BTL Mortgage vs Residential Mortgage
Buy-to-let mortgages are a distinct product category from residential mortgages, with different eligibility criteria, deposit requirements, rates and regulation. Understanding these differences is the starting point for any prospective landlord.
| Feature | Residential Mortgage | Buy-to-Let Mortgage |
|---|---|---|
| Minimum deposit | 5% (95% LTV) | 20–25% (75–80% LTV) |
| Interest rates | Lower (less risk) | Higher (more risk to lender) |
| Affordability test | Personal income and outgoings | Rental income coverage ratio |
| Regulated by FCA | Yes (consumer credit) | Mostly no (investment purpose) |
| Interest-only available | Restricted | Widely available |
| Income requirement | Minimum income assessed | Min. £25,000 personal income (many lenders) |
| Fees | Standard arrangement fees | Often higher arrangement fees |
Rental Income Coverage (Rental Stress Test)
For BTL mortgages, lenders primarily assess affordability based on whether the rental income adequately covers the mortgage payments. The standard requirement is that the monthly rent must be at least 125–145% of the monthly interest payment, calculated at a stressed rate (typically 5–5.5%). For higher or additional rate taxpayers, lenders often apply a higher coverage ratio of 145% to account for the reduced mortgage interest relief under Section 24.
Rental Yield Calculation
Rental yield is the annual return on your property investment, expressed as a percentage of the property's value. There are two key measures: gross yield and net yield.
Gross Rental Yield
Gross yield is the simplest measure: annual rent divided by property value, multiplied by 100.
Formula: Gross Yield = (Annual Rent / Property Value) × 100
Example: Monthly rent of £950 = £11,400 annual rent on a £180,000 property = 6.33% gross yield.
Net Rental Yield
Net yield accounts for all costs of ownership, providing a more accurate picture of actual returns.
Formula: Net Yield = ((Annual Rent − Annual Costs) / Property Value) × 100
| Annual Costs to Deduct | Typical Amount |
|---|---|
| Mortgage interest payments | Varies by loan and rate |
| Letting agent fees | 8–15% of rent (if used) |
| Buildings and landlord insurance | £200 – £600/yr |
| Maintenance and repairs | 1% of property value/yr (average) |
| Void periods (empty months) | Budget for 4–6 weeks/yr |
| Ground rent and service charges | £0 – £3,000+/yr (if leasehold) |
| Accountant fees | £200 – £600/yr |
| Landlord licensing fees | £0 – £1,000+ (if applicable) |
Use our Rental Yield Calculator to calculate both gross and net yield on any property with custom costs factored in.
Section 24 Tax Changes
Section 24 of the Finance (No.2) Act 2015 fundamentally changed the tax treatment of mortgage interest for individual landlords. Fully phased in from April 2020, these changes continue to significantly impact the profitability of leveraged buy-to-let investment for higher and additional-rate taxpayers.
What Changed
Previously, landlords could deduct mortgage interest as a business expense before calculating their taxable profit, providing full tax relief at their marginal rate. Under Section 24, individual landlords can no longer deduct mortgage interest from rental income. Instead, they receive a tax credit equal to 20% of mortgage interest costs — equivalent to basic-rate tax relief only.
| Tax Band | Relief Before Section 24 | Relief Under Section 24 | Impact |
|---|---|---|---|
| Basic rate (20%) | 20% of interest | 20% credit | Neutral |
| Higher rate (40%) | 40% of interest | 20% credit | Significant loss |
| Additional rate (45%) | 45% of interest | 20% credit | Very significant loss |
Company Ownership as an Alternative
Many landlords have transferred their property portfolios into limited companies (Special Purpose Vehicles) to avoid Section 24. Companies pay corporation tax on profits, can deduct mortgage interest in full, and retain profits at lower rates. However, extracting profits as salary or dividends creates additional personal tax liability, and transferring personally-owned properties to a company triggers SDLT and potentially CGT. Take specialist tax advice before making this decision.
SDLT Surcharge for Landlords
Since October 2024, purchasers of additional residential properties — including buy-to-let investors and second homeowners — pay a 5% SDLT surcharge on top of standard rates across all purchase price bands in England and Northern Ireland.
| Property Portion | Standard Rate | Additional Dwelling Rate (2026) |
|---|---|---|
| Up to £125,000 | 0% | 5% |
| £125,001 – £250,000 | 2% | 7% |
| £250,001 – £925,000 | 5% | 10% |
| £925,001 – £1,500,000 | 10% | 15% |
| Above £1,500,000 | 12% | 17% |
Example SDLT on a £200,000 BTL purchase (2026): (£125,000 × 5%) + (£75,000 × 7%) = £6,250 + £5,250 = £11,500 total SDLT.
