Residential investment finance covers the range of mortgage products for investors purchasing residential property for rental. The market divides roughly into three product areas: standard buy-to-let for single residential units, HMO finance for houses in multiple occupation, and multi-unit freehold block finance for buildings containing several separate flats on a single title. Each has different lender criteria, pricing, and stress test treatment.
The PRA framework and its effect on borrowing
Since the PRA underwriting standards took effect in 2017, buy-to-let lenders have applied Interest Cover Ratio (ICR) tests at stressed notional rates. Basic-rate taxpayers and limited company borrowers typically face 125% ICR at a stressed rate of around 5.5%, while higher-rate taxpayers face 145% ICR at similar stressed rates. Some lenders apply higher notional rates for 2-year fixes and lower notional rates for 5-year fixes, which materially affects loan sizing.
This is why 5-year fixed products dominate the residential investment market: the lower stress rate applied to 5-year fixes typically supports 15% to 25% more borrowing than 2-year fixes on the same rental income. For a property expected to generate £1,200 monthly rent, the difference between 2-year and 5-year fix stress treatment can be £40,000 to £60,000 of borrowing capacity, which frequently determines whether a purchase completes.
HMO and multi-unit finance
HMO finance applies to houses in multiple occupation, typically defined as properties with 3 or more unrelated occupants sharing facilities. Large HMOs (5 or more occupants) require mandatory HMO licensing under the Housing Act 2004. HMO lending is a specialist market: mainstream buy-to-let lenders decline HMOs, and specialist lenders including Paragon, Shawbrook Bank, InterBay Commercial, Foundation Home Loans, and Kent Reliance service the market. Typical LTV caps at 75%, with pricing 0.5% to 1.5% above standard buy-to-let rates.
Multi-unit freehold block (MUFB) finance funds buildings containing multiple self-contained flats on a single title, typically 3 to 12 units. Assessment considers aggregate rental income across all units with vacancy and management factor adjustments. Foundation Home Loans, Paragon, and specialist commercial lenders dominate this market. Some lenders offer MUFB finance for buildings with commercial units on the ground floor, blending into semi-commercial territory.
Limited company borrowing and Section 24
Since Section 24 of the Finance Act 2015 phased out mortgage interest tax relief for individual landlords (fully implemented by tax year 2020/21), limited company borrowing has taken market share from personal name buy-to-let. Companies retain full deductibility of mortgage interest against rental profit, and pay corporation tax rather than income tax on retained profits. For higher-rate taxpayer investors, the limited company route often produces materially better after-tax returns.
Limited company buy-to-let mortgages are now widely available, though typically priced 0.3% to 0.7% above personal name equivalents. All the main specialist BTL lenders (Paragon, Kent Reliance, Aldermore, Landbay, Fleet Mortgages, Foundation Home Loans) offer limited company products. Choice of SPV (Special Purpose Vehicle) versus trading company matters materially for lender acceptance: SPVs are generally preferred and often required.
AM Commercial Finance arranges buy-to-let, HMO, and multi-unit residential investment finance across the whole specialist market. To discuss a residential investment purchase, portfolio refinance, or limited company incorporation, phone 01604 552100 (Monday to Friday, 9am to 6pm) or email info@amcommercialfinance.com.