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Find your local brokerBecoming a buy-to-let landlord may pave the way to many financial rewards, but getting started with your own buy-to-let investment isn’t always easy or affordable.
One of the challenges many buy-to-let beginners face is gathering a deposit that gives them access to the many buy-to-let mortgage products currently available. But how much do you need for a buy-to-let deposit and is now a good time to make that leap into the rental market?
Becoming a buy-to-let landlord has always unlocked a number of lucrative perks. As a buy-to-let investor, the ability to generate income in both the short and long term is a major plus-point as Galliard Homes explains:
“One of the greatest advantages of being a Buy-to-Let investor is that you can earn an income two different ways. One way is through the rent paid by tenants of the property, and the other is through capital growth, depending on where the property is located. In London, regenerative areas are becoming increasingly in demand, which is causing property prices and rental yields to climb.”
With current rental demand high, mortgage criteria becoming stricter for prospective homeowners, a lack of affordable housing still an issue for the nation, and a larger number of first-time buy-to-let products now available in comparison to previous years, there couldn’t be a better time to move onto the property ladder as a landlord.
Whilst residential mortgage deposits are as low as 5% of the property’s purchase price, buy-to-let deposits are a little steeper. As a general rule of thumb, you’ll need at least a 20 to 25% deposit for a buy-to-let mortgage.
A word of warning, however: even a hefty deposit like this won’t give you access to the best deals on the market. Saving 40 to 50% as a buy-to-let deposit will put you in a much better position, especially given the recent rises in interest rates.
In short, yes, despite requiring a larger deposit to get started with the application, taking out a buy-to-let mortgage is no easier than applying for a residential mortgage product. In fact, as a would-be landlord, you’ll face a ‘landlord stress test’ during the process.
As part of the landlord stress test, lenders will use an ‘interest cover ratio’ – the ratio of rental income to mortgage repayments – to determine whether you’re investable enough to proceed with the application.
The ratio determines whether the rental income generated from the property you wish to purchase is enough to cover the mortgage repayments and a surplus. As a result, you’ll have to prove that the rental income can cover at least 125% to be successful.
The interest cover ratio will vary, with selected lenders requiring your rental income to cover at least 145% of the mortgage repayments.
We always recommend seeking mortgage advice from an independent advisor like us when searching for a buy-to-let mortgage. Our specialists regularly assist investors with varying deposits looking to start or grow their buy-to-let portfolios.
Negotiate the minefield of buy-to-let mortgages with a little help from us by finding your advisor today.
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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. A typical fee is £295. Ask for a personalised illustration. The Mortgage Bureau is a trading name of A.M. Mortgages (UK) Ltd. Authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate some aspects of Buy to Let mortgages.