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What Deposit Do I Need for a Buy-To-Let Mortgage (2022)

Written by, Marija Petkova

Updated September, 16, 2022

If you are interested in buying a property to let out, the first question that comes to mind is ‘What deposit do I need for a buy-to-let mortgage and how can I get the best deal possible?’

Lucky for you we have the answer to that question and more. In this guide, we will take a closer look at the all-important buy-to-let mortgage deposit, as well as explain how BTL mortgages work and who is eligible for one.

What Deposit Do I Need for a Buy-To-Let Mortgage 

The minimum deposit needed for a buy-to-let mortgage is 25% of your property’s value, though the amount can vary from 20 to 40%. 

Let’s say the property is worth £250,000. In that case, a buy-to-let mortgage with a low deposit of 20% means you have to pay £50,000, while a 40% deposit will amount to £100,000.

Some lenders will even accept a buy-to-let minimum deposit of 15% of the property’s value given the right circumstances, although this is very rare and almost never available for first-time buyers. 

Like other mortgages, each BTL mortgage has a maximum loan-to-value (LTV), i.e. the maximum proportion of the property’s value you can borrow against. So the more you deposit, the lower the LTV will be and so will the mortgage. 

How Do BTL Mortgages Work?

A BTL mortgage is specifically designed to help you purchase a property that you can let out to tenants. 

It works in quite the same way as other mortgages, but with a few notable differences:

  • BTL mortgages are considered more high-risk than residential mortgages. Problems collecting rent, having periods where there will be no rental income and similar factors are why mortgage providers tend to be stricter when it comes to approving BTL loans. 
  • BTL mortgage providers require a higher deposit. As stated above, this is typically 25% of the value of the property, while the minimum deposit for a residential mortgage is back to pre-pandemic levels of 5%, the latest mortgage statistics reveal. 
  • BTL mortgages tend to have higher interest rates than residential mortgages. 

Another important aspect is that most BTL mortgages are interest-only. This means you’ll pay only the monthly interest without the capital amount, so you will end up paying less a month. Once your mortgage term comes to an end, you will have to pay the original loan in its entirety. 

Most landlords choose to sell the property at that time; however, if house prices have taken a hit, you could end up selling the property for less and still not be able to cover the mortgage. 

You could also opt for a repayment mortgage, but your monthly payments will be higher as you will be paying the interest and the capital borrowed. Your mortgage will be paid off by the end of the mortgage term, though. 

How Much Can You Borrow for BTL Mortgages?

In order to calculate the maximum amount you can take out for a BTL mortgage, you need to see how much rental income you can get. 

Affordability is determined using an ‘interest cover ratio’ (ICR). This is the minimum ratio between the expected rental income of the property and the borrower’s mortgage repayments, usually tested at a representative interest rate ( 5.5%). 

Mortgage providers normally require a minimum ICR of 125%. Some might require an ICR of up to 145% if the landlord falls in the highest tax bracket. 

For instance, if your monthly interest payments are £1,000 for an ICR of 125%, you should charge at least £1,250 a month for rent. If the ICR is 145%, then rent will be at least £1,450.

The best way to find out how much rent you can charge on your property is by talking to local letting agents and checking online listings in the area. Doing so will give you a good idea of how much rental income you can expect. 

Top slicing 

Some banks have a different approach to lending by adopting a system known as ‘top slicing’ This includes the borrower’s personal income in the affordability assessments. So, if you have significant income that is not connected to your property, such as salary or pension, you could use it to cover any shortfalls that might come up during your affordability assessment. 

Note: Only a few lenders use this approach, so it’s best to talk to a mortgage broker who will tell you if this is a viable solution for you. 

Can You Remortgage to Buy a Second Property to Let?

Yes, you can remortgage your house to buy another property that you can rent out to tenants. There are several risks involved though. Since your home is used as collateral, it could be repossessed if you cannot make monthly repayments. You will also end up with two mortgages to repay, which could stretch your budget. 

Are there other options to consider?

If remortgaging your home is not the best way to go, here are some other options available: 

Bridging loan

Some lenders offer a bridging loan that can give you quick access to funds you can use as a deposit for a buy-to-let mortgage, although these tend to have higher interest rates.

Gifted deposit

You could always pay for a BTL deposit with money gifted from your parents or family. Each individual in the UK has £3,000 as a tax-free gift allowance, meaning that they could partially or fully fund your deposit in this way. 

Still, most lenders will need proof of funds for a gifted deposit, i.e. proof that the money doesn’t have to be repaid. What’s more, they might require that you match the deposit with your own money. In other words, if the gift covers 20% of the deposit, the lender might ask you to supply another 5% of your own funds. 

Who Is Eligible for Buy-to-Let Mortgage?

As mentioned previously, lenders have stricter approval criteria for buy-to-let mortgages.

To be eligible for a BTL mortgage you need to:

  • Own a home yourself, either outright or with an existing house loan. 
  • Have a good credit rating
  • Be under 70 years old when the mortgage ends
  • Earn a salary of  £25,000 a year or more

The property you are buying should be in good condition and be available as a single unit. If you are looking to rent per room on a multiple occupancy basis, you would need a different type of buy-to-let mortgage, called an HMO mortgage. 

Can You Switch to a Buy-to-Let Mortgage?

If you have decided to let out your home you must let your mortgage provider know. Not informing lenders that you are renting out a property that has an outstanding residential mortgage, could invalidate your loan agreement. 

For more information on how to switch to a BTL mortgage, take a look at this guide

Bottom Line

Investing in property requires a lot of thought and consideration. First off you would need a much higher deposit for a buy-to-let mortgage. The interest fees are also higher, plus you need to manage the property after you buy it. On the other hand, collecting rent every month is a great source of steady income that could significantly contribute to your financial stability.

Whether you choose to get into the renting business or not, make sure you talk to a mortgage broker beforehand so you can make an informed decision. 

                           

Frequently Asked Questions And Their Answers

Do you need a larger deposit for buy-to-let?

Yes, the minimum deposit required for a buy-to-let mortgage is 25% compared to 5% for a residential mortgage. 

Can I get a buy-to-let mortgage with a low deposit?

You might be able to find a minimum deposit for a buy-to-le of just 20%, although you would get higher interest rates and pay more for other fees. 

Can I get a buy-to-let mortgage with no deposit?

The only way to invest in a buy-to-let without any deposit is to finance the payment with a personal loan or to raise equity against another property

Can a first-time buyer get a  buy-to-let mortgage?

Yes, but it’s better to purchase a buy-to-let mortgage if you’ve owned property before, otherwise, it may be more difficult to secure a loan. Plus, you’ll most likely need to put down a bigger deposit for a buy-to-let if you are a first-time buyer.

What deposit do I need for a buy-to-let?

As mentioned above you will need at least 25% of the property’s value as a deposit for a buy-to-let mortgage. Lenders see BTL mortgages as higher risk than other types of loans, hence you will need to make a much larger deposit. 

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.