Buy-to-let and HMO Mortgages

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What is a Buy-to-let (BTL) Mortgage?

A BTL mortgage is designed for landlords who are planning to rent their property out to one or more tenants and is secured against residential property.

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Why Choose a BTL Mortgage?

A BTL mortgage is mortgage of choice if you plan to purchase additional property to lease out for a profit.

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How it Works

Most buy-to-let mortgages are on an interest-only basis. This means that each month you’ll only pay the interest on the loan, until the end of the loan term.

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Buy-to-Let Mortgages at a Glance

What is a Buy-to-Let Mortgage?

A buy-to-let or buy2let mortgage is one which is secured against the residential property that you are planning to lease out to tenants. The buy-to-let (BTL) property may be purchased personally, either by an individual, or a couple (similar to a traditional mortgage). Another option is to set up an SPV (Special Purpose Vehicle) to mortgage the property through. This is essentially a non-trading limited entity purely set up to hold investment properties and can have multiple shareholders. An SPV is used for tax benefit purposes so it is advisable to speak with an accountant for advice on the best option and route to take based on your individual circumstances.

What is a HMO Mortgage?

HMO stands for House of Multiple Occupation. A HMO mortgage is a type of buy-to-let mortgage where the property concerned is to be leased out to 3 or more unrelated tenants, who will likely share facilities such as kitchens and bathrooms.

When to Choose a BTL or HMO Mortgage?

A B2L would be the mortgage of choice if you are planning to lease a property out to a 3rd party tenant. As it would be an investment property typically you will be looking to generate additional income while owning the property and earning potential capital gains depending on the market value.

A HMO BTL mortgage is recommended if you’re planning to lease your property to 3 or more tenants from different households/families which has become popular in recent times.

Another scenario may be If you are looking to use the property yourself for holidays at certain times of the year, in which case you would require a ‘holiday let’ mortgage. A B2L mortgage would also be required if you were to vacate your property but didn’t want to sell in a scenario of moving away, to move in with a new partner or purchase a new family home as examples.

Key Benefits of Buy-to-Let Mortgages:

  • Generate additional income from rentals.
  • Allow you to keep and own an additional property while covering the mortgage repayments.
  • You can re-mortgage a rental property to release equity within the property for further investments.
  • HMO allows you to lease rooms individually and in turn realise greater rents and profit yields.

How it Works

Buy-to-let mortgages are similar to traditional mortgages whereby borrowing is capped by a maximum LTV (loan to value). This cap is usually lower and typically at 70-75% of the property value, though some lenders can offer 80% LTV in some scenarios. As a result, with a B2L purchase you will typically be required to put down a 25% deposit. Of course, the higher the deposit you can put down the lower the LTV, which will often mean a lower rate. Sub-50% tends to be the level at which you will receive a minimum rate.

Affordability is based around the rental cover ratio and a national interest rate of 5.5% typically. (For some products they base the test rate as the actual interest rate or occasionally it can be lower). A lender will then usually look to ensure there is a rental coverage of typically 125%-135% of the monthly mortgage payment, dependent on the lender. In some cases, a lender may require coverage as high as 145%.

As an example, if you were to purchase a property for £250k with a 25% deposit of £62,500 – this would mean you would require a mortgage of £187,500 on interest only. With a stress test rate of 5.5% this would give a monthly interest-only mortgage repayment of £859.38. Using the rental cover ratio of 125% means the minimum rental needed from this property to qualify for the mortgage will be £1,074.22.

To find out more about buy-to-let mortgages and if they could turn profit for you, please get in touch with our in-house team of property finance specialists today.


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