net: £6,480
Yearly saving: £1,680 (35% better)
But here is the catch: Companies make getting new loans harder. You need filed accounts. Taking money out is taxed at 33.75%. The tax edge only shows if you put profits back in.
The Five BTL Loan Mistakes (That Cost Thousands)
Mistake #1: Using a Home Loan Broker Home brokers do not know BTL. They will put you with high street banks charging 0.5-1.0% more than special lenders.
Cost: £5,000-£12,000 over five years on £135,000 loan
Mistake #2: Not Testing Rental Cover You assume rent covers the loan. Lender stress-tests at 5.5%. You fail the rental test. App turned down. Credit score hurt.
Cost: Wasted app fees (£200-£500) + credit score hit
Mistake #3: Picking 2-Year Fixed When Rates Rise Rates are low now (4.3-5.0%). Likely higher in 2 years (5.0-6.0%+). Fixing for 5 years locks in safety.
Cost: £3,000-£8,000 in higher rates on new loan
Mistake #4: Adding Fees to Loan £1,500 fee added to £135,000 loan at 4.5% over 25 years costs £2,774 total (84% more). Pay fees upfront if you can.
Cost: £1,274 in wasted interest (on £1,500 fee)
Mistake #5: Not Shopping Around Each lender has other rules, rates, and fees. First offer is not always best.
Cost: £4,000-£10,000 over five years
The Birmingham Case Study
Sophie wanted a BTL loan for a £172,000 Birmingham home. She went to her home loan bank first.
High Street Bank Offer (Halifax):
- Rate: 4.9% fixed 5 years
- Set-up fee: £999
- Deposit: 25% (£43,000)
- Rental test: 145% of 5.5% stress test
- Needed rent: £965/month
- Monthly pay: £580
- Five-year cost: £34,800 + £999 = £35,799
What a BTL Broker Found:
- Rate: 4.3% fixed 5 years (Precise Loans)
- Set-up fee: £1,495
- Deposit: 25% (£43,000)
- Rental test: 125% of 5.5% stress test
- Needed rent: £852/month (passed easier)
- Monthly pay: £463
- Five-year cost: £27,780 + £1,495 = £29,275
Saving: £6,524 over five years
But here is the twist: Sophie's rent (£900/month) passed at the 125% lender but would have failed at 145%. If she had gone to Halifax, she might have been turned down. The right lender made the deal work.
The broker's value was not just a better rate. It was finding the right lender first time. No turned down app. No credit score harm.
What Rate Sites Do Not Show
Rate sites are useless for BTL. They show home loans. BTL needs direct broker access or lender apps.
Where to find BTL loans:
- Expert BTL brokers (the best choice, whole market access)
- BTL lenders (Precise, Foundation, Kent Reliance, Paragon)
- High street banks (Barclays, NatWest, Santander, which are often less good)
- Building societies (Nationwide, Coventry, which are good for smaller groups)
Here is the truth: BTL loans are ties products, not bulk goods. Brokers with links to expert lenders get better rates, faster answers, and solve issues that rate sites cannot.
What Comes Next
We have not covered: the best BTL lenders by case (first-time landlord, many homes, company, HMO), how credit score affects BTL yes, and the new loan plan that pulls equity for growth.
The question is not whether to use a broker. DIY BTL shopping wastes time and costs money. The question is whether you use a BTL expert or a home broker who dabbles in BTL (avoid the latter).
Every good landlord knows: Your loan is a tool, not a one-time choice. The right setup shapes your cash flow and growth for years. Be sure to consider your obligations regarding landlord compliance before securing finance. You should also check the lease status if buying a flat, as leasehold vs freehold can impact lending criteria.
Your BTL loan is the base of your returns. A 0.5% rate gap on a £500,000 group costs you £2,500/year, or £12,500 over five years. That's enough for another deposit.
Expert Advice and Rules for BTL Loans
Before asking for BTL loans, always check current rules and talk to trained pros:
- FCA-ruled BTL broker - Check at FCA Register
- Trained lawyer or licensed handler - For home buy legal work
- Trained accountant - For tax planning, company advice (ICAEW, ACCA, CIMA)
- Free money adviser - For overall plan and if you can pay
Key Sources:
- FCA Loan Rules - Rules framework
- UK Finance - Industry data
- HMRC Let Income - Tax duties for landlords
- MoneyHelper - Free govt-backed help
- BTL Loans Help
Bodies: FCA | SRA | HMRC | HM Land Registry
Check Current Law: GOV.UK | Legislation.gov.uk | FCA Handbook
Note: This is general help, not money or legal advice. BTL loans have risk. Rules change often. Get advice from FCA-ruled advisers before making choices. The author accepts no blame for any loss from this info.