Buying a rental property with a mortgage will require a deposit. The total amount you can borrow will be dependant upon the amount of rental income you can expect to receive from your new buy to let property.
So how much money will you need? Mortgage lenders usually require a 25% deposit of the total value to purchase a buy to let property. Depending on your experience, credit report and the financial markets, some lenders maybe willing to loan up to 85% or more of the ‘loan to value’ (LTV).
The amount you borrow will have an effect on your ‘return on investment’ (ROI), also referred to as ‘cash on cash return’. The greater the deposit, the less you could receive on your ROI, and the smaller the deposit, the more you could receive on your ROI. I have written an article which walks you through calculating both your Net Yield and ROI here.
What Are The Benefits of A Lower LTV
The larger the deposit, the more likely you will be able to obtain a more favourable interest rate. An 85% LTV may attract interest rates of 2.49%, and a 75% LTV may attract interest rates around 1.49%. That is one percentage point difference which could equate to more than £100 per calendar month.
This amount will have a big impact on your bottom line, which is important for your business.
The best buy to let mortgage interest rates are typically offered to people who have a 40% deposit or more.
What Are The Benefits Of A Higher LTV?
The most obvious difference is that you will require less capital to get started, which could mean that you would be able to buy your investment property much sooner. But take the time to analyse the numbers before you rush in.
In my opinion, a higher LTV is great for properties that you want to flip; buy, renovate and sell, or possibly let with a refinance option to a more favourable LTV and interest rate after the renovation works.
I generally like to buy property with as little money as possible. But this strategy doesn’t suit everyone.
What Do You Need For A Buy To Let Mortgage?
Having a good credit report and not too many unsecured loans will work in your favour of being accepted for a buy to let mortgage with a good interest rate. I use Credit Karma to monitor my credit report. It’s free to use and it allows me to check my credit score regularly.
At the time of writing this article, most lenders also look for a regular income of £25,000+ a year.
If you are employed, but don’t earn that amount, it isn’t to say you won’t be approved for a buy to let mortgage, but there will probably be fewer lenders available to you.
Mortgage lenders will also require the rental income to be 25-30% higher than the monthly mortgage payment.
Other Costs When Purchasing A Buy To Let Property
Be aware that you will also need money to cover other expenses associated with purchasing a buy to let property, including:
- Survey Fees
- Legal Costs
- Stamp Duty
- Buildings Insurance
- Letting Agents Fees
Since April 2016 landlords have had to pay an additional surcharge on stamp duty which is currently set at 3%. For more information and to check whether this amount has changed you can visit the Ministry of Housing, Communities & Local Government website.
Is Buy To Let Still A Good Investment?
I am often asked this question, and from my experience I can tell you that the demand for rental property remains strong and there are a number of reason’s for this.
Firstly, not everybody wants to own their own home. A lot of young people prefer the lifestyle that comes with renting a home. They may still be finding their feet in their careers and they don’t like the idea of being tied down in one location.
A lot of older people prefer renting too, because they don’t want the commitments that come with maintaining a property and paying a mortgage.
Affordability plays a big part as well. Saving a deposit to buy a home takes time and commitment. Young people who pay for further education must especially find it very difficult to save for a deposit once they start working and paying back their student loan.
And lastly but by no means least, in a country with a growing population and housing developers unable to keep up with demand, there is a housing shortage. As a result house prices have continued to rise, making the affordability even more difficult for some.
This is just a brief overview as to why I believe that a rental property can be a good investment. That’s not to say that every property would make a good investment though. But providing you take some time to research an area and do your due diligence on specific properties, you will greatly reduce the risk of your investment failing to perform for you.
Just a small amount of the right knowledge, can reduce the risk of property investing significantly!
Are Buy To Let Mortgages More Expensive?
Yes. Buy to let mortgages are more expensive and are often one percentage point higher than a residential mortgage. Banks view tenants as a higher risk compared to owner occupiers, which is their reason for charging higher interest rates.
Can I Get A Buy To Let Mortgage Without Owning A Property?
Yes, but there will be fewer mortgage lenders that will be willing to do business with you. Most banks will require you to own your own home for at least six months, so the borrowing options available to you will be limited.
I would always advise someone to buy their own home first. I also ask them to consider buying a home with additional bedrooms which they could then let to lodgers. There is a generous tax free amount that can be earned from lodgers which would then help them save for a deposit to fund their first investment property.
Can I Get A Buy To Let Mortgage With A Low Credit Score?
Yes. There are many factors that effect your credit score; age, credit history, where you live, your income and being registered to vote are just a few. So it’s possible to have a low credit score even if you don’t have a bad credit history.
Banks and mortgage lenders won’t always perform a credit score, but they will look at your credit history. As I mentioned early, it is worth taking the time to check your credit score by registering with one of the many websites available.
Credit Karma is my preferred choice because it’s completely free to use. The website contains lots of tools and advice on ways to improve your credit score too.
New To Property Investing?
If you are seriously considering buying your first investment property, I have a FREE 7 Step Guide which walks you through the complete process.
It also contains a handy Property Viewing Checklist too, which will prompt you to check for potential faults and help prevent any costly surprises after you have completed your purchase.