Buy-to-Let Calculator

What this calculator does

• Works out gross and net rental yield after voids and running costs.
• Calculates the interest cover ratio lenders test against.
• Estimates the stamp duty payable including the additional-property surcharge.
• Totals the cash required to complete the purchase.

How the calculation works

The calculation starts with rent and works down. Expected rent is reduced by a void allowance, because no property is let every week of every year, and then by running costs — letting agency fees, insurance, maintenance, safety certificates, service charges. What remains is net operating income. The mortgage cost is then set against it. The interest cover ratio is that income divided by the mortgage interest, and it is the test lenders apply before they will lend at all. Note the difference in basis: lenders normally compute the ratio on gross rent before costs, so their published figure is more generous than the one shown here, which uses income after voids and costs. Yields are expressed two ways — gross yield against the purchase price, and net yield after costs — because the gap between them is where most optimistic buy-to-let arithmetic falls apart. Stamp duty includes the additional-property surcharge of 5% on the whole price, which is a substantial upfront cost that never appears in a headline yield.

Step by step

1. Reduce annual rent by the expected void rate to give effective rent.
2. Subtract annual running and maintenance costs to give net operating income.
3. Work out the annual mortgage cost on the borrowing.
4. Divide net operating income by the mortgage cost to give the interest cover ratio.
5. Subtract the mortgage cost from net operating income to give pre-tax cash flow.
6. Add stamp duty including the surcharge to the deposit to give the cash required.

Worked example

A £250,000 flat bought as an additional property with a £75,000 deposit, let at £1,300 a month on an interest-only mortgage at 4.5%, with a 5% void allowance and £3,000 of annual costs.

What was entered

The arithmetic

1. Annual rent of £15,600 less a 5% void allowance gives effective rent of £14,820.
2. Deducting £3,000 of running costs leaves net operating income of £11,820.
3. The mortgage is £250,000 − £75,000 = £175,000, costing £7,875 a year at 4.5% interest only.
4. The interest cover ratio is £11,820 ÷ £7,875 = 1.50 on this after-costs basis.
5. Pre-tax cash flow is £11,820 − £7,875 = £3,945 a year.
6. Stamp duty is £15,000: £2,500 of standard duty plus £12,500 from the 5% additional-property surcharge.
7. Cash required is the £75,000 deposit plus £15,000 of stamp duty = £90,000, before legal fees and any refurbishment.
8. Gross yield is 6.24% but net yield is 4.73% — the gap is the voids and running costs.

What the calculator returns

Key assumptions

• The void rate and running costs you enter are realistic for the property and the area.
• Stamp duty is estimated on the England and Northern Ireland basis including the additional-property surcharge.
• The interest cover ratio here uses income after voids and costs, which is more conservative than the gross-rent basis lenders normally quote.

Limitations

• Income tax on rental profit is not modelled, and it is the single biggest omission. Finance costs on residential lettings are no longer deductible from rental income: relief is given instead as a basic rate tax reduction, so a higher-rate landlord pays materially more tax than a naive profit calculation suggests.
• The stamp duty figure applies to England and Northern Ireland only. Scotland charges Land and Buildings Transaction Tax with an 8% Additional Dwelling Supplement, and Wales charges Land Transaction Tax.
• Lender interest cover ratio requirements and the stressed rate they apply were not confirmed against a primary source for this guide, so no specific threshold is asserted here.
• Capital growth, or its absence, is not modelled and usually dominates the long-run outcome.
• Letting a property carries legal obligations — deposit protection, safety certificates, licensing in some areas — with costs and risks not captured by any yield figure.

Common questions

Related calculators

• Stamp Duty Land Tax Calculator — Work the stamp duty out properly, including first-time buyer and surcharge cases.
• Scotland LBTT Calculator — For a Scottish property, Land and Buildings Transaction Tax applies instead.
• Property Capital Gains Tax Calculator — Model the Capital Gains Tax due when the property is eventually sold.
• Loan-to-Value (LTV) Calculator — Buy-to-let lending is usually capped at a lower maximum loan-to-value.

Official sources

Every figure in this guide was checked against the sources below. Where a source could not confirm a figure, it is marked as requiring verification rather than presented as settled.

• Stamp Duty Land Tax: residential property rates — GOV.UKNil to £125,000; 2% to £250,000; 5% to £925,000; 10% to £1.5m; 12% above. Additional property surcharge 5%. First-time buyer relief: nil to £300,000, 5% to £500,000, withdrawn above £500,000
• Tax relief for residential landlords: how it's worked out — GOV.UKFinance costs are not deductible from rental income; relief is a basic rate tax reduction, fully in force from 6 April 2020
• Underwriting standards for buy-to-let mortgage contracts (SS13/16) — Bank of EnglandInterest cover ratio testing and stressed interest rate expectations for buy-to-let lending. The publication could not be retrieved during verification, so no specific ratio or stress rate is asserted in this guideThis figure is awaiting source verification.
• Work out your rental income when you let property — GOV.UKWhat counts as rental income and which expenses are allowable