Remortgaging a buy-to-let: How it differs from a residential remortgage

A buy-to-let remortgage is usually assessed differently from a residential mortgage. With buy-to-let borrowing, lenders generally place much more emphasis on the rent the property can generate, although they may also consider your personal income and wider financial circumstances.

The exact criteria vary between lenders, so the figures below are examples, not universal rules. Mortgage lending and tax treatment also depend on your individual circumstances.

The interest coverage ratio

One of the main affordability checks used for buy-to-let mortgages is the interest coverage ratio (ICR). This compares the property’s expected rental income with the mortgage interest used in the lender’s affordability calculation.

For example, a lender might require the rent to cover 125% of the calculated mortgage interest. Some lenders use higher ICR requirements for certain borrowers, including landlords who pay higher rates of Income Tax.

Lenders may also calculate affordability using a stressed interest rate, rather than simply using the mortgage rate you will actually pay. The ICR percentage and stress rate vary between lenders and can also depend on factors such as the type and length of mortgage deal.

You can find out more about how lenders assess landlords in our guide to buy-to-let mortgages.

What the stress test does to your borrowing

Here is a simplified example of how the calculation can affect borrowing.

Suppose a property generates rent of £1,100 a month.

If a lender applies a 125% ICR and tests the mortgage at 5.5%, the £1,100 rent would support monthly interest of £880:

£1,100 ÷ 1.25 = £880

That is £10,560 a year, which at a 5.5% interest rate would support a theoretical mortgage of:

£10,560 ÷ 5.5% = £192,000

If the lender instead applied a 145% ICR using the same stress rate:

£1,100 ÷ 1.45 = approximately £759 a month

That works out at approximately £9,103 a year and a theoretical maximum mortgage of around £165,500.

That is a difference of roughly £26,500, despite the property producing the same rent.

These figures are illustrative only. Lenders use different ICR percentages, stress rates and affordability rules, so the amount you could actually borrow may be very different.

If the rent does not support the mortgage balance you need, your options could include looking at other lenders, reducing the amount borrowed or, where appropriate, considering a new deal with your existing lender.

Why tax can affect the calculation

Tax is one reason lenders may use different affordability requirements.

Since April 2020, individual residential landlords have generally been unable to deduct mortgage interest and other finance costs in full when calculating taxable rental profits. Instead, eligible finance costs generally receive a basic-rate Income Tax reduction.

You can read more about this in our separate guide to Section 24 and mortgage interest relief.

This restriction does not apply in the same way to UK companies, which can generally continue to deduct qualifying finance costs when calculating their taxable profits.

Mortgage lenders can therefore take account of a landlord’s likely tax position when setting their affordability criteria. However, no single ICR applies to every higher-rate taxpayer or every limited company borrower.

If you are considering changing how your properties are owned, our guide to moving buy-to-lets into a limited company explains some of the tax, mortgage and legal considerations involved.

The rent used for the affordability assessment can also need to be verified. Depending on the lender and application, this might involve an assessment of expected market rent, an existing tenancy agreement or another approved valuation method.

Portfolio landlords are assessed differently

If you have four or more mortgaged buy-to-let properties, you are generally classed as a portfolio landlord for PRA underwriting purposes.

Lenders are expected to use a specialist underwriting approach when assessing portfolio landlords. This can mean looking beyond the individual property being remortgaged and considering factors such as your overall portfolio, outstanding mortgage balances, rental income and other financial commitments.

As a result, a portfolio landlord application may require more information than a straightforward single-property remortgage. Exactly what you need to supply will depend on the lender.

The parts that feel familiar

As with a residential remortgage, it is sensible to start looking at your options several months before your existing deal ends. This gives you time to compare products and deal with any checks required by the lender.

Some buy-to-let lenders also take your personal income into account, although minimum income requirements vary and some lenders do not set one at all.

We cover the timing decision in our separate guide on when to remortgage.

What happens when you remortgage?

One important distinction is between moving to a new lender and taking a new deal with your existing lender.

A product transfer means changing your mortgage deal while remaining with the same lender. These can involve fewer checks and normally do not require the same conveyancing process as moving the mortgage to another lender, although the lender’s own criteria will apply.

A remortgage to a different lender can involve a new affordability assessment, valuation and legal work. Our guide explains when you need a conveyancer to remortgage and what the legal process involves.

The Prudential Regulation Authority (PRA) underwriting framework also makes provision for certain buy-to-let remortgages where there is no additional borrowing beyond the existing mortgage balance. However, lenders can still apply their own lending criteria.

A straightforward remortgage that does not involve transferring ownership of the property would not normally create a new property purchase tax liability. Different rules can apply if ownership is also changing or debt is being transferred between owners.

If the numbers do not work

A failed affordability calculation with one lender does not necessarily mean you cannot remortgage.

Different lenders use different ICRs, stress rates and affordability criteria. Some may also take personal income into account alongside rental income, an approach sometimes referred to as top slicing.

The mortgage term and type of fixed-rate deal can also affect the stress test a lender applies.

A genuine increase in market rent could improve affordability too. However, the lender may require evidence that the higher rent is sustainable rather than relying solely on the figure you intend to charge.

For example, using the simplified 125% ICR and 5.5% stress-rate calculation above, an additional £50 a month in accepted rental income would increase the theoretical supportable mortgage by approximately £8,700.

Again, this is only an illustration. The actual amount a lender is prepared to advance will depend on its current lending criteria and its assessment of the application.

If your remortgage requires legal work, you can compare conveyancing quotes from regulated firms in minutes.