How Much Deposit Do You Need for Buy-to-Let?

Although the value of your property will always be prone to fluctuation, long-term investments in the real estate market have historically fetched more benefits than losses. 

And this is one of the main reasons why many people (even first-time home buyers) prefer buy-to-let properties.

Besides, the rise of the rental market in the UK may prove to be an advantage, especially with a shortage of affordable housing. 

However, one question that people often ask is how much deposit do you need for buy to let? Learn all about it in the guide below.

How Much Deposit Do You Need For Buy-to-Let?

Generally speaking, for buy to let minimum deposit varies between 20% and 40%, with the minimum usually being 25%.

For example, if a buy-to-let property is valued at £250,000, the minimum deposit will require you to pay £62,500.

Now, some lenders (or banks) may accept a lower deposit as low as 15% under special circumstances, but this is pretty rare and almost never applicable for first-time buyers.

But are buy-to-let (BTL) mortgages the same as residential mortgages?

Well, the answer to that is both yes and no. For instance, like usual residential mortgages, a higher deposit will give you a better interest rate. 

This is largely based on the maximum LTV (loan-to-value) amount, i.e., the maximum proportion or percentage of the property you can get a mortgage for.

Hence, the larger the deposit, the lower the LTV and the lower the mortgage (with a low interest rate).

Buy-To-Let vs Personal/Residential Mortgage: What’s The Difference?

So, what are the differences between a normal mortgage and a buy-to-let mortgage?

1. It’s High Risk

Since a buy-to-let mortgage is essentially meant for rental properties, there are a lot of variables involved that can make recovery difficult for lenders. 

Issues such as ineffective rent collection, vacant periods and similar problems make BTL mortgage lenders approach a ‘stricter’ approach for loan recovery.

2. It’s Almost Always Interest-Based

BTL mortgages, in most cases, follow an interest-only approach, meaning you have to pay the interest amount only each month for the total duration of the mortgage. And once the mortgage tenure ends, you have to pay back the total principal amount.

From what we have seen, many BTL property owners tend to sell the property during the end of their mortgage tenure, which allows them to pay off the loan without hassles.

However, this will depend on the property market- you may end up selling your property for a lower amount than it was bought at, making mortgage repayment challenging.

You may opt for a repayment mortgage plan to avoid this problem wherein you will have to pay both the interest and principal amount (in parts) every month for the duration of the mortgage.

In other words, your monthly repayments will be much higher compared to the above scenario. 

But a significant advantage of this plan is that you will be able to pay off the principal gradually at the end of the mortgage so that you wouldn’t need any big one-time payments.

3. High-Interest Rate

Because BTL mortgages are high-risk, the interest rate tends to be higher than personal or residential mortgages.

Sure, you can reduce it with a higher deposit, but that will require considerable savings or funding depending on the total value of the BTL property.

You can learn more about the differences between buy-to-let and residential mortgages in our post here.

How Much Can You Borrow for A BTL Mortgage And Who Can Qualify For One?

Now that you know how much deposit you need for a buy to let mortgage, let us tell you how much you can borrow for a BTL mortgage (affordability assessment) and the eligibility criteria for it.

Usually, the amount you can borrow for your BTL mortgage is determined using the ICR (interest cover ratio, calculated in percentage) between your anticipated rental income and the mortgage repayments. The latter is typically represented by an average interest rate, i.e., 5.5%.

Most lenders typically demand a minimum ICR of 125%, which can extend up to 145% if the BTL owner falls in the higher tax brackets.

For example, if your monthly loan repayments are £1,000 for an ICR of 125%, then your BTL rent (monthly) should be at least £1,250.

However, some banks or lenders take a different approach for lending, which doesn’t include the ICR factor.

In this case, the personal income of the borrower is taken into consideration to cover any shortfall during loan repayment from rental income. 

This can include your pension or salary, and the process of affordability assessment using this method is called top slicing.

Although it varies, here are the general eligibility criteria for a BTL mortgage:

• Be less than 70 years old when the mortgage ends
• Own a home (even with an existing home loan)
• High credit rating
• A minimum yearly salary of  £25,000

Types Of Buy-To-Let Mortgages

1. Fixed Mortgage

As the name suggests, a fixed mortgage comprises a fixed interest rate for the total period of the mortgage, which can be 3, 5, 7 or 10 years.  

2. Tracker Mortgage

The interest rate of a tracker mortgage depends on and varies according to the base rate of the Bank Of England.

3. Variable Mortgage

The interest rate of a variable mortgage changes according to the ‘discretion’ of the lender to anything at any time.

Final Words

Sure, owning a property increases your chances of getting a good BTL mortgage with a low interest rate.

However, there are many banks and lenders that offer the same to first-timers, and that too in the ‘variations’ mentioned above.

We’d suggest consulting a mortgage advisor to understand the best possible options for your case.

Moreover, you should never rely on selling your BTL property to repay the mortgage, as fluctuations in the real estate market are always prevalent.

Likewise, during times of void (or no rent), use your existing savings to pay off the mortgage during that period.

**A buy to let mortgage will be secured against your property.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.