DEPOSIT REQUIREMENTS FOR BUY TO LET MORTGAGES
Key insights into what to expect when applying for a BTL mortgage
Deposit requirements for Buy To Let Mortgages
Key insights into what to expect when applying for a BTL mortgage
Investing in a buy-to-let property can be an exciting step towards generating passive income and building wealth, but the first step is considering how to afford that property. Unlike standard residential mortgages, buy-to-let loans come with different rules, and deposit requirements are a key part of that. So, how much deposit for a buy-to-let do you need? Well, we’re here to discuss that and help you out!
Don’t worry! With the right approach, navigating this process can be smoother than you might think. Start by reviewing your finances early and comparing lenders. Some may offer more flexible terms or special deals for first-time landlords. Working with a mortgage broker can also save you time and headaches. They’ll know which lenders to recommend and which ones are likely to approve your application.
The last thing you should keep in mind is to prepare all the paperwork, including proof of income, credit history, and property details. With a little preparation and the right support, securing that loan can be one of the easiest parts of your buy-to-let journey.
How much deposit do you need for a buy-to-let mortgage?
For a buy-to-let mortgage, you typically need a deposit of 20% to 40% of the property’s value. Most lenders set the minimum deposit at 25%, though some may accept a lower amount, but it won’t be lower than 20% for borrowers with strong finances or a good credit history. However, if you’re considered a higher risk, such as a first-time landlord, or if the rental market isn’t particularly stable at the moment, lenders may require a larger deposit, up to 40%, but never above that!
It might seem like a disadvantage to make a larger deposit, but a larger deposit can also unlock better interest rates, which will reduce monthly mortgage payments and increase your potential rental yield. Most people tend to focus only on the deposit, which will be the biggest expense at the moment, but you also need to consider other upfront costs like legal fees, stamp duty, and any renovation expenses to ensure you’re fully prepared for the investment.
What’s the minimum deposit requirement?
There are several factors that will affect the amount you need to deposit, but the minimum deposit requirement for a buy-to-let mortgage is typically 20% of the property’s value. However, most lenders prefer a slightly higher deposit, which is usually 25%. The reason behind this is that it offers them better security.
While a 20% deposit might be available from select lenders, it’s usually tied to higher interest rates, so you’ll need to weigh the cost of a smaller deposit against potentially higher monthly payments. Sometimes, saving money on the deposit means that you will spend more in the long term, so spending a bit more money on the deposit might make the property cheaper in the end.
Keep in mind that if you’re a first-time buyer or first-time landlord, lenders may ask for a larger deposit, often 25% to 40%, depending on your financial situation and the property’s rental potential. Anyone entering this business will face a couple of obstacles that might be harder to overcome if you do not have a professional by your side.
That said, our guides can also be helpful! So, if you have any questions, browse through The Property Buying Company’s blogs, and you might just find what you are looking for.
Getting a low deposit BTL mortgage
Obtaining a low deposit buy-to-let (BTL) mortgage means that you will secure a deal that requires only a 20% deposit, which can be challenging. Most lenders require at least 25%, but if you look in the right place, you might just find a lender that will give you a free pass and allow you to purchase your property with a 20% deposit. Here’s how to improve your chances of securing a low deposit BTL mortgage:
- Ensure you have a good credit score, as lenders offering low deposit BTL mortgages prefer borrowers with solid credit. Pay down any existing debt and avoid taking on new credit before applying.
- Lenders want assurance that rental income will cover mortgage payments. Usually, they look for rental income to be at least 125% to 145% of the mortgage payment. Investing in properties with high rental demand can strengthen your case.
- Specialist mortgage brokers often have access to lenders who offer low deposit BTL options. They can arrange meetings with lenders who are willing to work with smaller deposits and negotiate better terms.
- If you’re struggling with a low deposit, some lenders offer guarantor mortgages, where a third party provides additional security. In this case, you need to ensure you’re going to be able to keep up with the payments because you wouldn’t want to get that third person into trouble.
What types of deposits are accepted?
When applying for a buy-to-let (BTL) mortgage, lenders typically expect the deposit to come from specific accepted sources. Here’s a list of the most common types:
This is the most straightforward and preferred source. Savings accumulated over time, including from personal bank accounts, are widely accepted.
Proceeds from the sale of assets, such as another property, a car, or investments like stocks or bonds, can be used. You’ll usually need to provide documentation showing where the funds are coming from.
If you’ve recently received an inheritance, most lenders will accept this as a deposit source. However, you’ll need to show evidence that the property now belongs to you, such as a letter from the executor of the estate.
If you own another property, you can release equity by refinancing it and using that money as a deposit for your buy-to-let mortgage.
