How to Calculate Buy to Let Mortgage
Calculating a buy to let mortgage starts with three numbers: the property price, your deposit, and the interest rate. The loan is the price minus the deposit, and the monthly interest payment is the loan multiplied by the annual rate and divided by 12. If you want a repayment figure instead, the loan, rate and term go into the standard amortisation formula, which spreads capital and interest across the full term.
The second half of the calculation is the rent. Divide the annual rent by the property price to get the gross yield, and divide the monthly rent by the monthly interest payment to get the interest cover ratio. Lenders use that ratio to judge affordability, and they usually test it at a rate higher than the one you will actually pay, so a deal that looks comfortable at today's rate can still fail a stress test.
Worked example: a £250,000 property with a £62,500 deposit leaves a £187,500 loan. At 5.5% the interest-only payment is about £859 a month, and £1,250 of rent gives a 6.00% gross yield and an interest cover ratio of about 1.45x. Change any one input and the picture changes quickly, which is why it is worth running the numbers before making an offer.
- Loan = property price minus deposit.
- Interest-only payment = loan × annual rate ÷ 12.
- Interest cover ratio = monthly rent ÷ monthly interest payment.
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