Interest only is by far the most popular mortgage type for buy-to-let (BTL) investors. Unlike residential mortgages, where interest only has become restricted to higher earners, BTL interest only remains widely available and is the standard choice for most landlords. This guide explains why, how rental yield interacts with interest only payments, the tax implications, and what lenders require.
For a broader overview of interest only lending, read our complete guide to interest only mortgages. For general buy-to-let guidance, see our buy-to-let mortgages guide.
Why Do Landlords Choose Interest Only?
Interest only is the default choice for most BTL investors for several compelling reasons:
- Maximised cash flow: Lower monthly payments mean more of the rental income stays in your pocket each month. This is crucial for covering other costs such as maintenance, insurance, letting agent fees, and void periods.
- Higher rental yield: Because the mortgage payment is lower, the net rental yield (income minus costs as a percentage of the property value) is higher compared to a repayment mortgage.
- Capital growth strategy: Many landlords rely on long-term property price appreciation as their exit strategy. When the property is sold, the proceeds repay the mortgage with the surplus representing profit.
- Portfolio building: Lower outgoings per property free up capital for deposits on additional properties, allowing faster portfolio expansion.
- Tax efficiency: The mortgage interest element qualifies for a 20% tax credit against rental income (for individual landlords), and this is the same whether the mortgage is interest only or repayment.
Over 85% of buy-to-let mortgages in the UK are taken on an interest only basis. For landlords, the combination of maximised cash flow, higher rental yields, and a capital growth exit strategy makes interest only the logical choice.
How Does Rental Coverage Work for a Buy-to-Let Interest Only Mortgage?
Lenders require your rental income to cover 125% to 145% of the mortgage payment, stress-tested at a higher rate than the actual product rate (typically 5.5% to 6.5%). This is assessed through the rental coverage ratio (also called the interest coverage ratio or ICR), which measures whether the expected rental income is sufficient to cover the mortgage payments with a comfortable margin.
Most lenders require the monthly rental income to be at least 125% to 145% of the monthly mortgage payment, stress-tested at a higher interest rate (typically 5.5% to 6.5%, regardless of the actual product rate). The exact requirement depends on the lender, the borrower's tax status, and whether the property is held personally or through a limited company.
How Much Rent Do I Need for an Interest Only BTL Mortgage?
Consider a £250,000 BTL property with a £187,500 mortgage (75% LTV) on interest only:
| Interest only | Repayment | |
|---|---|---|
| Monthly payment at 5.5% (product rate) | £859 | £1,150 |
| Monthly payment at 6.5% (stress test rate) | £1,016 | £1,337 |
| Rental income needed (125% of stress test) | £1,270/mo | £1,671/mo |
| Rental income needed (145% of stress test) | £1,473/mo | £1,939/mo |
| Net monthly cash flow (if rent is £1,300) | £441 | £150 |
| Annual net cash flow | £5,292 | £1,800 |
As the example shows, interest only makes it significantly easier to meet the rental coverage requirement. A property renting at £1,300 per month comfortably passes the 125% stress test on interest only but would not pass at 145% on repayment. The difference in net cash flow — £5,292 versus £1,800 per year — is also substantial.
Use our mortgage calculator to estimate your monthly interest only payments, then check whether your rental income meets the lender's coverage ratio requirement.
What Do Lenders Require for a Buy-to-Let Interest Only Mortgage?
Most lenders require a maximum LTV of 75%, sufficient rental coverage at a stressed rate, and in many cases a minimum personal income of around £25,000. BTL interest only criteria differ significantly from residential interest only — there is typically no high-income threshold and higher LTVs are available. The key requirements include:
- Maximum LTV: Most BTL lenders offer interest only up to 75% LTV. Some may stretch to 80%, but rates tend to be significantly higher above 75%.
- Rental coverage ratio: The property must generate sufficient rent to cover the mortgage payment at the stressed rate (125% to 145% depending on the lender and borrower's tax status).
- Minimum personal income: While some lenders have no minimum, many require at least £25,000 per year of personal income from sources other than rental. This ensures the landlord can cover mortgage payments during void periods.
- Property type: Standard residential properties are most straightforward. Houses in multiple occupation (HMOs), multi-unit freehold blocks (MUFBs), and commercial properties may require specialist lenders.
- Experience: Some lenders prefer experienced landlords, particularly for larger portfolios or more complex property types. First-time landlords may face slightly more restrictive criteria with certain lenders.
- Portfolio limits: If you own multiple BTL properties (typically four or more mortgaged properties), you are classed as a portfolio landlord. This triggers additional underwriting requirements, with the lender assessing your entire portfolio rather than just the individual property.
