Buy-to-Let Mortgage Deposit: How Much Do You Need?

What Is a Buy-To-Let Mortgage?

A buy-to-let mortgage is a special type of mortgage offered to prospective landlords who want to buy a property they can then rent out. Buy-to-let mortgages are normally offered to people who have already bought their own home and have a reasonably steady income, and so do not benefit from first-time buyer schemes. They are typically more expensive and carry higher interest rates than a residential mortgage.

What Are the Features of a Buy-To-Let Mortgage?

A buy-to-let mortgage works in a similar way to a conventional mortgage, but because it is aimed at people who already have a certain amount of wealth and rely on rent to repay it, it tends to be a little harder to qualify for. The three features that set it apart are:

1. Higher interest rates. Buy-to-let rates are generally higher than equivalent residential rates because the lender treats the loan as a business transaction with more risk. As with residential deals, you can usually choose between a fixed-rate period or a tracker or variable rate;
2. A larger deposit. Where first-time buyers can sometimes find deposits as low as 5%, a buy-to-let mortgage deposit usually sits between 25% and 40% of the property value;
3. Interest-only repayments. Buy-to-let mortgages are normally interest-only, so each month you pay only the interest you owe rather than any of the capital. The full loan amount is then repaid at the end of the term, typically by selling the property or remortgaging.

How Much Deposit Do You Need for a Buy-To-Let Mortgage?

The standard buy-to-let mortgage deposit is 25% of the property value, which equates to a 75% loan-to-value (LTV) mortgage. In practice the market spans a wider band: a small number of lenders accept around 20%, while putting down 40% or more usually unlocks the lowest rates and the widest choice of deals. This is markedly higher than a residential mortgage, where deposits can start at 5% to 10%.

Because the deposit is a percentage of the purchase price, the cash you need rises sharply with the value of the property. The table below shows what each deposit level looks like in pounds at three common price points.

Illustrative deposit amounts by property value and loan-to-value band. They show how the percentage translates into cash, not a quote.

What Affects the Deposit You Need?

Two landlords buying the same flat can be quoted different deposits. The main factors lenders weigh up are:

• Expected rental income: the stronger the rent relative to the mortgage, the more comfortable the lender is to lend, and the lower the deposit they may accept;
• Your credit profile: a clean credit history and low existing borrowing widen your options and can reduce the deposit required;
• The property type: flats above shops, new builds and houses in multiple occupation (HMOs) are seen as higher risk and often need a deposit of 30% or more;
• Whether you are a first-time landlord: lenders may apply stricter terms or a larger deposit if you have no track record of letting;
• How you buy: purchasing through a limited company is increasingly common and typically calls for a deposit of around 25% to 35%.

How Much Can You Borrow and the Rental Cover Stress Test

Unlike a residential mortgage, the amount you can borrow on a buy-to-let is based mainly on the rent the property is expected to earn, not on a multiple of your salary. Rent is the main source of repaying the loan, so lenders apply a rental cover stress test to make sure there is a margin of safety.

How the Rental Cover Stress Test Works

Most lenders require the expected monthly rent to be 125% to 145% of the monthly mortgage payment. Basic-rate taxpayers are often assessed at the lower end of that range, while higher-rate taxpayers are usually held to 145%. Lenders also test affordability against a notional interest rate above the rate you actually pay, to check the loan still works if rates rise.

Rental cover example Suppose your monthly buy-to-let mortgage payment would be £800. At a 125% cover requirement the lender wants rent of at least £1,000 a month; at 145% it wants £1,160. If the property is only expected to let for £900, you may need to borrow less and put down a larger deposit so the payment, and therefore the rent needed, falls within the ratio. Figures are illustrative.

If the rent does not stretch far enough to pass the test at your chosen loan-to-value, increasing your deposit is the most direct way to bring the loan, and the required rent, back within range.

Who Is Eligible for a Buy-To-Let Mortgage?

Because the deposit and the rental cover test set a high bar, eligibility for a buy-to-let mortgage is tighter than for a residential one. Most banks and lenders set their own criteria, but you will generally need a good income and credit score alongside enough cash for the deposit and fees.

What Are the Most Common Criteria?

The most common criteria lenders look for are:

• You already own your own home;
• A strong credit history with no recent missed payments;
• You are typically under the age of 70 to 75 at the end of the term;
• You have a clear plan to invest in and let the property.

Do You Need a Minimum Income for a Buy-To-Let Mortgage?

Many lenders also set a minimum personal income, commonly around £25,000 a year, on top of the rental cover test. This shows the lender you could keep up the payments during a void period when the property is empty. For most applications, though, the expected rental income is the decisive affordability factor rather than your salary.

Buy-To-Let vs Residential Mortgage

A buy-to-let mortgage is a different product from the residential mortgage you would use to buy your own home. The headline differences are summarised below.

Already own the home you want to let? If you want to rent out a property you bought with a residential mortgage, you do not always have to switch to a buy-to-let product. Many lenders grant consent to let, which lets you rent the home for a set period while keeping the residential mortgage, though the lender may raise the interest rate. Check with your lender before letting, as renting out without permission can breach your mortgage terms.

Costs and Considerations Beyond the Deposit

The deposit is the largest upfront cost, but it is not the only one. Weigh up the following advantages and drawbacks before committing to a buy-to-let mortgage.

Advantages of a Buy-To-Let Mortgage

A buy-to-let mortgage can be a sound long-term investment when the numbers stack up:

• Allowable expenses: you can deduct allowable costs such as letting agent fees, repairs and maintenance from your rental profit before tax. Note that mortgage interest is now relieved through a 20% tax credit rather than being fully deductible. Your tenant normally pays the council tax while the property is let;
• Investment profit: the goal is a long-term return, both from monthly rent and from any rise in the property's value, which you may be able to release by remortgaging;
• Strong rental demand: demand for rental property remains high in much of the UK, which gives a degree of security when planning a buy-to-let purchase.

Disadvantages of a Buy-To-Let Mortgage

Buy-to-let also carries real risks for landlords, so weigh up the possible downsides:

• Tenant issues: if tenants fall behind on rent it can strain your mortgage repayments, and damage to the property can reduce the value of the freehold;
• Landlord responsibilities: being a landlord is hard work, with legal responsibilities to your tenant. You will need a tenancy agreement and an inventory checklist, plus insurance to protect the property;
• Void periods: prepare for periods of no rent when the property is empty between tenancies, as letting it again is not always quick;
• Higher stamp duty: buying an additional property normally means paying a stamp duty surcharge on top of the standard rates, which raises your total upfront cost.

Where Can You Get a Buy-To-Let Mortgage?

Buy-to-let mortgages are available from most high-street banks, building societies and specialist lenders, and it pays to compare across the market rather than going straight to your own bank. Deals usually run with an initial fixed period of 2 to 5 years before reverting to a variable rate, much like a residential mortgage.

What is APRC? To compare two deals over the long term, look at the Annual Percentage Rate of Charge (APRC). It reflects the cost of the mortgage, including fees, averaged over the full term, and is the most reliable way to compare two different mortgage rates rather than just the headline initial rate.

Rates, fees and lending criteria change frequently, so we do not publish a live rate table here. When you compare, weigh up the deposit, the initial rate, the APRC and the arrangement fees together, as a low headline rate with a large fee can work out more expensive than a slightly higher rate with no fee. A larger deposit almost always opens up cheaper deals.

Buy-To-Let Mortgage Deposit FAQ

The Selectra team answers the most common questions about buy-to-let mortgage deposits.

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