Buy To Let

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Article created by Christian Duncan, Director – Mortgage and Protection Adviser
Last updated 9th August 2023

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The UK property market has increased significantly over the years, with numerous investors scouting for lucrative opportunities. In the heart of these opportunities lies the Buy-to-Let (BTL) mortgage, a popular choice for those aiming to venture into the property rental sector. This complete guide will demystify the concept of BTL mortgages, encapsulating the UK’s landscape of property investment and providing clarity to prospective investors.

What are Buy-to-Let Mortgages?

A BTL mortgage is designed for investors who intend to purchase a property and rent it out rather than live in it. Unlike a traditional residential mortgage, a BTL mortgage considers the potential rental income the property may command, providing a higher prospective return on investment. BTL mortgages have played a pivotal role in shaping the UK’s property market, with many investors diving deep into this lucrative venture.

Limited Company SPV vs Personal Name

In 2015, David Cameron and George Osborne introduced section 24.  It was a measure put in place to try and slow the private rental market and prevent it from growing at such a rapid rate.  In short as of 2017 over a four year period landlords that help property in their personal names were unable to claim mortgage interest relief against their tax bill.  Naturally, this resulted in investors looking for an alternative solution.  

The solution very quick become apparent and this was to buy their properties under a Special Purpose Vehicle (SPV) Limited company.  This allowed investors and business owners to deduct the interest only element of any buy to let mortgage from their tax bill liability.    

Limited Company SPV Credit Scores

This raised other concerns for investors.  If they were to open a limited company on day one with no trading history or credit score how would a lender proceed to lend them the money?  The answer was simple.  With a personal guarantee.  Because a SPV is effectively a “tax wrapper” for holding property lenders were happy to credit score its directors and base their decision on this alone.  Great news for limited company SPV investors.

Buy to Let Trading Limited Company

For many years a small minority of investors have invested in property under a trading limited company.  Unlike an SPV limited company a trading company will have different primary activities.  These can be distinguished by looking at a companies SIC codes on companies house.  

Limited Company SPV SIC Codes

When forming any limited company you must select a SIC code.  This signifies what activities the company will participate in.  Below are the main four SIC codes accepted by lenders. 
68100 – Buying and selling of own real estate  
68201 – Renting and operating of housing association real estate  
68209 – Other letting and operating of own or leased real estate
68320 – Management of real estate on a fee or contract basis

When setting up a limited company SPV its important to get the formation correct.  We work closely with a team of accountants who can carry out this process on your behalf for clients across the UK.

The Benefits and Risks of BTL Mortgages

Like all financial commitments, BTL mortgages come with both benefits and risks. On the upside, the potential for generating a steady income and achieving capital growth is significantly high. On the flip side, risk factors such as rate fluctuations, void periods, and unexpected maintenance costs could affect your return on investment.

How Much Can I Borrow on a BTL Mortgage?

The borrowing amount for a BTL mortgage relies on the potential rental income from the property. Most lenders will require your rental income to be at least 125% of the mortgage payments on an interest-only basis.  If you are a higher or additional rate tax payer then you can expect for this stress rate to increase considerably.  

Is BTL Right for Me?

Deciding to invest in a BTL property requires careful consideration. You must assess your financial capabilities and future objectives, consider likely market trends, and factor in potential risks, maintenance costs, and void periods.

Mortgages Explained: BTL vs. First-Time Buyer

First-time buyer mortgages fundamentally differ from BTL mortgages. While the former helps you secure your first residential property, a BTL mortgage funds the purchase of a property intended to be let out.  You can however be a first time buyer and a first time lender.  

Choosing the best Buy to Let product

Theres a no shoe fits all approach to choosing the best buy to let product.  It depends on your future plans.  Its common to see landlords buying a property, adding value and then refinancing the property after a couple of years once the price has increased to go ahead a invest further.  Its important to have a clear investment strategy in mind.  

No Age Limit, Income Considerations & More

Unlike standard residential mortgages, most BTL mortgages impose no age limit, making them accessible to older applicants. Some lenders even offer BTL mortgages without income proof, basing their lending entirely on potential rental revenue.

Rental Mortgages & The Future of BTL

The thriving property rental sector means many investors are deciding to dive into this engaging world. 

BTL mortgages offer an exciting prospect, especially within the UK’s robust property market. While this guide provides an introduction into the world of BTL properties, its important that you use a mortgage broker to access products across the whole of the market. 

LTV: Loan-to-Value Ratio in BTL Mortgages

Loan-to-Value (LTV) ratio is a critical factor in securing a BTL mortgage. LTV represents the proportion of the property’s value covered by the loan amount. For example, if a property is worth £200,000 and you have a mortgage of £150,000, your LTV ratio is 75%.

With BTL mortgages, lenders typically offer a maximum LTV of 75%. Lenders perceive high LTV as high risk, so investors should aim for a lower LTV ratio for more favourable interest rates.

How to Maximise Your Return on BTL Mortgages

Opting for an interest-only BTL mortgage can maximise your monthly cash flow, as you only pay the interest on the loan monthly, while the loan balance is cleared at the end of the mortgage term.

Also, selecting a property with high rental demand can reduce void periods (the period when a property lacks tenants), maximising your rental income.

In Closing, Know Your Numbers

Understanding rental yields, vacancy rates, and future market trends can significantly boost your BTL profitability. We will offer you the right knowledge and assistance that you require.

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