We’re sure that you’ll know what to do if you have enough money saved up in your account, but if you are leaning towards another option for a deposit and aren’t sure if that could be accepted, feel free to give us a call!
Does the deposit amount affect the rate?
If you want to keep things simple, then the word yes will be enough for you, but we know that’s not the answer you’re looking for. So, let’s take a look at how the rate works.
Lenders view smaller deposits as higher risk because there’s less equity in the property. To make up for this risk, they often charge higher interest rates, which means higher monthly payments.
With a larger deposit, lenders see you as a safer bet. People who have to put up that much money upfront are usually successful in this or some other type of business. This can unlock lower interest rates and better mortgage deals, reducing both monthly payments and overall borrowing costs.
Even though a larger deposit means a bigger upfront commitment, it can save you a lot of money over the life of the mortgage through lower interest rates. The bottom line is that the more you can put down, the better the deal you’ll likely secure.
What is a bridging loan?
A bridging loan is a temporary, high-interest loan created to provide quick access to funds when you need to “bridge the gap” between two financial transactions. It’s often used in property transactions when immediate capital is required, but long-term financing isn’t yet in place. Bridging loans are typically secured against estate or other valuable assets.
Common uses for a bridging loan:
- Buying a new house before selling your current one.
- Purchasing at auction where you need money right away.
Renovating your home after purchasing it will require some money, and after the deposit, you might need a quick loan to help you through that period.
Bridging loans usually have to be returned in a period between 6 and 12 months, but sometimes, they can be extended to a period of 18 to 24 months. Securing these loans is much easier, but the rates are higher. So, if you need a bridging loan, let us know if we can help you find the right lender.
Can I use a bridging loan on a buy to let?
Yes, bridging loans can be used to purchase BTL properties, but there’s one thing you should think about, and it’s a higher rate. We talked about higher return rates for these loans because they’re meant to be short-term. Even though many landlords use these types of loans to buy new homes, you’re going to be better off securing a typical loan for a home because of the more affordable rates.
There are several cases in which using a bridging loan for a house purchase can be a good or the only option. Here they are:
- If you won a property at an auction and need to come up with a big sum of money in the next 4 weeks, a bridging loan might be your only option if you don’t have a lot of money saved up.
- One more situation where using this type of loan will come in handy is when you’re just trying to fill the gap. Let’s put it in terms you’ll understand. You need a certain amount of cash for a new property before selling your old one. With this strategy, you’re almost guaranteed to get a bridging loan.
You’ll need an exit strategy to secure a bridging loan, which makes sense since nobody is going to give you money just because you’re asking for it. If you come up with a good business plan, there shouldn’t be any problems, but before we finish this topic, there are a few key things you should know about this loan. The rates are usually between 0.5% and 1.5% higher than with the usual loan, and you can secure a loan of only up to 70% to 75% property value.
What are the benefits of using a bridging loan?
Bridging loans offer several benefits, especially for those needing fast, flexible financing. It’s a useful tool for property investors, developers, and businesses when timing is critical. Here are the key benefits:
You can arrange bridging loans much more quickly, typically within a few days or weeks. This is ideal for time-sensitive situations, like auction purchases or urgent investments.
Unlike traditional loans, bridging loans can be used for various purposes, including house purchases, renovations, business cash flow, or even covering temporary financial gaps.
Bridging loans are designed for short-term needs, typically ranging from 6 to 12 months, making them perfect for those who only need temporary financing before securing longer-term options.
You’d have to go through a thorough check to secure a traditional loan, but bridging loans are available for a wide range of people and can be used for various purposes, not just property purchases.
Securing a short-term loan with the terms that are the best for you is easier than ever because everything is up for negotiation as long as you’re looking for reasonable terms.
Bridging loans are ideal for those who need fast financing solutions. However, they come with higher interest rates, so they’re best suited for those with a clear exit strategy and the ability to manage short-term costs effectively.
Need a loan with the best rates?
Purchasing a second home need not be a painful process if you have someone to guide you through the entire experience. Through our many years of being in the property investment business, we have built a black book of mortgage and bridge finance lenders who we can share with you.
These mortgage and financing lenders can offer you competitive rates, on extremely fast timelines all while working seamlessly with our sourcing service. Want to find out more? Book a consultation today.
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No middlemen, no stress & no hassle. We make investing in property and growing your portfolio as easy as it possibly can be.
WHY INVEST WITH US?
Simply put, we’ll get you the best possible deal. Our sister company, The Property Buying Company, have been in the property buying industry for years & we have access to all their stock which is at a price point that is ready for investors to buy and make a great return on.
No middlemen, no stress & no hassle. We make investing in property and growing your portfolio as easy as it possibly can be.
