Buy To Let Mortgages: Deposits

Putting down a deposit for a buy-to-let mortgage: a guide

Buy-to-let mortgages are designed to help you buy a property that you intend to rent out to other people, rather than to live in. The amount you can borrow usually depends on the rental income you expect to earn from tenants, although we might consider other income in some circumstances. Typically, you’ll need a higher deposit amount for a buy-to-let mortgage.

What is a buy-to-let mortgage?
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Instead of acquiring a mortgage for a place to live yourself, a buy-to-let mortgage is a mortgage issued exclusively for people who acquire property as an investment. In other words, if you're buying real estate to let out the rooms/entire property to generate a rental income.

Mortgages for buy-to-lets operate differently than conventional mortgages for homes. Therefore, lenders will most likely prefer that you use a buy-to-let mortgage to finance your purchase if you decide to rent out your new house.

How much will my buy-to-let mortgage cost?

How much your buy-to-let mortgage will cost you will depend on several factors. The main ones are:

• The size of your deposit: As with traditional mortgages, the bigger deposit you can put down, the smaller the mortgage you'll need to borrow. Lenders will usually ask for 25% of the property’s value, although it can be higher
• Interest rate: You’ll only pay back the interest each month, not the full capital amount
• Loan term: You’ll pay back the full cost of the mortgage at the end of the loan term

An important factor to consider

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With a buy-to-let mortgage, you’ll only usually pay the interest each month, not the full capital amount. But while this might mean your monthly repayments are cheaper than a standard residential mortgage, you’ll need to consider how you’ll repay the full cost of your mortgage debt at the end of the loan term.

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What is different about a buy-to-let mortgage deposit?

If you plan to rent out your home, you definitely need a buy-to-let mortgage. There are some key differences between buy-to-let and 'ordinary' mortgages that could potentially make it more difficult to buy a property for rental purposes.

Mortgage providers see buy-to-let mortgages as higher risk than residential mortgages. This can be because landlords often face problems with rent collection, and it is unlikely that your property will constantly be occupied. It is seen more as a business loan than a personal one.

Because of the higher risk involved you will need to pay a larger deposit for a buy-to-let mortgage. This is usually a minimum of 25% of the total value of the property, although this can vary depending on the lender and type of mortgage. You can sometimes pay a minimum deposit of 20% for a buy-to-let mortgage, although some of the best mortgage rates available require a deposit as high as 40%.

Other fees tend to be higher too when taking out buy-to-let mortgages. For example, arrangement fees can be as high as 3.5% of the property's value.

Many buy-to-let mortgages are interest-only, compared to residential mortgages which are usually capital and interest loans. This means that landlords only pay monthly interest payments, rather than repayments on the loan itself. This usually results in lower monthly payments for buy-to-let mortgages. However, the mortgage must be repaid in full at the end of the term. Most landlords will pay for this by selling the property, although if house prices have fallen since the time you bought the property then you will struggle to repay the mortgage. You should make sure you have enough savings to cover these circumstances.

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Who can get a buy-to-let mortgage?

If you're planning to buy a property with the purpose of renting it out, you will need a buy-to-let mortgage.
Many lenders consider a buy to let mortgage as higher risk so you may need to need certain conditions to be eligible for one. These typically differ from lender to lender and may include the following:

• This isn’t always the case, but your lender could make it a condition of your buy-to-let mortgage that you already own your own home, whether that's outright or with an outstanding mortgage
• You should have a good credit record and ensure that you are not stretched too much on your other borrowings e.g. credit cards
• You may have to provide evidence of employment income or earnings from self-employment separate from rental earnings. This is typically around £25,000+ a year - if you earn less than this you might struggle to get some lenders to approve your buy-to-let mortgage
• Mortgage lenders have a maximum age requirement which is usually around 75 years of age although some lenders may have lower age limits
• There is typically an LTV limit of at least 75% so you will need a minimum 25% deposit for a buy-to-let mortgage (see above)
• The amount you can borrow is based on the monthly rental you are getting or are likely to get. Your rental income should cover 125% of your mortgage repayments 

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How can I get the best deals on a buy-to-let mortgage?

• ‍Compare from a wider range of deals to find the cheapest rate Shopping around can help you find the cheapest interest rate. Money comparison sites can compare deals from across the mortgage market to find the right one for you
• ‍Keep an eye on your credit score Before you apply, check your credit report. Your credit rating can have a big impact on what mortgage rate and deal you’ll be offered and therefore the size of your deposit. Take steps to improve your score if necessary!
• ‍Consider which type of mortgage is right for you A fixed-rate deal can offer you peace of mind, as you’ll know what your monthly repayments will be. But a tracker or variable-rate mortgage could work out cheaper overall
• ‍Be mindful of fees The fees attached to any mortgage  can affect the overall cost. Is there an early repayment charge if you want to leave the deal before the end of your mortgage term?

To get an idea of how much your buy-to-let mortgage will cost you, a mortgage repayment calculator can be a good place to start. You can work out what your repayments will cost you each month. This will be based on how much you’re borrowing, the interest rate and fees of your mortgage deal, and how long you’ll have to pay it off (the term).

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A little about us

We hope this guide about buy-to-let mortgages has been helpful!

Find out more about how Oasis Living can find you the perfect tenants and improve your property management experience. Head to our website now or contact one of our property experts. Plus, you can read our guide on renting for tenants.

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