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How much deposit do you need for a buy to let?
How Much Deposit do you need for a Buy-to-Let?
You typically need a 25% deposit for a buy to let mortgage. However, some lenders will approve loans with 20%, or even 15% deposits, but they usually come with higher interest rates and/or product fees.
The more in-depth answer? Well, it’s important to make quite a few considerations:
Have you got a proper business plan that details rental yield? - Being a landlord and having a buy-to-let (even just one) requires an in-depth assessment of the property’s potential to bring in income. While this won’t affect the deposit required, it will be a component to having your mortgage approved.
Are you structured as a limited company business or an individual landlord? - This will make a difference to your mortgage structure and required deposit. Businesses may be required to provide larger deposits, as much as 40% while individual landlords may be able to obtain property with less.
Are you purchasing residential or commercial property? - Commercial property BTL mortgages, for example, those for office space or retail units, will require a greater deposit. Expect a minimum of 30-40%.
Recent BTL mortgage case studies
Do you have other property to leverage in a portfolio mortgage? - Portfolio mortgages can use the equity built up in one property as deposit in a second. With sufficient equity, this can effectively reduce the need for a cash deposit to as little as 0%!
A well structured portfolio mortgage will be able to spread the LTV of the overall loan across all properties, though the overall LTV will rarely be above 60%, equating to a spread deposit of both equity and injected capital of 40%.
Have you considered a repayment mortgage structure? - Many buy-to-let mortgages in the UK are interest-only mortgages that require an exit strategy of property sale or refinancing at the end of their term; however, using a repayment mortgage structure will result in overall ownership in exchange for a larger monthly repayment. Deposits on BTL repayment mortgages are between 25% and 40%.
Understanding Deposits and Risk
Mortgages, like any other loan, are calculated and approved based on the lender’s risk. When the risk is low, they’ll OK the mortgage and give you a decent rate, but if you present as high risk, then they’re not interested or will mitigate their risk by increasing the interest rate heavily in their favour.
When you buy a house to live in you use a residential mortgage. This is a special mortgage that’s offered to give you a home. You’re only allowed one residential mortgage at a time and they’re provided with low rates and require low deposits to help people get somewhere to live.
They’re generally considered low risk for mortgage lenders because you’re living there and are unlikely to just disappear not paying the mortgage. Most residential mortgages are the top priority for personal monthly budgets - after all, no one wants to lose their home.
Deposits vs. LTV - What Do the Terms Mean?
LTV is something you see all the time. It stands for loan-to-value and means ‘the percentage of the property value that is represented by the loan (mortgage) that’s leveraged on it’.
The larger the LTV, the more risk it is to the lender. After all, if they have to repossess the house and sell it on to claw their money back, if the LTV is 75%, that means they have to make sure it gets at least 75% of its market value in an auction to clear the debt. A 50% LTV mortgage is far easier to guarantee, and a 25% LTV debt is easy for them to cover. It really is as simple as that.
Lower risk means they’re more likely to say yes to the mortgage. Lower risk means better mortgage rates. Everyone likes lower risk!
When you first buy a house, on day one, there are only two factors that determine the LTV - the amount of money you are putting in, which is the deposit, and the market value of the property. If you buy a property worth £1,000,000 and you have £100,000 of your money as a deposit, that’s 10% deposit, and thus 90% LTV. If you have £250,000 of your own money to put in as a deposit, it’s a 25% deposit and only 75% LTV. It can be easily seen that a lender is more likely to say yes to a mortgage with the 25% deposit than the 10% one.
Loan-to-value is a major part of any lender’s risk assessment and decision making process.
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