The side-by-side comparison
| Residential | Buy-to-let | |
|---|---|---|
| Purpose | Owner-occupier | Letting to tenants |
| Regulation | FCA-regulated | Largely unregulated (consumer BTL is regulated) |
| Min deposit | 5%–10% | 20%–25% |
| Affordability | 4×–4.5× income | Rental coverage 125%–145% |
| Rate (75% LTV 5yr) | 4.30%–4.60% | 5.30%–5.80% |
| Arrangement fee | £0–£999 | 1%–3% of loan |
| SDLT | Standard rates (FTB relief) | +5% surcharge |
| Capital repayment | Usually repayment | Usually interest-only |
| Income tax | N/A | Rental profit taxable; mortgage interest restricted |
How BTL affordability really works
The Interest Coverage Ratio (ICR) test:
- Lender stresses your mortgage interest at 5.5%–7% (depending on borrower type and product term).
- Rent must be 125% (basic-rate personal name) or 145% (higher-rate personal name / limited company) of that stressed interest.
Worked example: £200,000 BTL at 75% LTV = £150,000 mortgage. Stressed at 5.5% interest-only: £687.50/month. Required rent at 145% ICR: £997/month. If the property only rents at £900, the loan must be reduced or rejected.
How residential affordability really works
Income multiple test:
- Standard cap: 4×–4.5× gross income (5.5×–7× available from specialists for qualifying earners).
- Stress test: monthly payment at product rate + 1% must be affordable from net income after committed outgoings.
- Outgoings include credit card minimums, car finance, childcare, student loan repayments.
£60,000 income at 4.5× = £270,000 maximum. Stress at 5.3% on a 25-year term = ~£1,624/month — must fit after fixed outgoings.
Tax treatment — the big BTL difference
Residential: no income tax on the home you live in. CGT exempt on sale (main residence).
BTL personal name (post-Section 24):
- Rental income fully taxable at marginal rate.
- Mortgage interest is NOT deductible from rental income — instead a 20% basic-rate tax credit applies.
- Higher/additional-rate landlords get the worst of this rule.
BTL limited company (SPV):
- Rental profit taxed at corporation tax (25% for profits over £50k, 19% below £50k).
- Mortgage interest fully deductible.
- Extracting profit (dividends or salary) triggers personal tax.
Switching between residential and BTL
- Residential to BTL ('let to buy'): need lender consent to let (CTL) or remortgage to a BTL product. Let-to-buy is a specific product allowing you to keep the old home as a BTL while buying a new residential.
- BTL to residential: need permission to occupy (rare) or remortgage to a residential product. You must qualify on personal affordability.
Consumer BTL — the regulated exception
If you're letting out a property you previously lived in (e.g. inherited, accidental landlord), it's classified as 'consumer BTL' and falls under FCA regulation. Same rate cards but assessed slightly differently — and you get the full Financial Ombudsman protections residential borrowers have.
Pros
- Residential: lower rates, lower deposit, FCA-regulated protection.
- BTL: rental income funds the mortgage, builds portfolio wealth.
- Limited company BTL: efficient tax structure for higher-rate landlords.
- Multiple specialist BTL lenders compete on every niche.
- Switching products is possible with the right remortgage strategy.
Cons
- BTL has higher rates, larger deposits and 5% SDLT surcharge.
- Section 24 makes personal-name BTL inefficient for higher-rate taxpayers.
- Residential mortgages can't be used for letting without lender consent.
- BTL is largely unregulated — fewer consumer protections.
- BTL arrangement fees of 1%–3% can dwarf the headline rate saving.