Buy-to-let mortgages are only available with deposits of 15% or higher. Because the rental income upon which mortgage repayments depend is not guaranteed, mortgage lenders see buy to let as higher risk than residential loans.
Lenders also think it more likely that buy-to-let borrowers who fall into financial trouble will prioritise the repayments on their main home over those on their rental property.
Can you use government schemes like Help to Buy for buy to let?
A handful of government schemes, including the Help to Buy schemes, help buyers with their mortgage deposits. Most of these schemes are only for first-time buyers, however, and none help with buy-to-let purchases.
Buy-to-let borrowers will therefore need to fund their deposits themselves. However, there are ways of getting into buy to let without a large deposit.
Consider high-LTV buy-to-let mortgages
According to the Land Registry, the average property price in the UK is a little under £214,000. At typical buy-to-let loan-to-value (LTV) thresholds, the deposit payable for an average UK property varies from £32,100 at 85% LTV to £85,600 at 60% LTV.
So a deposit of just 15% – the lowest possible for a buy-to-let mortgage – still comes to over £30,000 on average. But there is tremendous disparity in the UK housing market, and far cheaper properties than this are available.
You can invest in a region where house prices trend much lower than the national average, such as the North East of England. RightMove reports that in 2015, the average terraced property in the North East sold for just over £118,000.
A £32,100 deposit in this region would allow you to borrow at around 73% LTV. If you borrowed at the 85% maximum, the up-front costs would be just £17,700.
As capital growth is less robust in these areas, landlords tend to invest with a view to generating good rental yields.
Be aware, though, that low-deposit buy-to-let mortgages have higher interest rates. And if you opt for a capital repayment loan, you start out with more capital to repay. Between these two factors, you might find that your monthly payments are quite high. This can affect your rental yield and make it more difficult to budget for your day-to-day management costs.
Note: Some buy-to-let lenders are tightening their affordability checks. Clients who take out a mortgage with a low deposit may find it more difficult to refinance in the future. Speak to your advisor about your circumstances and to discuss your options.
Tips to help qualify for a low-deposit buy-to-let mortgage
- Check your credit score. Request a copy of your credit report from each of the three credit referencing agencies: Callcredit, Equifax and Experian. Go over the reports and ensure that your credit is in the best shape possible before you begin applying.
- Make sure you can evidence a personal income. Buy-to-let mortgage lenders don’t always ask for evidence of personal income, because the rent will usually cover the mortgage repayments. But if you are applying for a high-LTV mortgage, a good salary can be beneficial to your application.
- Find the right property. A property that can generate a good rental yield is essential when applying for a buy-to-let mortgage with a low deposit. Finding the right property takes a lot of planning and insight, which will show your lender that you are serious about your investment.
Release equity from your residential property
Many buy-to-let investors nowadays are in or approaching retirement age and looking to supplement their main income or boost their retirement funds. These individuals may be in the lucky position of having a lot of equity in their home, or even owning their home outright.
If you have enough equity in your own home, you could release the amount needed for a deposit with a residential remortgage. If you put this capital towards a deposit of 40% or more, you’ll be able to access the best buy-to-let rates and start out with at least two fifths of your loan principle already paid off.
Note: Be careful when securing more debt against your home. If you can’t keep up with repayments, one or both of your properties could be repossessed.
Buy property below market value
Sometimes, often at property auctions, property sells for less than the market value of comparable local dwellings. Such properties may need refurbishment before they become habitable. You can pick up such a property with a smaller-than-average deposit and then do the works needed before letting it. With clever planning, the value gained will be far more than the cost of the renovation works. (Bridging loans are useful for this purpose.)
Some dilapidated properties can be bargains, but others might not be suitable for investment. The cost of the project might be higher than anticipated, and local market factors might limit how much value you can add. It is crucial to research and plan the investment and find the right property in the right location.
Remember, if you’re securing additional finance to fund the refurbishments, you will need to plan your exit strategy. You will need to know that your investment is sound and can start making a good return soon.
This is the option for landlords who might struggle to raise a deposit for a market-value property, but can cope with a short-term shortfall and have a good eye for a property bargain.
How to get the most out of your buy-to-let deposit
Setting aside the needed capital for a buy-to-let investment is the first step; investing it wisely is the second. Ask yourself the following questions to help get the most out of your buy-to-let deposit.
Why am I investing in buy-to-let property?
Investors turn to buy-to-let property for capital growth, rental income or a mixture of the two. Knowing why you are investing will form the basis of every important decision that you make
Do I want to self-manage my property?
Self-management requires time and knowledge. But more importantly, it requires that you live near your investment property, which limits how far afield you can invest. Employing a letting agent will give you a greater geographical choice, but you will need to budget for the added cost of doing so.
Do I want to build a buy-to-let portfolio?
One way to start building a property portfolio is to spread a deposit across multiple, cheaper properties. When you have a low deposit to begin with, this is difficult – so you may need to think about other ways that you can get the most out of your available capital.
How long will I hold the property for?
Buy to let is a medium- to long-term investment. Over the short term, house price movements and other economic factors are more volatile. But over time, property values trend upwards and allow investors to recoup their short-term losses.
Investors with longer investment horizons are, on balance, less at risk of making a loss. But it is also possible to enjoy short-term gains from a buy-to-let investment. For help establishing your ideal investment strategy, discuss your goals with a professional financial advisor.
Getting into buy to let without a large deposit can be tough, but it’s not impossible, and the advice of an experienced buy-to-let mortgage broker can be invaluable. To discuss your options, call us on the number at the top of the page or click the link below to enquire today.