Why is a Buy-to-Let Minimum Deposit so important?
If you’re looking to invest in property, you’re going to need access to enough capital to do so. However, that’s not easy to achieve and you could risk destabilising your finances if you were to use your own savings. However, another way of overcoming this obstacle is by applying for a Buy-to-let Mortgage. A Buy-to-let Mortgage is a secured finance solution that’s widely used by experienced property investors and commercial landlords since it allows you to raise a large lump sum whilst also renting part, or all, of the property concerned. Yet one area that many investors find confusing often involves the minimum deposit.
Why is making a deposit so important when applying for a Buy-to-let Mortgage?
Placing a deposit or down payment is a vital aspect of applying for a Buy-to-let Mortgage, which makes up a portion of the funds that are given to the seller. As well as offering collateral in the form of the property in question, making an upfront deposit essentially means placing your own capital into the agreement too. Doing this gives the mortgage lender additional confidence in your commitment to the agreement. This means that if you default, not only is the property repossessed, you’ll also lose your deposit as well as any other capital you’ve paid in. However, the act of making a deposit does help to make Buy-to-let Mortgages more accessible to a variety of financial circumstances and could earn you a favourable interest rate, depending on its size.
What’s the minimum deposit that I can make when applying for a Buy-to-let Mortgage?
With a Buy-to-let Mortgage the minimum deposit that you’re expected to make usually starts from 25% of the property’s total asking price. So, for example, if the property is being sold at £750,000 the minimum deposit you’ll need to put forward will be £187,500. Although this could be difficult to raise, offering up to 40% which would stand at £300,000, on the other hand, could help you leverage a more favourable interest from the mortgage provider. This also means that you’ll need to borrow less capital which, in turn, will reduce the size of your monthly repayments - saving you money in the long run.
What factors are considered when negotiating a Buy-to-let Mortgage deposit?
Raising a deposit for a Buy-to-let Mortgage isn’t easy, often requiring a large upfront capital outlay. As such, if you don’t possess a lot of capital in savings or can’t afford to redirect funds, wanting to make the minimum deposit is only natural. However, this can vary between mortgage providers on account of a variety of factors. So for a Buy-to-let Mortgage, the size of your minimum deposit could be based on:
Credit Score - As well as deciding the interest rate that you’re offered (which may vary if using a variable rate mortgage) on account of risk, it could also affect the size of the deposit required as well. So if you have an adverse credit rating, the minimum deposit expected could increase in order for the lender to protect their investment should you default.
Expected Rental Income - Because Buy-to-let Mortgages allow you to rent out part or all of the property in question, you could use your expected rental income to push for a smaller minimum deposit. However, you must also consider the reliability of the property’s revenue potential and whether there’s a risk of tenants missing payments or spaces not being filled for a period of time as well.
Location - The location of the property may also be taken into account - as well as the area’s demographics, environmental factors could also have an impact. For example, is there a risk of flooding? If so, mortgage providers may require to you make a larger minimum deposit as this would limit their exposure should you stop receiving rent and/or have to carry out repairs, which might make keeping up with the repayment scheme a challenge.
Mortgage Value - Finally, because mortgage providers want to earn a return on their investment, you could use it to your advantage in order to pay a smaller minimum deposit. That’s because you’ll be borrowing more capital from them, increasing how much they stand to earn through interest.
Thinking about applying for a Buy-to-let Mortgage?
If you’re looking to purchase property with the intention of generating a monthly rental income, the only thing that might be holding you back could be the cost outlay. But rather than depleting your savings, you could apply for a Buy-to-let Mortgage and spread out the expense over a term of up to 20 years. All you need to do is source an agreement from mortgage provider you can trust - which is where speaking with a qualified business finance professional could prove invaluable.
At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if your looking purchase property and use it generate a rental income, apply for a Buy-to-Let Mortgage today or find out more with Rangewell.