How Much Deposit Do You Need for Buy-to-let?
Estimated reading time 6 minutes
If this headline has caught your attention, chances are you are already considering buying a rental property. Before doing so there are a few things you need know and consider, firstly if you need to borrow money to purchase the property you will need to take out a buy-to-let mortgage. A buy-to-let mortgage is a specialised mortgage designed to purchase property that is going to be rented out to tenants rather than be owner occupied. This type of mortgage can be applied to a range of properties, including houses, flats, HMO (house in multiple occupation) and new builds, properties specifically chosen for their potential to generate rental income.
So, to recap, if you are looking to start or grow your rental property portfolio and require funding to do this you will need to approach a lender for a buy-to-let mortgages.
Are you eligible for a buy-to-let mortgage?
A buy-to-let mortgage comes with its own set of criteria and when investigating how much deposit do you need for buy-to-let will be fundamental to establish this. There are number of things you and your lender will need to consider for a buy-to-let mortgage, primarily checking your eligibility to apply, how much you can borrow as well as the viability of the property.
- Rental Income Focus: Unlike standard residential mortgages, buy-to-let mortgages primarily consider the rental income the property will generate. Eligibility hinges on rental income, which generally must cover at least 125% of the mortgage payment. This ensures repayments as well as other expenses are affordable.
- Deposit: It is important to take into account how much deposit buy-to-let mortgages require. Buy-to-let mortgages typically require a larger deposit compared to residential mortgages. It’s common to need a deposit of 20% and 25% but some lenders require 30% or higher. Lenders often cap the loan-to-value (LTV) at 80% or even less, with some high street lenders limiting it to 70% LTV.
- Age: Minimum and maximum age terms can apply as mortgage eligibility varies with age. It does become more limited as borrowers approach retirement. However, some lenders may not specify a maximum age limit, particularly if the landlord is experienced and the LTV is low.
- Personal Income Requirements: In addition to rental income, a landlord’s separate personal income may be assessed as part of the credit assessment, including tax liabilities. This income can include personal savings, and whilst there’s no specific minimum income requirement in some cases in other cases there may well be.
- Portfolio Size: Lenders have varying policies on the size of property portfolios. Some impose maximum limits on the number of properties or their total value, while others cater exclusivelyto portfolio landlords. Explore our guide on how many buy-to-let mortgages can you have? for more info on this subject.
- Property Type: The type of property you wish to purchase can affect eligibility. Some lenders only finance standard properties and exclude non-standard construction types. Additional restrictions may apply to houses of multiple occupation (HMOs) and alternative letting arrangements, contingent upon the lender.
- Value of Property: The lender may have a minimum and maximum loan to value threshold.
- Personal Guarantees: Some lenders may require personal guarantees from company directors, particularly when the LTV exceeds 50%.
- Licensing and Regulations: Buy-to-let properties may be subject to additional regulations, and licensing, depending on the location. For example, the Halifax insists on a minimum Energy Performance Certificate (EPC) Rating E or above unless the property is exempt from regulation. Compliance with these regulations is essential.
What are interest rates on buy-to-let mortgages?
The interest rates on buy-to-let mortgages can vary from one lender to another and a large part of it will depend not only your eligibility but the following as well.
- The smaller the deposit on buy-to-let, the bigger proportion of the property you have to pay through the mortgage. This can be perceived as a risker loan and therefore it can result in higher interest rates.
- Lenders will check your credit score, if you have a poor credit history it may lead to higher interest rates and the risk involved in lending you the money is higher.
- Bank of England base rates as well as interest rate markets can affect the interest on a buy-to-let mortgage, a rise in rates can lead to higher mortgage and a fall in rate can see lower rates.
Mortgage rates on buy-to-let properties are as a general rule higher than those offered by lenders on residential mortgages. Why? Because buy-to-let investments are seen as riskier loans due to potential income fluctuations, property voids when the property is unoccupied and rent isn’t paid and that landlords are reliant on timely tenant rental payments.
The lender compensates for these additional risks by charging higher interest rates on the loan. It is probably worth checking a comparison website to see what buy-to-let mortgages are available and to speak to a specialist firm that can assist you with securing the most suitable deal.
Has the surge on mortgage rates affected your buy-to-let income?
Are you concerned about the impact of increasing mortgage rates has had on your buy-to-let income? Are you refinancing or remortgaging your buy-to-let and are concerned by how much deposit do you need for buy-to-let? Asking yourself is buy-to-let still worth it for landlords and investors? Then you may decide to follow the path of other landlords and sell a buy-to-let property or sell your property portfolio. Note that between 2021 and 2022 landlords sold 153,000 properties according to HM Revenue and Customs a record number in any one year.
How can Gaffsy help?
Whether it is one buy-to-let property you want to sell or you want to sell your property portfolio Gaffsy is here to help. We specialise in helping landlords, investors and limited companies sell their properties quickly and efficiently. Regardless of the location, condition and tenancy status we can provide you with a cash sale.
As a cash house buyer we have the funds available to purchase your portfolio removing the requirement of any third party, mitigating any chance of your sale falling through. If you sell a buy-to-let or property portfolio to Gaffsy there are no fees or commission charges, so the final amount agreed is the full amount that hits your bank account on completion, we even pay your legal fees.
Gaffsy is happy to provide you with a free cash offer for your entire portfolio or the selection of properties you’d like to sell. As we have the ability to buy your portfolio for cash we can offer fast and flexible completion dates and are able to work to your timeline.