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Buy to Let vs. Residential Mortgage: Key Differences Explained

Discovering the Commonalities and Key Differences Between Buy-to-Let and Standard Mortgages

Key Differences in Buy-to-Let and Residential Mortgages:

  • Payment Structure: Buy-to-let mortgages, including buy to let re-mortgages, typically offer interest-only payments, with the full loan amount due at the end of the term. While you can choose a repayment mortgage for residential properties that clears the loan by the term's end, most landlords prefer interest-only mortgages for lower monthly payments. However, this means the loan principal remains unchanged, and you'll need to sell the property at term end, ideally at a higher value, to settle the loan and gain a profit, after accounting for capital gains tax.

  • Rental Income Matters: Lenders base your borrowing capacity on the rental income your property generates, rather than your personal income. They assess the demand for properties in your area, aiming for the rent to cover 125–145% of your mortgage interest, known as the Interest Cover Ratio (ICR). If you have a higher personal income, some lenders might adjust their ICR requirements. It's a good idea to do some market research by consulting local letting agents and checking property listings to gauge rental rates in your area for both buy to let and residential properties. While your salary is a factor, you'll generally need an income exceeding £25,000 per year and demonstrate the ability to cover payments in case of increased interest rates or periods of vacancy. If you own four or more properties, lenders will scrutinise your finances more closely, assessing the performance of each property.

  • Larger Deposit Requirement: Buy-to-let mortgages typically demand a higher deposit, often 25% or more, compared to standard residential mortgages, including residential re-mortgages. This higher requirement reflects the perceived risk associated with buy-to-let loans.

Seek professional advice when considering a buy-to-let mortgage or residential mortgage, as there are various legal and tax considerations to navigate. An accountant can help you make informed decisions about your investment."


Ape head mortgage advisor
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