How Buy-to-Let Mortgages Work

Waqas Ali
Dec 22, 2025
3 min read

The Foundation of Every Investment

At the heart of every thriving rental property lies a buy-to-let mortgage — a financial instrument that transforms regular savings into significant growth potential.

While the term may be well-known, buy-to-let (BTL) mortgages operate quite differently from the residential loans most individuals are accustomed to. They adhere to a distinct set of guidelines, focusing not on your salary but on the rental income generated by the property and its long-term investment potential.

At Genius Academy, we emphasise that grasping how lenders evaluate BTLs is a crucial step toward establishing a robust property portfolio.

What Is a Buy-to-Let Mortgage?

A buy-to-let mortgage is specifically tailored for investors who acquire properties for rental purposes rather than personal residence.

Typically, you will need:

A substantial deposit (generally 25% or more).
A rental income that sufficiently covers the mortgage payments.
A solid credit history and stable financial situation.

In contrast to residential mortgages, where affordability is determined by your income, BTL lenders primarily evaluate whether the rental income from the property can sustain the loan.

How BTL Mortgages Differ from Residential

Feature	Residential Mortgage	Buy-to-Let Mortgage
Purpose	Personal residence	Investment property for rental
Deposit	Usually 5–10%	Typically 25%+
Affordability	Based on personal income	Based on rental income
Repayment Type	Generally repayment	Often interest-only
Borrower Type	Homeowner	Landlord or corporate entity

This framework enables investors to prioritise cash flow over capital repayment, creating additional investment opportunities.

How Lenders Evaluate a BTL Application

1️⃣ Rental Coverage (ICR Test)

Lenders use an Interest Coverage Ratio (ICR) to assess how effectively the rental income covers the mortgage interest.

For instance:

Rent: £1,000 per month
Mortgage interest: £600
ICR = 1.67 (or 167%)

Most lenders require a coverage ratio of at least 125–145%, meaning your rental income must surpass interest expenses by that margin.

Higher-rate taxpayers or limited companies may encounter slightly different evaluation criteria.

2️⃣ Deposit and Loan-to-Value (LTV)

Most buy-to-let lenders mandate a minimum deposit of 25%, resulting in a maximum LTV of 75%. A lower LTV typically leads to better rates and more product choices.

If borrowing through a limited company, LTVs and rates may be comparable, but product fees could be higher.

3️⃣ Personal Circumstances

Although rental income drives affordability, lenders still consider:

Credit history
Experience with property (especially for multi-unit or HMO)
Age and income stability

This ensures that borrowers can handle periods without tenants and cover maintenance expenses.

Interest-Only vs Repayment

Many buy-to-let investors opt for interest-only mortgages because they:

Keep monthly payments manageable.
Maximise short-term cash flow.
Provide flexibility for refinancing or selling in the future.

However, repayment BTLs may appeal to investors looking for guaranteed equity growth over time.

Example: A £200,000 loan at 5% interest-only results in £833/month, while the same loan on repayment would be £1,169/month. That £336 difference can significantly impact cash flow.

Real-World Example

Imagine purchasing a property for £240,000 with a 75% mortgage (£180,000). Rent: £1,200 per month. Interest rate: 5%.

Monthly interest: £750
Rent coverage: 160%
Net income (after management and insurance): approximately £350/month

This scenario meets lender stress tests and generates positive cash flow — a solid buy-to-let investment

Tips for New Investors

Verify stress-test rates — lenders assess affordability at a higher notional rate (often 7–8%) to ensure resilience.
Consider future refinancing — select products that offer flexibility without substantial exit fees.
Account for taxes and fees — net cash flow is not merely rent minus mortgage.
Maintain organised documentation— rental history, AST, deposit proof, and property insurance.

Preparation enhances lender confidence and accelerates approval.

The Business of Borrowing

A buy-to-let mortgage is more than just a loan—it’s a strategic business tool. It enables you to leverage your capital, grow your portfolio, and generate income from appreciating assets.

The essential takeaway is to understand the rules before engaging in the market. At Genius Academy, we help investors recognise that mastering finance is not solely about pursuing the best rates—it’s about comprehending the mindsets of lenders.