Why Do You Need A Bigger Deposit For A Buy To Let Mortgage?

January 11, 2023

If you want to buy a property in order to let it out, you will need a buy-to-let (BTL) mortgage. In most cases, lenders charge higher interest rates and will require a higher deposit for a BTL mortgage than for a standard mortgage. Here’s a closer look at what conditions most lenders will require.

Why are there stricter lending criteria for a BTL mortgage?

From the lender’s point of view, the greater risks associated with a BTL mortgage mean that they have to mitigate against the possibility of incurring a loss. This is because the landlord will be at least partially relying on the ability of the tenant to pay the rent on time.

There may also be gaps between tenancies when the landlord will have to meet the mortgage repayments from out of their own income. To cover for these possibilities, most lenders will require a minimum deposit of at least 25%, and in some cases as high as 40%. Interest rates are usually higher than for a standard mortgage for the same reason.

Some lenders will also require that you have evidence of an income of £25,000 a year or above that is separate from your rental income. The amount you can borrow may also be linked to the projected monthly income of the rental property, and the lender may also require that you already have a residential property, either mortgaged or owned outright.

What other costs do you need to consider?

There is a lot of administrative work involved in letting out a property, and many landlords prefer to appoint a letting agent to deal with this on their behalf. Typical duties involve marketing the property, showing it to prospective tenants and carrying out credit checks on applicants. They can also prepare contracts and collect the rent on your behalf.

As with any property, buildings insurance will be required, and landlord liability may also be mandatory in some cases. You will also be liable for stamp duty of 3% on the portion of the property price up to £250,000, unless the price is £40,000 or lower. For properties worth between £250,001 and £925,000, stamp duty is currently 8%.

The rental income you get from tenants is taxed as income tax, in whatever band you fit into, either 20%, 40%, or 45% depending on the amount you earn. You will also need sufficient funds to pay for any repairs to the property, which you will be responsible for as the landlord, such as the boiler service or any broken appliances.

Who is eligible for a BTL mortgage?

As well as the criteria mentioned above, most lenders will want to see a good credit history. However, there are specialist BTL lenders who will consider applicants with an adverse credit history. If you would like to talk to IVA mortgage specialists, please get in touch with us today.

Your home may be repossessed if you do not keep up with your mortgage repayments.

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