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How much of a deposit do I need for a buy to let mortgage?

How much of a deposit do I need for a buy to let mortgage?

Buy to let mortgages, although common, are still specialised and seen as risky by lenders. To get a buy to let mortgage, lenders have tighter criteria and restrictions in place to protect themselves. Not only this, but mortgage lenders will often also require higher deposits from clients. Read below to find out what deposit you will need to invest in property with a buy to let.

How much deposit do I need to get a buy to let mortgage? 

 How much deposit you will need to get a buy to let mortgage can vary depending on different factors, but the minimum is usually 25% of the property value. Specialist lenders can offer deposit amounts as low as 15%, but these are less common and usually more expensive.  

 Lenders’ rates will improve the more deposit you can put down, and 30%-40% deposits usually get a better rate, which is why speaking to an experienced mortgage broker can help save you money and find you the best deals for your circumstance.  

Different deposit types for buy to let mortgages 

 Landlords with one or more properties (including their own residential home) may wish to release some equity from one of their existing properties to fund the deposit of a new BTL property. Capital raising is a common option for landlords who want to raise a deposit and can be done as part of a remortgage, further advance, as a second charge mortgage, or from an unencumbered (un-mortgaged) property.  

It's important to know that landlords with four or more properties are classed as portfolio landlords. Some lenders restrict the number of houses one person or limited company can have mortgaged, but there are lenders out there who happily accept large portfolios. A specialist mortgage broker will be able to review your portfolio and help advise which lenders accept portfolio landlords and the best way to release capital to fund a new deposit. 

Builder Deposit schemes 

 If the property you purchase is in a new development, you may be eligible for a builder deposit incentive. Builders use these incentives to encourage buyers to purchase one of the properties in the development by paying for the deposit on the new build home.  

Builder deposit schemes are not typically popular with lenders, but some lenders will consider this type of deposit. They will normally restrict the builder deposit amount to 5-10% as they will still want you to have some personal contribution or ‘hurt money’ in the transaction. Most lenders will want to see that you could afford the deposit, but speak with your mortgage broker to discuss the mortgages that accept builder deposit incentives. 

 Gifted Deposits 

Gifted deposits will come from two places, either an immediate family member or someone else.  

Lenders usually define an immediate family member as a parent, grandparent, spouse, sibling, child or grandchild. You can also receive a gifted deposit from someone other than a close family member, such as an employer, cousin, aunt, friends etc. Some lenders can also accept this source of gifted deposit, but it is less common.  

A gifted a deposit for a property is a generous gift, but it can add a level of complexity to a buy to let mortgage. Some lenders are more than happy to offer mortgages to purchasers with a gifted deposit, while others are not, so a specialist broker, such as ourselves, can help guide you to the most appropriate lender. 

 If your buy to let is an HMO (House of Multiple Occupancy) 

 Lenders view HMOs as more specialist due to the increased risk associated with them, and because of this, lenders usually want higher deposits from applicants. Seek expert advice, as you may be able to access a deal from a lender with a deposit as low as 15% with the full market access of your mortgage broker. However, as with standard BTL mortgages, rates here are typically higher and even though HMO’s are higher yielding and thus can generally absorb higher interest costs, we would still recommend  a 25-30% deposit for HMO purchases. 

How much can I borrow on a buy-to-let mortgage? 

 How much you can borrow on a buy to let mortgage largely depends on two things: your average rental income and your tax status. 

 Rental Income 

 Lenders will look at the predicted or actual rental income from a property in relation to your monthly mortgage interest payment. For lenders to consider offering on this type of mortgage, they will want the rental yield to sit at around 125-145% of the monthly interest costs assuming a notional interest rate of c5.5%.   This means that  a client will have money left over from their rental income once they have paid their mortgage, to cover things such as tax, management fees, repairs and rental voids and thus showing they can afford the investment. 

 Tax 

 For higher rate taxpayers, lenders will want to see a higher rental income. This ensures that you can afford both the mortgage and the tax payable. Just as with the rental income, lenders assess how much tax you pay to test if you can afford the mortgage. 

Can I get a BTL mortgage with no deposit? 

 Unfortunately, no. Even the most specialist mortgage lenders will only offer clients who have a deposit of at least 15%. 

Can I get a BTL mortgage with bad credit? 

 While the high street banks and building societies may only look to offer buy to let mortgages to applicants with excellent credit scores, this is not representative of the whole market. Many lenders will make offers to applicants with a history of bad credit, and speaking to a mortgage broker can make this process easy and simple.  

 Lenders will want to look at multiple factors when considering a case where the client has a poor credit rating: 

  • How long ago did the issue occur, and has it been satisfied  

 If your credit score has been damaged due to one or two missed payments years ago, then it is likely that lenders will be willing to accept this level of risk. However, if your credit rating is poor because of consistently missed payments and issues that happened more recently, then finding a more specialised lender may be the best option. There are lenders in the market that work specifically to help people with poor credit secure mortgages, so speak to an expert to find out your options. 

  • What the issue is/how severe it is 

 Depending on what has affected your credit score, it may again be that lenders are happy to continue to work with you. For example, one missed phone contract payment is not as severe as multiple missed mortgage payments. 

  • What caused the issue 

 Suppose you ran into financial issues due to a major life event or illness, but you have recovered financially since then. In that case, lenders may see this as more understandable than if a client had been unable to make payments due to overspending on material items. 

  • Your deposit 

 If you have a large deposit, lenders may be happy to proceed with dealings, as the risk of you having the funds to save is somewhat bypassed. 

 If you are interested in purchasing a buy to let property or have already saved up for a deposit and want to learn more about the best rate that would suit you, get in touch today. Submitting an enquiry to speak with a consultant will help you take a step in the right direction for your individual mortgage needs.  

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE