You’ve run the numbers on a rental: $300,000 purchase price, $2,200 a month in rent, solid neighbourhood, steady tenant demand. Then you sit down with a lender and find out the mortgage you’d take on your own home is the wrong tool entirely. Investment property loans are priced differently, underwritten differently, and come with a set of rules that catch first-timers off guard.
So which type is best? There’s no single answer, and any adviser who names a product before asking about your plan is guessing. What follows is how to work it out for your own deal.
Investment mortgages are underwritten on the property, not just you
On a home loan, the lender mostly asks whether you can pay. On a rental loan, it asks whether the property can pay. Most lenders want the rent to cover the mortgage by a margin, usually 125% to 145% of the payment calculated at a stressed rate that sits one or two percentage points above your actual rate.
Here’s how that plays out. A $225,000 loan at 6.5% interest-only costs $1,219 a month. Stress it at 8% and the lender models $1,500. If it wants 145% coverage, it needs rent of $2,175. Your $2,200 rent squeaks through, but only just. Raise the rate or tighten the rent and the same deal falls apart on paper even though it works fine in reality, which is why brokers spend half their time explaining stress tests to frustrated buyers.
Expect three other structural differences from an owner-occupier mortgage: a deposit of 20% to 25% rather than 5% to 10%, interest rates roughly half a point to a point and a half higher, and arrangement fees of 1% to 2% of the loan, which on $225,000 is $2,250 to $4,500 added to your costs before you’ve earned a penny of rent.
The main types of investment property mortgage
Standard buy-to-let
One property, one tenancy, standard construction, long-term let. This is the cheapest and most competitive corner of the market. You’ll typically see 20% to 25% deposits, five-year fixes, and lenders who understand landlords. If your plan is boring, reliable rent from a family or a professional couple, this is usually where you end up.
HMO mortgages
A house in multiple occupation means three or more unrelated tenants sharing facilities. Lenders treat it as higher risk because of licensing rules, higher turnover and management intensity, so rates run one to two points higher and deposits often start at 25% to 30%. Some lenders want you to already own a rental before they’ll consider you. The payoff is yield: five rooms at $650 each brings in $3,250 a month against $2,200 for a single let of the same building.
Holiday let and short-term rental mortgages
These are underwritten against projected short-season income and local occupancy rather than an annual tenancy agreement. Rates and fees are higher, some lenders insist you own your own home, and you’re running a hospitality business rather than collecting a standing order. In the right coastal or tourist location the income can be double a long let. In the wrong one it’s an empty calendar and a mortgage to pay.
Multi-unit and portfolio loans
Blocks of flats, mixed-use buildings and borrowers with four or more mortgaged properties drift into semi-commercial or commercial territory. Expect shorter terms, personal guarantees, higher rates and a lender who wants to see your entire portfolio, including how the other loans perform.
Bridging and refurbishment finance
Short-term money for auction purchases, quick completions and properties that need work before they’ll qualify for a standard loan. Costs run around 0.7% to 1.2% per month plus 1% to 2% arrangement fees, so a six-month bridge on $200,000 is roughly $10,000 to $16,000 in finance costs. It makes sense when a refurb adds $60,000 of value and you refinance onto a term loan at the end.
Commercial mortgages
Shops with flats above, six-unit blocks, anything with a business element. Deposits of 25% to 40%, terms from five to 25 years, and pricing linked to commercial rates rather than residential ones. Slower, more manual underwriting, but it’s often the only route for the buildings nobody else will touch.
The one to avoid
Taking a residential mortgage and letting the property out without permission breaches your loan terms. The lender can demand immediate repayment, your landlord insurance becomes worthless, and deliberately hiding a tenancy is mortgage fraud. If the numbers only work with an owner-occupier rate, the deal doesn’t work.
Interest-only or repayment? This moves your cash flow more than the rate does
Take that same $225,000 at 6.5%. Interest-only costs $1,219 a month and pays off nothing. A 25-year repayment loan costs $1,519, which is $300 more, and clears about $21,000 of capital over five years.
Interest-only keeps $3,600 a year in your pocket. If that money funds the deposit on your next property, it’s compounding faster than mortgage principal ever will, and most portfolio landlords choose it for exactly that reason. Lenders will usually want a stated exit strategy, either selling the property or refinancing at the end of the term, rather than a vague promise to sort it out later.
Repayment suits a different investor: someone buying one or two properties to hold for twenty years and retire on. Paying down the debt on a property a tenant is funding is a quiet, unglamorous way to build equity.
Fixed or variable is really a question about your exit
A five-year fix gives you certainty for five years. Rent reviews happen annually, so a fixed payment means your margin only widens. The catch is early repayment charges, commonly 1% to 5% of the loan during the fixed period. On $225,000 that’s up to $11,000 to get out early.
If you plan to refurbish and refinance within two years, or sell once the value rises, a long fix with a heavy exit penalty is a trap. Look for products with no early repayment charge, a shorter fix, or a tracker. If your plan is a ten-year hold, the penalty is irrelevant and the certainty is worth paying for.
Should you borrow through a limited company?
Buying via a special purpose vehicle lets you deduct full mortgage interest against rental profit and can keep profits in the company at corporation tax rates rather than your personal marginal rate. The trade-offs are real: rates typically 0.3% to 0.5% higher, bigger arrangement fees, annual accounts to file, and more paperwork at every stage. It usually pays off for higher-rate taxpayers with three or more properties. For a single rental bought by a basic-rate taxpayer, the extra cost often outweighs the saving.
Matching the loan to the plan
- Long-term single let, minimal fuss: standard buy-to-let, five-year fix, interest-only.
- Rooms let individually with strong margins: HMO mortgage, budget a 25% to 30% deposit.
- Cosmetic refurb then hold: bridge in, refinance out within 12 months onto a term loan.
- Six units or mixed use: commercial terms, 30% deposit, expect slower underwriting.
- Tourist area with high seasonal demand: holiday let product, and check local licensing first.
- Four or more mortgaged properties: specialist portfolio lender, and have your full book ready.
Ask what the property has to do before you ask what it costs
The rate is the last question, not the first. If the plan is to hold for fifteen years and let a tenant pay down the debt, a 25-year repayment loan at a slightly higher rate beats a cheap interest-only deal you never intend to clear. If the plan is to buy six properties in five years, interest-only at a slightly higher rate frees the deposit for the next one, and the one after that.
Get the exit clear, then get it priced. Lenders will happily tell you what they’ll offer. Only you know what the deal needs to do, and that answer picks the mortgage for you.