Landlord Responsibilities 2026
Being a UK landlord carries significant legal obligations. Failure to comply can result in heavy fines, rent repayment orders or prosecution. Key responsibilities include:
EPC Rating
Rental properties must have a minimum EPC rating of E. The government has proposed requiring a minimum of C for new tenancies — landlords should begin upgrading now to stay ahead.
Gas Safety
Annual gas safety check by a Gas Safe registered engineer. A valid gas safety certificate must be provided to tenants at the start of each tenancy and annually.
Electrical Safety
Electrical Installation Condition Report (EICR) required every 5 years. Results must be provided to tenants within 28 days and to local councils on request.
Deposit Protection
Tenant deposits must be protected in a government-approved scheme (Deposit Protection Service, MyDeposits or TDS) within 30 days of receipt.
Right to Rent
Landlords must check that all adult tenants have the legal right to rent in England before the tenancy begins. Failure can result in fines of up to £20,000 per illegal occupant.
Smoke and CO Alarms
Working smoke alarms must be fitted on each floor. Carbon monoxide alarms required in any room with a solid fuel-burning appliance. Test at the start of each tenancy.
Licensing Requirements and HMOs
Houses in Multiple Occupation (HMOs) — properties let to 3 or more tenants from more than one household sharing facilities — are subject to mandatory licensing requirements in England, Wales and Scotland.
Mandatory HMO Licensing
A mandatory HMO licence is required for any property occupied by 5 or more tenants forming 2 or more separate households. This includes large shared houses, converted flats and bedsits. Licences are granted by local councils, typically for 5 years, and require the property to meet minimum room size standards, fire safety requirements and management standards.
Additional and Selective Licensing
Many local councils have introduced additional licensing schemes covering smaller HMOs (3–4 tenants) or selective licensing schemes that require all private rented properties in certain areas to be licensed, regardless of size. Always check with your local council before purchasing any property intended for rental.
Letting Agents vs Self-Management
One of the fundamental decisions for any landlord is whether to use a letting agent to manage their property or to self-manage. Both approaches have clear advantages and disadvantages.
| Factor | Letting Agent (Full Management) | Self-Management |
|---|---|---|
| Cost | 8–15% of monthly rent + VAT | Your time only |
| Tenant finding | Agent handles marketing, viewings, referencing | You manage all of this |
| Legal compliance | Agent advises and assists | Your responsibility entirely |
| Maintenance | Agent coordinates repairs | Tenants contact you directly |
| Rent collection | Agent collects and chases arrears | You manage arrears directly |
| Out of hours | Agent handles emergencies | You are always on call |
| Best for | Busy landlords, remote properties | Landlords with time and local knowledge |
Letting agent fees are deductible as a business expense for tax purposes. Always use an agent that is a member of a recognised trade body such as ARLA Propertymark, RICS or the National Residential Landlords Association (NRLA).
Void Periods and Insurance
Void periods — periods when your property is empty and generating no rent — are an inevitable part of buy-to-let investment. Planning for them financially is essential.
The average void period across UK rental properties is approximately 3–5 weeks per year, though this varies enormously by location, property type and tenant demand. Budget for at least 4 weeks of void per year in your yield calculations. During void periods, your mortgage, insurance and council tax obligations continue regardless.
Essential Landlord Insurance
- Buildings insurance: Covers the structure of the property — required by your BTL mortgage lender
- Contents insurance: Covers furnished properties against damage or theft of your furnishings
- Landlord liability insurance: Protects against claims from tenants or visitors injured on the property
- Rent guarantee insurance: Pays rent if tenants default — typically covers up to 12 months of rent and legal costs
- Void period insurance: Some policies cover mortgage payments or fixed costs during void periods
Capital Gains Tax on Sale
When you sell a buy-to-let property at a profit, you are liable for Capital Gains Tax (CGT) on the gain above your annual exempt amount. CGT rules for residential property differ from those for other assets.
| CGT Element | 2026/27 Details |
|---|---|
| Annual exempt amount | £3,000 |
| Basic-rate taxpayer rate | 18% on residential property |
| Higher/additional rate | 24% on residential property |
| Reporting deadline | 60 days from completion |
| Payment deadline | 60 days from completion |
| Allowable deductions | Purchase costs, improvement costs, selling costs |
Top 10 BTL Investment Locations in the UK 2026
Location is the single biggest determinant of buy-to-let returns. The best investment areas combine strong rental demand, affordable property prices, high gross yields and positive economic fundamentals. In 2026, northern and Midlands cities continue to dominate on yield grounds, while southern cities offer stronger long-term capital growth prospects.