What Are the Tax Implications of an Interest Only Buy-to-Let Mortgage?
Individual landlords receive a 20% tax credit on mortgage interest paid (not a full deduction), while properties held through a limited company can still deduct mortgage interest in full as a business expense. Here are the key tax considerations:
How Does Mortgage Interest Tax Relief Work for Landlords?
Since April 2020, individual landlords can no longer deduct mortgage interest as an expense against rental income. Instead, they receive a 20% tax credit on the interest paid. This change (known as Section 24) has particularly affected higher-rate and additional-rate taxpayers, as they previously benefited from full deduction at their marginal rate.
On an interest only mortgage, the total interest paid over the term is higher than on repayment (because the balance never reduces), so the total tax credit available over the lifetime of the mortgage is also higher. However, this does not mean interest only is more tax-efficient — the higher interest cost simply means a larger credit against a larger expense.
Is It More Tax Efficient to Hold BTL Property Through a Limited Company?
Properties held through a limited company are not affected by Section 24. Mortgage interest remains a fully deductible business expense against rental income, regardless of the director's personal tax rate. This has led many landlords — particularly higher-rate taxpayers — to purchase new properties through limited companies. Interest only remains popular for company-owned BTL as it maximises the tax-deductible interest expense and company cash flow.
For more on this, read our guide to buy-to-let through a limited company.
How Much Capital Gains Tax Will I Pay When I Sell a Buy-to-Let?
When you sell a BTL property, any profit above the original purchase price is subject to Capital Gains Tax (CGT). For residential property, the rates are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers (2025/26 rates). The mortgage type does not affect CGT — it is based on the property's increase in value, not the mortgage structure. However, with interest only, the full sale proceeds after clearing the mortgage represent your return on the original deposit, which can be a highly leveraged gain.
How Do You Repay the Capital on a Buy-to-Let Interest Only Mortgage?
The most common exit strategy is selling the property at the end of the term and using the proceeds to repay the mortgage. Other options include remortgaging, selling other portfolio properties, or repaying from savings and investments. Here are the main approaches:
- 01
Sell the property
The most common exit. If the property has increased in value over the mortgage term, the sale proceeds will cover the outstanding mortgage and provide a profit. This is the strategy most lenders expect.
- 02
Remortgage
Take out a new mortgage at the end of the term. If you want to continue letting the property, a new interest only deal may be available, subject to age limits and current criteria. This effectively rolls the debt forward.
- 03
Repay from portfolio proceeds
If you own multiple properties, you may sell one or more to repay mortgages on others. This allows you to reduce the portfolio over time while retaining your best-performing properties.
- 04
Repay from other assets
Savings, investments, pensions, or other funds can be used to repay the capital. Some landlords build a separate fund specifically for this purpose alongside their rental income.
Property prices can fall as well as rise. If your BTL property decreases in value, the sale proceeds may not cover the outstanding mortgage. Ensure you are not relying solely on price growth as your exit strategy — rental yield and cash reserves are important safeguards.
Should I Choose Interest Only or Repayment for a Buy-to-Let Mortgage?
For most landlords, interest only is the better choice because it maximises cash flow, makes it easier to meet rental coverage requirements, and frees up capital for portfolio growth. However, repayment BTL mortgages do have a place. Consider repayment if:
- You want to own the property outright at the end of the term for maximum retirement income
- You are concerned about property price risk and want the security of a reducing balance
- The rental income is strong enough to cover repayment costs comfortably with surplus
- You are not planning to expand your portfolio and prefer a debt-free position
For a detailed comparison of both approaches across all mortgage types, read our guide to interest only vs repayment mortgages. For the latest on BTL rates, see our buy-to-let mortgage rates guide.
Ready to explore your BTL mortgage options? Complete our short online enquiry to be matched with an adviser experienced in buy-to-let lending. There is no obligation and no impact on your credit score.
Your property may be repossessed if you do not keep up repayments on your mortgage. Buy-to-let mortgages are not regulated by the FCA unless the property is or has been occupied by the borrower or a close family member. Tax treatment depends on individual circumstances and may change.
- Over 85% of buy-to-let mortgages are taken on interest only — it is the standard choice for landlords.
- Interest only maximises rental cash flow and yield, as monthly payments cover only the interest, not the capital.
- Lenders assess BTL affordability through the rental coverage ratio (typically 125–145% of the stressed mortgage payment).
- Section 24 means individual landlords receive a 20% tax credit on mortgage interest, not a full deduction — limited companies are unaffected.
- The most common exit strategy is selling the property at the end of the term and using the proceeds to repay the mortgage.