Becoming a landlord can be a rewarding investment, but buy-to-let mortgages work differently from residential ones. The deposit requirements are higher, the affordability criteria are based on rental income rather than your salary, and the tax landscape has changed significantly in recent years. This guide covers everything you need to know before purchasing your first investment property.
How Buy-to-Let Mortgages Differ from Residential
| Feature | Residential Mortgage | Buy-to-Let Mortgage |
|---|---|---|
| Minimum deposit | 5% | 25% (most lenders) |
| Interest rates | Lower | Typically 0.5–1% higher |
| Affordability basis | Your income | Expected rental income |
| Repayment type | Repayment or interest-only | Usually interest-only |
| Stamp Duty | Standard rates | Standard rates + 3% surcharge |
| Regulation | FCA regulated | Mostly unregulated (unless you live in it) |
| Minimum income | Based on affordability | Many lenders require £25,000+ personal income |
Deposit Requirements
Most buy-to-let lenders require a minimum deposit of 25% of the property value. Some specialist lenders offer 20% LTV products, but these come with higher interest rates and stricter criteria. A 25% deposit gives you access to the most competitive BTL rates.
For example, on a £200,000 investment property, you would need at least £50,000 as a deposit. Unlike residential mortgages, the government's 95% LTV schemes are not available for buy-to-let purchases.
Rental Coverage Requirements
Instead of assessing how much you earn, BTL lenders focus on whether the expected rent will cover the mortgage payments — and by a comfortable margin. This is called the Interest Cover Ratio (ICR).
Most lenders require the expected monthly rent to be at least 125% to 145% of the monthly mortgage payment at a stressed interest rate (typically 5.5%–6.5%, regardless of the actual rate you are paying). This stress test ensures you can still cover the mortgage even if rates rise significantly.
Lenders typically require a rental valuation from a local letting agent to confirm the expected rent. Some accept RICS valuations or their own surveyor's assessment.
Tax Implications for Landlords
Section 24: Mortgage Interest Tax Relief
This is the single most important tax change for landlords in recent years. Previously, landlords could deduct their full mortgage interest payments from rental income before calculating tax. Since April 2020, this relief has been replaced with a basic rate (20%) tax credit.
In practice, this means higher-rate (40%) and additional-rate (45%) taxpayers pay significantly more tax on rental income. For example:
- Annual rent: £12,000
- Annual mortgage interest: £6,000
- Old system (40% taxpayer): Tax on £6,000 profit = £2,400
- New system (40% taxpayer): Tax on £12,000 = £4,800, minus 20% credit on £6,000 = £1,200. Net tax = £3,600
That is £1,200 more tax per year on a single property. This change has made buy-to-let less tax-efficient for higher-rate taxpayers and is one reason many landlords have moved their properties into limited companies.
Stamp Duty Surcharge
Buy-to-let properties (and second homes) attract a 3% stamp duty surcharge on top of standard rates. On a £200,000 property, this adds £6,000 to the purchase cost. This surcharge applies to the entire purchase price, not just the portion above a threshold.
Capital Gains Tax (CGT)
When you sell a buy-to-let property, you pay CGT on any profit. The rates are 18% for basic-rate taxpayers and 24% for higher/additional-rate taxpayers (as of 2026). You have an annual CGT allowance (£3,000 in 2025/26), but for property gains this is often a small fraction of the profit.
Landlord Responsibilities
Owning a rental property comes with significant legal obligations. Failure to comply can result in fines, prosecution, or inability to evict tenants. Key responsibilities include:
- Gas Safety Certificate: Annual inspection by a Gas Safe registered engineer. You must provide a copy to tenants within 28 days of the check.
- Electrical Installation Condition Report (EICR): Required every 5 years. The installation must meet the national safety standards.
- Energy Performance Certificate (EPC): Must be rated E or above to let the property (with some exemptions). The government plans to raise this to C for new tenancies.
- Deposit protection: Tenancy deposits must be placed in a government-approved deposit protection scheme within 30 days of receipt.
- Right to Rent checks: You must verify that tenants have the legal right to rent in England before the tenancy starts.
- Smoke and carbon monoxide alarms: Working smoke alarms on every floor and CO alarms in rooms with solid fuel appliances (regulations expanding to all rental properties).
- Repairs and maintenance: You are responsible for the structure, exterior, plumbing, heating, and sanitation of the property.
Insurance for Buy-to-Let
Standard home insurance does not cover rental properties. You need specialist landlord insurance, which typically includes:
- Buildings insurance: Required by your mortgage lender. Covers the structure against fire, flood, subsidence, and other damage.
- Landlord liability insurance: Covers claims if a tenant or visitor is injured at the property due to a fault you are responsible for.
- Rent guarantee insurance: Covers lost rental income if a tenant stops paying. Typically covers 6–12 months of rent.
- Legal expenses cover: Covers the cost of evicting tenants, pursuing rent arrears, or defending legal claims.
- Contents insurance: Only needed if you are letting the property furnished.
Personal Name vs Limited Company
One of the biggest decisions for new landlords is whether to buy in your personal name or through a limited company. The key differences:
| Factor | Personal Name | Limited Company |
|---|---|---|
| Mortgage interest | 20% tax credit only (Section 24) | Fully deductible as business expense |
| Income tax rate | 20/40/45% on rental profit | Corporation tax (25%) on profit |
| Extracting profits | Immediately available | Dividends (additional tax) or salary |
| Mortgage rates | Generally lower | Typically 0.5–1% higher |
| Accounting | Self-assessment tax return | Annual accounts + confirmation statement |
| CGT on sale | 18% or 24% | Corporation tax on gains, then tax on extraction |
Getting Started: Step by Step
- Decide on your investment strategy: location, property type, target tenant, yield expectations
- Get specialist tax advice on personal vs limited company ownership
- Speak to a mortgage broker who specialises in BTL
- Obtain an Agreement in Principle to confirm your borrowing capacity
- Research areas with strong rental demand and good yields
- Factor in ALL costs: deposit, stamp duty surcharge, mortgage fees, legal fees, furnishing, insurance, maintenance, letting agent fees, void periods
- Purchase the property and arrange landlord insurance
- Ensure all safety certificates are in place before letting
- Decide whether to self-manage or use a letting agent (typically 8–12% of rent)
Related Guides
- Mortgage Fees Explained — all purchase costs including stamp duty
- Fixed vs Variable Rates — choose the right mortgage type
- Improving Your Credit Score — prepare before applying
- Mortgage Glossary — BTL-specific terms explained