1. Middlesbrough
Gross yields above 9–10%. Low entry prices, strong demand from workers and students.
2. Bradford
Yields of 8–10%. Growing student population, significant regeneration investment.
3. Sunderland
Gross yields 7–9%. Affordable prices, active rental market, improving connectivity.
4. Liverpool
Yields 6–8%. Vibrant city, strong student demand (3 universities), regeneration zones.
5. Sheffield
Yields 5–7%. Two major universities, thriving tech and digital sector, good transport links.
6. Nottingham
Yields 5–7%. Student-heavy market, affordable prices relative to the South East.
7. Manchester
Yields 4–6%. Premium northern city, strong capital growth, high tenant demand from professionals.
8. Birmingham
Yields 4–6%. UK's second city, HS2 uplift potential, growing tech and finance sectors.
9. Leeds
Yields 4–5%. Strong professional rental market, legal/financial hub, good long-term capital growth.
10. Glasgow
Yields 5–7%. Scotland's largest city, student demand, relatively low property prices.
Frequently Asked Questions
How much deposit do I need for a buy-to-let mortgage?
Buy-to-let mortgages typically require a minimum 25% deposit (75% LTV), though some lenders will accept 20% deposits on BTL mortgages. A larger deposit of 35–40% unlocks the best BTL rates and reduces your monthly mortgage costs, improving your rental yield. Unlike residential mortgages, 95% LTV BTL products do not exist. The minimum personal income requirement is typically £25,000 per year for most BTL lenders.
What is Section 24 and how does it affect landlords?
Section 24 of the Finance (No.2) Act 2015 restricts mortgage interest tax relief for individual landlords to the basic rate of income tax (20%), regardless of their marginal tax rate. Before Section 24, landlords could deduct mortgage interest as a business expense, providing full tax relief at 40% or 45% for higher-rate taxpayers. Now all individual landlords receive only a 20% tax credit. This significantly reduces net profitability for leveraged landlords who are higher-rate taxpayers. Owning properties through a limited company avoids Section 24 but has other implications.
How much extra stamp duty do I pay on a buy-to-let property?
From October 2024, buyers of additional residential properties pay a 5% SDLT surcharge on top of standard rates across all bands. On a £200,000 BTL purchase: standard SDLT = £1,500, surcharge = £10,000 (5% of full £200,000 purchase price), total SDLT = £11,500. This surcharge applies in England and Northern Ireland. Wales uses Land Transaction Tax (LTT) with a 4% surcharge on additional dwellings. Use our Stamp Duty Calculator for exact figures.
What is a good rental yield for a buy-to-let property in the UK?
A gross rental yield of 5–7% is generally considered good for a UK buy-to-let investment. Net yields (after mortgage payments, maintenance, insurance, letting agent fees and void periods) of 3–5% are realistic for most properties. In northern cities such as Middlesbrough, Bradford and Sunderland, gross yields above 8–10% are achievable but properties may come with higher management demands and potentially lower capital growth. In London and the South East, gross yields of 3–4% are common, with investors relying more on capital appreciation.
Do I need a licence to rent out a property in England?
Licensing requirements depend on property type and your local council's schemes. Properties let to 5 or more tenants from 2 or more households require a mandatory HMO licence from your local council. Many councils also operate additional licensing (covering smaller HMOs) and selective licensing (covering all private rentals in certain areas). You must check with your local council before letting any property, as operating without a required licence can result in unlimited fines and rent repayment orders covering up to 12 months of rent.
What taxes do I pay when I sell a buy-to-let property?
When you sell a BTL property at a profit, you pay Capital Gains Tax (CGT) on the gain above the annual exempt amount (£3,000 in 2026/27). CGT rates on residential property are 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers. You must report the gain and pay any CGT due within 60 days of completing the sale. Allowable deductions include purchase costs, SDLT paid, improvement costs (but not maintenance costs) and selling costs such as estate agent and solicitor fees.
What is the EPC C requirement for rental properties?
The government has proposed that all newly let private rental properties must have a minimum EPC rating of C from 2028, with all existing tenancies requiring the same standard from 2030. Currently the minimum is EPC E. Landlords should begin assessing their properties and budgeting for energy efficiency improvements now. Common upgrades include loft and cavity wall insulation, double glazing, heat pumps and solar panels. Properties in conservation areas or with listed status may be exempt from certain requirements.