How much is the required deposit for buy-to-let properties?
Let’s not beat around the bush – for most applicants, the minimum deposit for buy-to-let mortgages in the UK is 15%.
That said, there’s a lot more to consider when breaking into the rental market, not just how much you have to put on the table to get started.
From 15% to 50% deposits – you’ll get better interest rates if you’re less of a risk
It’s incredibly unlikely that you’ll ever see a 100% LTV on a buy-to-let mortgage, as the rental market is considered a mixed-risk proposition for lenders in the current climate. As rents are set to rise, rental incomes appear healthier. Still, with property prices fluctuating and the cost of living heading sky-high, a renter’s ability to pay becomes riskier too.
At the time of writing, an 85% LTV (15% deposit required for buy to let) will achieve rates between the high 5%s up to 6.5% – higher still from mainstream lenders.
By putting more on the table, let’s say a 75% LTV (25% deposit required for buy to let) can get those interest rates down to under 4% from some specialist lenders.
However, there are plenty of additional costs when borrowing on any mortgage. Of course, achieving your best possible interest rate is essential to your income and cash flow, but that isn’t the only figure you need to take into account.
How much can you borrow on a buy-to-let mortgage?
Unlike a residential mortgage based on your earnings and combined family income, a buy-to-let mortgage is based on the property's potential rental income.
Where the rental income typically had to cover 125% of the total mortgage amount, many lenders expect at least 145% in the current climate on standard buy-to-lets and even more, in some cases, up to 170% for HMO properties.
Ways you can boost your mortgage deposit amount
- Raise capital from another property through releasing equity or remortgaging
- Using a residential property against your buy-to-let mortgage
- Gifted deposits from family members or investors
- Unsecured personal loans
- Builder deposit incentives
- Bridging loans
The difference between being accepted for buy-to-let and residential mortgages
Interest rates on buy-to-let properties tend to be higher than those on residential properties. Simply put, they’re higher risk loans associated with business operations, and the rates take that into account.
Most residential buyers will expect to own their home at the end of the mortgage term, whereas that isn’t always the way with a rental opportunity. In fact, many landlords buy rental properties on interest-only mortgages, with landlords planning to sell the property at the end of the loan term, earning any profit from the change in market value over the period.
Contributing elements to entering the rental market
Okay, so we’ve nailed down the minimum deposit for buy-to-let UK mortgages and how much you can borrow for your rental property, but what else contributes to being accepted, and what other costs can you expect to encounter?
Ordinarily, you should be aged between 25 and 75-years-old, although some lenders will consider over 18s and over 21s in some circumstances.
Lenders will usually expect you to earn around £25k to use as security against your buy-to-let mortgage.
A healthy credit score will help you achieve lower interest rates. On the other hand, a poor credit score can put many lenders off, but don’t panic! There are specialist lenders available to help all kinds of applicants achieve the loans they need.
Single-tenant, couples, and family occupancy properties are usually reasonably straightforward applications for your buy-to-let mortgage. In contrast, HMO properties (house of multiple occupation) or holiday lets can be a little trickier and come with higher rates.
Stamp Duty Land Tax
Every property purchase requires payment of stamp duty. This is governed by the property's price—from 3% for properties up to £125k to as much as 15% for those over £1.5million.
Specialist advice comes at a price. Some brokers will charge you directly for their expertise and tracking down your best options, whereas others will hold existing arrangements with the lenders, charging them a referral or matching fees.
Some lenders will expect payment of a non-refundable deposit before setting up a mortgage to ensure the buyer is serious.
Occasionally called completion fees, this is a charge made by the lender on top of the loan amount for the administration and organisation of the loan.
Each lender needs assurance that the property is worth what you’re hoping to pay for it and expect to see a professional valuation. They may include it as part of your agreement, or you may want to arrange a homebuyer survey yourself.
Clearing an existing mortgage or upgrading to a better deal might leave you with unexpected fees for exiting the loan earlier than agreed.
Property maintenance fees
Whether you do the work yourself or leave it to a property management company, there are always costs keeping your property in good shape, occupied, and your income flowing.
Letting agent fees
Again, if you choose a property management company to find and look after your tenants and manage all or specific interactions, that will come at a cost, subtracting from your profits.
You’ll need specialist landlord cover to protect your investment in what can be quite a risky market. Buy-to-let insurance protects landlords from missed rent payments, damage, and other issues.
Capital Gains Tax
When the time comes to sell your investment, the Inland Revenue will class any profit you make as income, so you’ll be liable to pay tax on it.
For a personal appraisal and up-to-the-minute advice, talk to the experts
You may have the deposit required for a buy-to-let UK property, but as we’ve pointed out, there’s a lot more to becoming a landlord than simply finding the property’s purchase price.
To bring your buy-to-let dream to life, it’s well worth seeking some expert advice.
An experienced mortgage broker will help you understand the journey into becoming a buy-to-let landlord, and they’ll also track down the rates you need to give you the best chances of success and the highest return on your investments.