In the UK, a standard mortgage typically requires a deposit between 5% to 10% of the property’s overall value. This is low compared to the deposit required for a buy-to-let mortgage, which is typically between 20% – 25%.
The huge difference between these figures is mostly due to mortgage lenders seeing buy-to-let mortgages as higher risk than residential mortgages due to various factors, such as:
- Rental income – Rental income is known to fluctuate. Considering rental income is the main way in which many borrowers repay their mortgage, lenders have to be confident that the property will be in demand if they’re to consider a low deposit.
- Interest-only mortgage – Many buy-to-let investors seem to prefer an interest-only mortgage. Whilst this means that the interest will remain high, due to the principal not being paid off, the monthly mortgage repayments overall are low – allowing landlords to benefit more from the rental income. That being said, the longer the loan remains unpaid, the more the risk of default. Furthermore, the market and property value may change during this time, leading to a net loss for the mortgage lender.
- Seasonal divergence – Only the most in-demand properties see year-round occupancy. Otherwise, summer and spring are peak seasons, especially in cities, university towns or tourist areas, and rental income is maximised due to high demand. Autumn is a more stable season, leading from the peak seasons into winter, where the rental market slows to a crawl.
How do I lower the deposit amount required for a buy-to-let mortgage?
Lowering the deposit of a buy-to-let mortgage can be tricky, as so long as there is a risk, lenders will almost always offset it with a higher deposit to lower the loan-to-value ratio. Here are some suggestions regardless:
- Credit score – As with all mortgages, the credit score is the core contributing factor to how favourable your mortgage interest rates and loan-to-value ratio will be. That being said, improving your credit score is a process that happens over a while. We recommend reaching out to credit reference agencies for expert advice on improving your credit score. Request a credit report and have it looked at, as sometimes errors are recorded, and having them rectified can be a considerable boost to your score.
- Mortgage brokers – A mortgage broker is a lawyer in the real estate world – a partner/representative that will not only help you build an application and argue the case during the interview but also find the most competitive mortgage deals on the market. Brokers will look at loan-to-value (deposit), interest rates, the overall mortgage term and more to determine the best deals for you. When the Bank Says No is one such mortgage broker company, with access to many lenders both mainstream and specialist with whom we have strong relationships.
- Demand – If you declare that you intend to pay back the buy-to-let mortgage with rental income, then lenders will judge how risky lending the money is against the proposed rental income. However since buy-to-let property income can be hard to gauge, this may result in a perceived high risk. One way to mitigate this is to invest in a buy-to-let property in a high-demand area that signals consistent rental income. So long as the rest of your application looks right, you could qualify for a minimum deposit payment.
- Joint ownership – When purchasing a buy-to-let mortgage with another investor/partner, one of two things may happen. Firstly, your partner may be considered a less risky option, meaning the overall deposit will be lower. Secondly, you can split the deposit by 50/50.
- Personal savings, inheritance, selling assets – Many buy-to-let mortgages are purchased through personal savings, inheritance and selling other assets. Whilst this means that your capital will be held within the rental property loan to value itself, it also means possibly eliminating a lot of interest overall, and having lower monthly payments to pay against your monthly rent income.
How do interest rates affect deposit requirements for buy-to-let mortgages?
Interest rates on buy-to-let mortgages are tied very closely to the size of the mortgage deposit, or rather, the loan-to-value. LTV refers to how much deposit has been paid against the overall value, with the more being paid signalling a lesser risk. Depending on your credit, portfolio, and the validity of your proposed buy-to-let mortgage.
This means that if you’re set on getting anywhere near close to the minimum deposit, you should make sure that your application is strong. Otherwise, most lenders will increase the interest rates to reflect the perceived higher risk.
Does property type affect how much deposit you need for a buy-to-let mortgage?
The type of property that you choose does affect whether or not you’ll pay a larger deposit. The following are what will apply in typical cases:
- New builds and flats – Lenders require a larger deposit of between 25% to 30%. For new flat builds, this is because of the solid possibility that these flats will depreciate after purchase. The initial premium price for a new property loses a portion of its value when it becomes second-hand, much like a car. New developments also sometimes suffer from a slower overall rental demand, especially in cases of larger-scale developments where several units are available at once.
- Houses and established properties – For houses and established properties, you can expect between 20% to 25% as a benchmark. This is because of the stable property value that goes along with established properties, especially family houses. They have already gone through the initial market fluctuations, so their value has been tested, corrected and is predictable. Furthermore, family houses in established neighbourhoods experience more stable rental demand, as families prefer to rent houses with gardens and large living spaces that are in reasonable proximity to schools.
- Houses in multiple occupation (HMOs) – Investors considering a purchase of a house in multiple occupation will be subject to larger deposit requirements, between 30% to 35% in property value. An HMO property rented to multiple tenants not part of the same household typically has its rental agreement, with the rooms rented out individually. This adds some complexity for landlords, and lenders see each room as having a high potential for void rooms. Vacant rooms can result in inconsistency in cash flow.
How does rental yield affect buy-to-let mortgage deposits?
Estimated rental yield is a key factor that influences deposit requirements for a buy-to-let mortgage. It is the estimation of annual rental income generated by the property in question and is calculated through researching the local rental market, historical rental data for similar properties, using rental yield calculators etc.
- High rental yield – Properties that have been calculated to have high rental yields can be seen as safer investments by lenders. If the consistent income coming from the rental property can easily cover the mortgage repayments, lenders will consider it a good investment and may be willing to go with a low deposit (minimum deposit is considered to be 20%).
- Lower rental yield – Properties with low rental yields of 5% or lower are considered a higher risk, and will be subject to a higher deposit – and possibly additional assurance if the rental property won’t produce enough income to cover the mortgage payments.
- Impact of location – Properties in high-demand areas such as city centres, universities etc. are considered to have a higher rental yield. These areas typically have higher levels of rental interest than other areas.
Conclusion
To lower the amount of deposit lenders require, you have to lessen the perceived higher risk of your borrowing. Buy-to-let mortgages are always seen with more suspicion than residential mortgages because tenants are within a residential mortgage.
FAQ: Do I need a salary for a buy-to-let mortgage?
Those seeking a buy-to-let mortgage typically do not need a salary in the traditional sense to qualify for a mortgage. This is because, commonly, buy-to-let mortgages are paid through rental income generated from the very property being mortgaged. That being said, a salary can be introduced as being part of the monthly payment plan – and in these instances, it can only help your application.
With a stable salary, they may offer a higher loan amount against the value of the property, meaning you may be able to pay a minimum deposit. Furthermore, you may have access to better interest rates – thereby lowering the total amount of interest you’ll have to pay.
Like with residential mortgages, you will have to demonstrate a stable income and a sufficient debt-to-income ratio. This, of course, means that you probably don’t want to already be within an existing mortgage, unless your income is high enough (and expenses are low enough) to comfortably accommodate the buy-to-let mortgage.
Regardless – so long as you plan to make rental income part of how you pay the mortgage, you will always have a buy-to-let standard deposit.