11 March 2025 | Written by Mercantile Trust
Product Guide | Buy to Let Mortgages
What is a Buy to Let Mortgage?
A Buy to Let Mortgage is a type of loan designed specifically for landlords who purchase properties with the intention of renting them out. Unlike residential mortgages, BTL mortgages have different eligibility criteria, interest rates, and deposit requirements. They are typically interest-only, meaning landlords only pay the interest each month and repay the capital at the end of the mortgage term. However, some lenders also offer repayment options where both capital and interest are paid off monthly.
Types of Buy to Let Mortgages
HMO (House in Multiple Occupation) Buy to Let Mortgage
- Designed for properties rented out to multiple tenants (e.g. student housing, shared accommodations).
- Often requires a larger deposit and higher interest rates.
- Subject to specific licensing and regulations.
Limited Company Buy to Let Mortgage
- Suitable for landlords buying property through a limited company rather than personally.
- More tax-efficient for higher-rate taxpayers, as profits are subject to corporation tax.
- Typically has stricter lending criteria and higher interest rates.
Holiday Let Mortgage
- For properties rented out as short-term holiday rentals (e.g. Airbnb, cottages).
- Different affordability checks, often based on projected seasonal income.
- Considered higher risk and subject to stricter lending criteria.
Multi-Unit Freehold Block (MUFB) Buy to Let Mortgage
A specialist mortgage designed for properties that contain multiple, separate rental units under a single freehold title, such as: Blocks of flats (without individual leases), Houses converted into self-contained flats, Student accommodation buildings, Co-living properties
How Do Buy to Let Mortgages Work?
If you are considering a BTL mortgage, here is a step-by-step breakdown of the process:
- Choose a Property – Identify a rental property in a location with high tenant demand.
- Assess Your Deposit – Most BTL mortgages require a deposit of 25-40% of the property’s value.
- Check Rental Yield – Lenders typically require rental income to be 125-145% of the monthly mortgage repayments.
- Apply for a Mortgage – Provide details about your income, credit history, and projected rental earnings.
- Property Valuation – The lender will assess the property’s value and rental potential before approval.
- Receive Your Mortgage Offer – Once approved, funds are released, and you can complete the property purchase.
Who Can Get a Buy to Let Mortgage?
BTL mortgages are available to individuals and limited company landlords, but lenders typically require:
- A good credit history and financial stability. (We consider adverse credit)
- A minimum income threshold (typically £25,000+ per year).
- A larger deposit compared to residential mortgages (usually 25-40%).
- The ability to meet the lender’s rental income stress test.
Pros & Cons of Buy to Let Mortgages
Pros:
- Steady Rental Income – Provides a consistent revenue stream.
- Capital Growth Potential – Property values tend to appreciate over time.
- Interest-Only Repayments – Lower monthly payments help maximize cash flow.
- Tax Benefits – Some expenses, such as mortgage interest, maintenance, and letting agent fees, may be deductible.
Cons:
- Higher Deposit Requirements – Typically 25% or more.
- Market Fluctuations – Property prices and rental demand can vary.
- Tax Changes – Landlords must account for income tax and reduced mortgage interest relief.
- Potential Vacancies – Rental void periods can impact cash flow.
Final Thoughts
Investing in buy-to-let properties can be a rewarding way to build wealth, but understanding how BTL mortgages work is crucial for success. By choosing the right mortgage, calculating rental yields, and staying informed on market trends, landlords can maximize their investment potential and achieve long-term financial stability.
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