How buy to let mortgages are assessed
A buy to let mortgage looks like any other mortgage on paper: you borrow against a property and pay interest on the loan. The difference is in how the lender decides whether you can afford it. With a home you live in, the question is whether your salary covers the payments. With a property you let out, the main question is whether the rent does. This calculator is built around that question, so alongside the monthly payment it shows the rental cover at a stress rate, the most the rent supports and what is left of the rent each month.
How buy to let lending differs from residential
Lenders regulated by the Prudential Regulation Authority underwrite buy to let mortgages against a set of expectations published in its supervisory statement SS13/16. It asks lenders to test affordability in one of two ways, or both. The first is an interest coverage ratio test, which checks whether the rent from the property supports the interest. The second is an income test, used when the lender takes your personal income into account as well as the rent.
Because the property is meant to pay for itself, the deposit, the rent and the rate all feed straight into how much you can borrow. Two buyers with the same salary can get very different answers on the same property if one expects more rent or puts down a bigger deposit. Each lender also sets its own maximum loan to value, so check that limit before you rely on a figure from any calculator, this one included.
The other difference is scale. SS13/16 treats borrowers with four or more mortgaged buy to let properties as portfolio landlords, and expects lenders to look at the whole portfolio rather than the new loan on its own. If you are building towards that point, expect a lender to ask about rents, mortgages and costs on every property, not only the one you are buying.
What rental cover means and why lenders use it
Rental cover, also called the interest coverage ratio or ICR, compares the rent with the interest on the loan. SS13/16 defines it as the expected monthly rent divided by the monthly interest, worked out at a rate that allows for future rises. If a property lets for £1,300 a month and a year's interest on the loan at the stress rate comes to £10,312, the annual rent of £15,600 gives cover of about 151%.
The stress rate is there because the rate you pay today may not be the rate you pay later. PRA guidance expects lenders to allow for a rise of at least 2 percentage points, and to assume a rate of at least 5.5% over the first five years. Rates fixed for five years or more are treated differently, because the payment cannot rise during the fix. That is why the calculator starts at 5.5% and has a one-click option to test at your rate plus 2 points.
The required cover sits above 100% so there is room for the costs of letting. SS13/16 describes 125% as the current industry standard minimum, and asks lenders to factor in letting fees, repairs, voids, insurance and other running costs, plus any tax linked to the property. Those factors can push the figure up, and they depend on the lender, the product and your own position. The calculator does not assume a tax band. Enter the cover figure your lender or broker gives you, and the pass or fail will follow their test rather than a guess.
What to do when cover falls short
A fail does not mean the property is a bad buy. It means the rent does not support this size of loan at the settings you entered. The results show the gap in pounds and what would close it, and there are four main levers.
The first is a bigger deposit. Every pound of extra deposit is a pound less borrowed, so the gap tells you how much more cash would make the numbers work, and the loan to value drops at the same time. The second is the rent. If you believe the property will let for more, the lender will want evidence, and SS13/16 expects the expected rent to be checked by an independent valuer, automated valuation or an existing tenancy. Use a figure you could defend rather than a hopeful one.
The third is the product. A product the lender tests at a lower rate changes the sum, and longer fixes are one place to ask about, given how the guidance treats them. A broker can tell you which lenders test which products at what rate. The fourth is to look again at the price. The most the rent supports is a useful ceiling when you are deciding what to offer, especially once you add in stamp duty on the purchase, which comes out of the same pot of cash as the deposit.
Some lenders will also consider your personal income alongside the rent, under the income test described above. Whether that helps depends on the lender and your income, so treat it as a question to ask rather than a fix you can count on.
Interest only or repayment across a portfolio
Interest only is the calculator's starting point because it is the simplest way to see what the rent has to cover. On a £187,500 loan at 5%, the interest only payment is £781.25 a month. On capital repayment over 25 years it is about £1,096, so roughly £315 more of the rent goes on the mortgage each month, but the debt shrinks to nothing by the end of the term.
With interest only, the full £187,500 is still owed at the end. That can work if you plan to sell, refinance or clear it from savings, but it needs to be a plan rather than a hope, and a lender may ask what it is. Across several properties, one approach is to mix the two: interest only where cash flow is tight, repayment where the rent leaves room, so the overall debt still comes down. Whatever mix you choose, keep an eye on when each fixed rate ends, because the payment on every loan can change at that point, and if you borrow more when you remortgage, the lender's affordability test applies again.
Remember that rental cover is about interest, not the full payment. A repayment mortgage can pass the cover test and still leave a thin monthly margin, which is why the calculator shows the rent minus the payment separately. If you add your running costs, it shows the margin after those too. Our rental yield calculator breaks those costs down in more detail.
What the product fee does to the real cost
A lower rate with a fee is not always cheaper than a higher rate without one. Take a £187,500 interest only loan. At 4.5% with a £3,000 fee, the payment is £703.13 a month. At 5% with no fee, it is £781.25. Over two years the fee product costs £19,875 in interest and fee, against £18,750 for the no-fee product, so the no-fee deal is £1,125 cheaper. Over five years it flips: £45,188 against £46,875, and the fee product wins by about £1,688. The length of time you keep the product decides which is better.
Adding the fee to the loan avoids paying it upfront, but you then pay interest on it for as long as it is owed. In the example, a £190,500 loan at 4.5% costs £714.38 a month, and the extra £3,000 is still owed at the end. It also raises the loan to value and lowers the rental cover, because the rent now has to cover a bigger loan. At £1,300 rent and a 5.5% stress rate, cover drops from about 151% to 149%. On a deal that only just passes, that can be the difference, so the calculator shows both ways with one switch.
Where the starting values come from
The stress rate starts at 5.5% and the required cover at 125%. Both come from the PRA's supervisory statement SS13/16: 5.5% is the minimum rate it expects lenders to assume over the first five years, and 125% is the figure it describes as the current industry standard minimum. They are starting points, not rules. Lenders set their own figures, they differ by product and borrower, and they change. The property value, rent, rate and term are examples to replace with your own.