First Charge Buy-to-Let Mortgages: A Complete Guide for Property Investors

As the private rental sector continues to grow, more investors are turning to buy-to-let (BTL) property as a long-term wealth-building strategy. Whether you are expanding an existing portfolio or acquiring your first rental property, understanding the fundamentals of first charge buy-to-let mortgages is essential for making sound financial decisions.

This guide outlines the key concepts, eligibility criteria, lending process, and considerations associated with first charge BTL lending.

What is a First Charge Buy-to-Let Mortgage?

A first charge mortgage is a loan secured against a property where the lender holds the primary legal claim. In the event of sale or repossession, the first charge lender is repaid before any other creditors.

When applied to buy-to-let, a first charge mortgage finances the purchase or refinance of a residential property intended for letting, not owner-occupation. These mortgages are structured around rental income affordability rather than solely on the borrower’s personal earnings.

Key Features

1. Priority Security Position
The lender holds the first legal charge, meaning the debt has priority over other secured loans on the property.

2. Rental-Based Affordability
Affordability is typically assessed using projected rental income, with calculations based on a rental coverage ratio (e.g. 125%–145% of the mortgage).

3. Interest-Only Options
Many first charge BTL products are available on an interest-only basis, offering lower monthly payments and improved cash flow for investors.

4. Larger Loan Sizes
Given the first charge position, lenders are often able to offer higher loan-to-value (LTV) ratios and more competitive interest rates compared to secondary or unsecured borrowing.

5. Wide Market Availability
These products are offered by banks, building societies, and specialist lenders catering to both individual and limited company borrowers.

Eligibility Criteria

While requirements vary by lender, common eligibility criteria include:

• Applicant age: Typically 21–75 years old
• Deposit: Minimum of 20%–25% of the property’s value
• Rental income: Must meet stress-tested interest coverage ratios
• Credit history: A strong profile is advantageous, though we at Mercantile Trust consider adverse credit under certain circumstances. To learn more, contact our expert team.
• Property type: The asset must be suitable for letting and in good condition
• Ownership structure: Available to individuals, partnerships, and limited companies (including Special Purpose Vehicles (SPVs))

Rental Income Assessment

Unlike residential mortgages, BTL affordability is driven by rental income. Lenders typically use an Interest Coverage Ratio (ICR) to stress test the loan:

Rental income must cover the mortgage payment by a specified margin (e.g. 125%) at an interest rate, often 5.5% or higher.

This ensures the property remains financially viable even in periods of rate volatility.

The Application Process

The application process for a first charge buy-to-let mortgage is broadly similar to residential lending but with some specific considerations:

1. Pre-assessment and Decision in Principle (DIP)
   A preliminary check based on income, property value, and credit profile.
2. Full application
   Submission of required documents including proof of income, ID, property details, and rental projections.
3. Property valuation
   Independent valuation or automated valuation (AVM) to confirm market value and expected rental income.
4. Underwriting and affordability checks
   As a common-sense lender, we use manual underwriting to assess eligibility and determine loan terms.
5. Completion
   Funds are released and the mortgage is secured via legal charge.

Benefits for Landlords and Investors

• Access to leveraged growth: Amplifies purchasing power using mortgage finance
• Cash flow optimisation: Interest-only payments support income generation
• Scalability: Suitable for building portfolios over time
• Tailored lending: Options for first-time landlords, experienced investors, and corporate entities

Tax and Legal Considerations

Investors must consider the tax implications of rental income and property ownership. These may include:

• Income tax: Payable on rental profits
• Mortgage interest relief: Restricted to a 20% tax credit for individual landlords
• Capital Gains Tax (CGT): Applicable upon sale of the property
• Stamp Duty Land Tax (SDLT): Additional 3% surcharge for BTL purchases
• Incorporation: Using a limited company structure may offer tax efficiency but involves different lending terms and regulatory obligations

It is recommended to get advice from a qualified tax adviser or mortgage broker to determine the most suitable ownership model.

Limited Company Buy-to-Let

A growing number of investors are acquiring properties via Special Purpose Vehicles (SPVs) or trading companies. While corporate lending criteria differ slightly, benefits include:

• Full mortgage interest relief
• Corporation tax rates (currently 25% for most businesses)
• More structured ownership for larger portfolios

Lenders offering first charge BTL mortgages to limited companies will typically require incorporation documents, director guarantees, and business bank statements.

Common Use Cases

• Purchasing new rental properties
• Refinancing existing BTL properties to release equity
• Consolidating multiple loans under one facility
• Financing auction purchases with time-sensitive completions

Conclusion

First charge buy-to-let mortgages remain one of the most effective tools for property investors looking to expand their portfolios or improve their financing structure. With tailored lending solutions, flexible underwriting, and a focus on rental income viability, these products offer a scalable and sustainable path to long-term investment success.

As lending criteria and market conditions continue to evolve, professional advice remains key to navigating the complexities of BTL finance. When considering a first charge BTL mortgage, working with an experienced intermediary or specialist lender can significantly enhance the outcome of your investment strategy. As a direct lender, our expert team is here to help you. Get in touch today!