BTL Mortgage Calculator

## Understanding Buy-to-Let Mortgage Affordability in the UK

Buy-to-let mortgage lending works fundamentally differently from residential mortgages. While a standard home loan considers your personal income, BTL mortgages are assessed primarily on the rental income the property will generate. This guide explains exactly how lenders calculate your maximum borrowing capacity and what factors affect your BTL affordability.

### The Core Principle: Rental Coverage Ratios

When you apply for a buy-to-let mortgage, lenders want to ensure the rental income will comfortably cover the mortgage payments, even if interest rates rise. They measure this using the Debt Service Coverage Ratio (DSCR), also known as the Interest Coverage Ratio (ICR).

What is DSCR? The DSCR is the ratio between your expected annual rental income and your annual mortgage payments. For example, if your property generates £12,000/year in rent and your mortgage payments are £10,000/year, your DSCR is 1.2x.

### Step-by-Step: How Lenders Calculate Your Maximum Mortgage

Step 1: Determine the DSCR Requirement

Lenders require different coverage ratios based on your tax status:

- Basic rate taxpayers (20%): Typically require 125% coverage (DSCR of 1.25x) - Higher rate taxpayers (40%): Typically require 145% coverage (DSCR of 1.45x) - Additional rate taxpayers (45%): May require 145-165% coverage

The higher requirements for higher rate taxpayers reflect the impact of Section 24 tax changes, which restrict mortgage interest relief to a 20% tax credit rather than full deduction.

Step 2: Apply the Stress Test Rate

Lenders don't use the actual mortgage interest rate for affordability calculations. Instead, they apply a "stress test rate" – typically 5.5% – to ensure you can afford payments if rates increase. Some lenders use rates between 5% and 6.5%, and these can change with market conditions.

Step 3: Calculate Maximum Borrowing

The formula works backwards from your expected rent:

1. Maximum Annual Payment = Annual Rent ÷ DSCR Requirement 2. Maximum Mortgage Amount = Maximum Annual Payment ÷ Stress Test Rate

Worked Example:

Let's say you expect £1,200/month rent (£14,400/year) and you're a basic rate taxpayer:

- Annual rent: £14,400 - DSCR requirement: 1.25x - Maximum annual payment: £14,400 ÷ 1.25 = £11,520 - Stress test rate: 5.5% - Maximum mortgage: £11,520 ÷ 0.055 = £209,454

If you're a higher rate taxpayer with the same rent:

- DSCR requirement: 1.45x - Maximum annual payment: £14,400 ÷ 1.45 = £9,931 - Maximum mortgage: £9,931 ÷ 0.055 = £180,563

This demonstrates why tax status significantly impacts BTL borrowing capacity.

### Understanding LTV and Deposit Requirements

Buy-to-let mortgages typically require larger deposits than residential mortgages:

- Standard BTL: 25% deposit (75% LTV) - Lower rate products: Often require 40% deposit (60% LTV) - Higher risk properties: May need 35-40% deposit

Using our example with a £209,454 maximum mortgage at 75% LTV: - Maximum property price: £209,454 ÷ 0.75 = £279,272 - Deposit required: £279,272 × 0.25 = £69,818

### Factors That Affect Your BTL Borrowing Capacity

Property Type: HMOs, multi-unit blocks, and non-standard construction may require specialist lenders with different criteria.

Location: Some lenders have restrictions on certain postcodes or won't lend on properties in areas with lower demand.

Portfolio Size: Landlords with 4+ mortgaged properties face additional underwriting requirements under portfolio landlord rules.

Experience: First-time landlords may face stricter criteria than experienced investors.

Personal Income: While not the primary factor, some lenders require a minimum personal income (typically £25,000+) to demonstrate financial stability.

### Top Slicing: Using Personal Income to Boost Borrowing

Some specialist lenders offer "top slicing" – where they consider your personal income to cover any shortfall between rental income and required coverage. This can help if:

- The rental yield is below standard requirements - You're a higher rate taxpayer facing Section 24 restrictions - You want to purchase in a lower-yielding area

Top slicing typically comes with higher interest rates but can unlock deals that wouldn't otherwise be possible.

### Current Market Considerations (2024-2025)

The BTL mortgage market has evolved significantly:

- Higher interest rates: Base rates have increased substantially from historic lows - Stress test adjustments: Some lenders have reduced stress rates as the base rate has risen - Section 24 fully phased in: All landlords now receive only 20% tax credit on mortgage interest - EPC requirements: Upcoming minimum EPC C ratings will affect property eligibility - Regulatory changes: The Renters' Reform Bill may impact landlord decisions

### Planning Your BTL Investment

Before searching for properties, use this calculator to understand your realistic budget. Consider:

1. Target rental income: Research achievable rents in your target area 2. Your tax position: Higher rate taxpayers face more restrictions 3. Deposit availability: Larger deposits unlock better rates and higher borrowing 4. Running costs: Factor in maintenance, voids, insurance, and management

This calculator gives you the starting point – your maximum mortgage based on expected rent. From there, you can determine what property prices are achievable and structure your investment accordingly.