Buy to Let mortgage calculator

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Buy to Let mortgage calculator

  • Buy to Let Mortgage Specialists
  • Free, no obligation initial consultation
  • 5 Star Reviews
  • Exclusive Rates
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Author: Carl Shave - CEO and co-founder
Last updated: 07 Dec 2023

Benefits of Buy to Let calculators

Use our Buy to Let mortgage calculator to find out how much you can potentially borrow to purchase a buy-to-let property. Please note that the figure provided by the calculator is for illustration purposes only. The exact amount you will be able to borrow can vary from lender to lender, and will be based on your individual circumstances, income from all sources (including rent), your tax band, credit history and the type of property (for example, standard residential property or HMO). To discuss your buy-to-let mortgage needs in more detail, give us a call today.

There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.

Calculating affordability on Buy-to-Let mortgages

Current rules imposed by the Financial Conduct Authority and the Bank of England mean that lenders now have to go further to assess affordability when someone applies for a buy-to-let mortgage, with extra diligence required in the case of landlords who own four or more properties. In short, lenders have a responsibility to “stress test” assessments to be sure that the mortgage would remain affordable even in the event of future interest rate increases, and in the case of portfolio landlords they will look at the portfolio as a whole, considering factors such as the total equity and rental income across all properties owned.

Buy-to-let lending criteria can vary significantly from one lender to the next, but is generally based on the projected rental income exceeding the mortgage interest by a set ratio – for example, the monthly rental income should be 125% of the mortgage interest, usually calculated at a higher “reference rate” rather than the actual interest rate of the mortgage product you are applying for. The rental income percentage may be determined by assessing other factors including your total annual income from all sources (including rent) and your current tax liabilities. For example:

  • Minimum rental income of 125% of mortgage interest, calculated at a reference rate of 5% for applicants with a total income of under £40,000 and who are non-taxpayers or basic rate (20%) taxpayers.
  • Minimum rental income of 140% of mortgage interest, calculated at a reference rate of 5.25% for applicants with a total income of over £40,000 or who are higher (40%) or additional rate (45%) taxpayers.

Some lenders may refuse to lend on certain types of property, for example houses in multiple occupation (HMOs). For those lenders who do lend on HMOs, you will likely find that an even higher rental ratio and reference rate will be used to assess affordability, for example 170% at 6.5%.

Calculating the affordability of a buy-to-let mortgage is important in two ways: mortgage lenders will use an affordability assessment in calculating how much they will let you borrow, and – perhaps more importantly – it is a vital measure of how profitable the buy-to-let property will be. If you get your sums wrong, it could be the difference between making a profit and making a loss.

Whenever anyone applies for a mortgage, the lender will carry out an affordability assessment. For a standard residential mortgage, this involves assessing the applicant’s verifiable income as well as any monthly outgoings, such as existing credit commitments. These factors, in combination with external credit reference checks and internal credit-scoring processes, determine whether the lender will approve the mortgage application, and how much the applicant can borrow.

When it comes to buy-to-let mortgages, however, a different approach is invariably used. Instead of basing the affordability calculations on salary and existing commitments, the lender will usually compare the projected rental income generated by the property, with the mortgage interest payments. What this means in practical terms is that they will be looking for your rental income to be more than the mortgage interest by a certain margin.

Until recently, most mortgage lenders would typically look for rental income to be 125% of the mortgage interest payment as calculated at a predetermined interest rate of 4.99%. However, at the beginning of 2017 the financial regulator, the Prudential Regulation Authority (PRA), set down tougher rules on buy-to-let affordability assessments. Now it is more common for buy-to-let lenders to look for rental income to be 140% or 145% of the mortgage interest payment and now at a predetermined rate of between 5% – 5.5%. Certain types of buy to let, such as borrowing to purchase a House in Multiple Occupation (HMO) can see even higher affordability margins used – up to 170%.

As already touched on, the guidelines from the PRA mean that buy-to-let affordability assessments are not quite as straightforward as comparing the projected rental income with the actual projected mortgage interest payments. Instead, they require buy-to-let lenders to “stress test” affordability. That means that in most situations rather than using the actual interest rate of the mortgage that you are applying for to assess affordability, the lender will use a predetermined interest rate that assumes a future interest rate rise. The purpose of this is to ensure that your ability to repay the mortgage based on the rental income will remain even if the economy changes and interest rates start to increase.

The stress-testing rules mean that, unless the mortgage product’s interest rate is fixed for five years or more, lenders should base their buy-to-let affordability calculations on the higher of:

  1. A hike of at least 2% above current rates
  2. Market projections of future interest rates
  3. A minimum stress-test rate of 5% – 5.5%

If you have done your research, you should know before applying for a mortgage how much rent the property might reasonably demand. However, for the purposes of affordability assessment, do not expect the lender to take your word for it; lenders will typically base their calculations on a rental value provided by the external or in-house surveyor who carries out the property valuation.

Many lenders’ buy-to-let affordability assessments also take into account void periods – a typical approach is to assume that there will be one month out of the year that the property will generate no rental income, and this is taken into account when carrying out the affordability calculation.

Lenders may also factor property-related expenditure into the affordability calculation, deducting this from the rental income. Expenditure that lenders typically take into account – and that you should also account for when working out the affordability of a buy-to-let property – include:

  1. Letting agent fees (usually around 10–15% of the rental income)
  2. Landlord insurance
  3. The cost of any regular safety checks (including gas, electrical and fire safety)
  4. Any maintenance and repair costs

A final consideration is the lender’s maximum loan-to-value (LTV) limit. The LTV places an absolute cap on the amount a lender will lend on a property, regardless of rental income. For buy-to-let lenders, a maximum LTV of 75% is typical, though some lenders do offer higher LTV mortgages. Be aware that many lenders also price their mortgage products in LTV tiers; if you are able to put down a larger deposit or borrow less against the value, you may qualify for more attractive interest rates.