Buy To Let Mortgage Deposit
While a buy to let mortgage may seem simple enough to apply for if all the paperwork is in order, the buy to let mortgage deposit is an altogether different story. Investors need to have at least 25% of the purchase price ready as a deposit, which excludes stamp duty and other costs at purchase. This means that if a property is sold for £400,000, investors will need around £100,000 for the deposit alone. While this might not seem like a lot of money, it may take a while to save up for a large portion of the UK population, as the average income is just under £3,000 per month.
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Buy To Let Mortgage Deposit Explained
For potential homeowners, getting together a sizeable deposit can place a damper on their purchasing plans for investment purposes. The deposit required for a buy to let mortgage, however, is viewed a little differently to that of a first-time home purchase. For a lender, the purchaser is viewed as an investor and as such, does not have a personal stake in the property quite like a homeowner who is relying on the property as their home does. This means that the risk rating for an investor is slightly different as the vested interest is different. For a lender, this means that they take on a higher risk by lending to an investor and a way to mitigate this risk is with the high deposit. For the investor, the money that they put into the property shows the lender that they are willing to risk their own funds in the property. Some banks employ a deposit sliding scale to determine whether the client will pay a 25%, 20%, or 15% deposit. This sliding scale takes a number of things into consideration, such as the quality of the property, whether it already has a suitable tenant, the experience of the investor, and a range of other important qualities.
Advantage Of A Buy To Let Mortgage Deposit
While it may seem like a big pill to swallow, a buy to let mortgage deposit takes away a big portion of the debt burden that investors may have to endure when applying for a mortgage. As it’s not a guarantee that the property will have tenants in it at all times, investors should look at ways to decrease their instalments. A higher deposit is one way of doing this. The deposit also means that the property has a head start on building up equity. For investors, the equity portion is always under the microscope as the equity determines the profit in a sale. It also cushions the loan slightly in the event that market conditions change and property prices are affected. Investors who have extra funds available for a higher deposit may also be in a position to negotiate a better interest rate, as their risk is lowered.
How Much Deposit For A Buy To Let Mortgage
The rule of thumb for a property investor looking to get their hands on a buy to let, is 25% deposit or downpayment. This amount needs to be unencumbered which means it can’t be sourced from another loan, as that will place the investor under too much pressure to afford the repayments in the event that the property is without a tenant. The deposit can go up if the lender finds that they’re over-exposed where risk is concerned.
Experienced property investors who have a substantial portfolio and solid asset backing, may be in a position to negotiate their mortgage deposit for a buy to let. Some have managed a deposit payment of as little as 15% based on their previous performance and track record. While this might be good news for established investors, it does create a fairly large barrier for those looking to enter the market as property investors. A robust savings plan and funding regime may need to be followed in order to make up that mortgage deposit.
Knowing How Much Deposit For Buy To Let Will Make Investing Easier
One of the key components of a good investment is that the cash flow is still intact after the investment. Buy to let properties are slightly different to other types of investments, as there are usually other fees and additional expenses to consider. There is also the time cost factor, as managing a simple holiday let property can cost an investor around nine hours a week. By knowing how much deposit for a buy to let is required, investors can determine whether additional expenses will run them into the negative. If this is the case, they may want to reconsider the purchase.
To get the most out of the purchase and to ensure that unforeseen expenses are kept to a minimum, investors can set aside additional funds to hire industry professionals to assess the property. This will include checking the plumbing, electric work, foundation, and other items that tend to create a headache for investors later on. Buy to let properties are essentially bought with the intention of renting it out, and investors can enlist the services of Pro Buy To Let to ensure that they tick all the boxes when they go through tenant vetting and contracting too. Finding the right tenant is critical to the success of a buy to let venture.
Deposit For Buy To Let: The Pros And Cons
While there’s no getting away from a deposit on a buy to let mortgage, investors can minimize the pressure on their finances by ensuring that they approach their investment holistically. If they view their buy to let property as a business, this initial deposit could be seen as startup capital. Even when approaching lenders to fund the most cutting edge and forward-thinking business concepts, entrepreneurs are expected to mitigate some of the risk by putting in their own money. The same goes for property investors.
The pros of putting down a sizeable deposit on an investment property, include:
- The higher the deposit, the lower the repayment
- Investors may be in a position to negotiate their interest rates with a higher deposit
- Higher deposits lower the chances of settling for substandard properties as investors will only want to part with their funds for properties that can generate a healthy ROI
- Banks are more favourable to investors willing to put their own money into purchases
- Investors may be able to negotiate the repayment term in order to get out of debt faster
There are a few cons too:
- Investors may feel too cash-strapped in order to do necessary repairs and maintenance
- Other property costs along with the deposit may seem out of reach for investors, which could cause a slump in the market
- The markets could shift significantly like the 2008 recession, and investors can lose a sizeable amount of money
- Investors might get stuck with a non-paying tenant and because the investor has put their own money in the property, they hold on too long
While property investing is something that can be done as a side hustle, investors are encouraged to consider the buy to let mortgage deposit before signing an offer to purchase. They have the option to include a clause in the offer to purchase that would only make the application valid if the bank approves a lowered deposit. Sign up with Pro Buy To Let to work with our team of property professionals who can assist you with all you need to know about a buy to let mortgage deposit.