November 6, 2023 2:25 pm

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Nikka Sulton

Buy-to-let (BTL) mortgages are for buying properties to rent out. They’re like regular mortgages but with key differences. Knowing these distinctions is crucial for potential landlords.

BTL mortgages usually require a sizable deposit, which can be a challenge for new property investors. However, it’s possible to buy a rental property with a smaller deposit if you follow the right approach. In this detailed guide, we’ll list lenders with low deposit requirements and offer tips to improve your mortgage approval chances.


What are the criteria for a Buy to let mortgage?

Lenders consider the following factors for a buy-to-let mortgage:

  1. Rental income – The rental value of the property you want to purchase is a significant factor. Lenders typically require the property to generate 125% to 145% of the monthly mortgage payment.
  2. Employment – Many lenders require applicants to be in full-time employment, often requiring employment details for the last 6-12 months.
  3. Income and salary – While some lenders have no income requirements, most expect applicants to have a minimum base salary. Unless you are a full-time landlord or have a buy-to-let limited company, you’ll need to provide income details.
  4. Age – To secure a buy-to-let mortgage, you should be at least 21, though a few lenders may accept applicants as young as 18. Some lenders set a minimum age of 25.
  5. Credit history – Lenders assess your credit history. While it’s possible to get a buy-to-let mortgage with bad credit, it may pose challenges. Severe credit issues could make it difficult to meet a lender’s criteria, while minor problems like a missed phone bill are less concerning.


How much deposit do you need for a buy-to-let mortgage?

In the UK, approximately half of lenders cap the loan-to-value (LTV) ratio at 75%, while around a third set it at 80%. This implies that a substantial deposit, usually ranging from 20% to 25%, is necessary to secure a favorable mortgage deal.

Notably, lenders tend to offer the highest LTV deals for previously owned houses. However, if you’re purchasing a flat, maisonette, or a newly constructed property, a larger deposit is typically required. For instance, nearly all lenders demand a minimum of 25% deposit for a new build flat.


What’s the minimum deposit requirement?

Typically, the minimum deposit for a buy-to-let (BTL) property is around 25% of its value, though it can range from 20% to 40%. Most BTL mortgages operate on an interest-only basis. This implies that you make monthly interest payments without reducing the principal loan amount. The full loan amount is repaid at the end of the mortgage term. Repayment-based BTL mortgages are also an option.

First-time buyers aiming for a buy-to-let property often need a minimum 30% deposit for potential acceptance. This is because most lenders do not typically entertain first-time buyers in the buy-to-let market.


How to get a buy-to-let mortgage with a low deposit

Securing a mortgage with less than a 20% deposit can be challenging, but it’s achievable by following these three steps:

Step 1: Raise Capital

Explore various methods to boost your mortgage deposit. The more capital you can accumulate, the wider your range of available deals. Consider the strategies mentioned above to increase your contribution.

Step 2: Consult a Buy-to-Let Expert

Even if you can manage a 15% or 5% deposit, there are options for purchasing property. Reach out to a specialist in low-deposit buy-to-let mortgages for expert guidance. To connect with an expert, complete the provided form.

 Step 3: Prepare a Strong Application

Given limited mortgage options, your application must be impeccable. Lenders will assess your experience as a landlord, business accounts, and financial projections. A skilled broker can present your information in the most favorable light, enhancing your chances of approval.


How your deposit amount affects your mortgage rate.. 

A smaller deposit typically leads to higher mortgage rates, primarily because fewer lenders are open to higher-risk applications.

However, once your initial fixed-rate or discounted-rate period concludes, you have the option to consider remortgaging. If you’ve saved from the rental income of your property, you can use those funds to remortgage with a lower loan-to-value (LTV) ratio. This can expand your choices by increasing your attractiveness to a broader spectrum of lenders.


Buy-to-let and tax


Capital Gains Tax

For basic rate taxpayers, Capital Gains Tax (CGT) on second properties in the buy-to-let category is set at 18%, while higher or additional rate taxpayers face a rate of 28%. For other assets, the basic-rate CGT is 10%, and the higher rate is 20%.

When you sell your buy-to-let property and make a profit exceeding the annual threshold of £6,000 (for the 2023/24 tax year), you’re typically liable to pay CGT. Couples who jointly own assets can combine this allowance, potentially enabling a gain of £12,000 (2023/24) in the current tax year.

To reduce your CGT liability, you can offset costs such as Stamp Duty, solicitor and estate agent fees, or losses incurred from the sale of a buy-to-let property in a previous tax year by deducting them from any capital gain.

Any profit from selling your property must be reported to HMRC, and the applicable tax should be paid within 30 days. The resulting capital gain is added to your income and taxed at the marginal rate (18% and/or 28%) you would normally pay. CGT annual allowances cannot be carried forward or back, so they must be utilized within the current tax year.


Income Tax

The income you receive from rent is considered taxable income and may be subject to Income Tax. You should report this income on your Self Assessment tax return for the tax year in which it was earned.

In England, Wales, and Northern Ireland, the tax rate may be 20%, 40%, or 45%, depending on your Income Tax band. In Scotland, it may be taxed at 19%, 20%, 21%, 42%, or 47%.

You can deduct certain allowable expenses from your rental income, such as letting agent fees, property maintenance, and Council Tax.

You will only be liable for tax on your rental income if your total income for the tax year surpasses your personal allowance.


Mortgage Interest Tax Relief

Landlords can no longer subtract mortgage interest from their rental income to lower their tax liability. Instead, you will receive a tax credit equivalent to 20% of the interest portion of your mortgage payments. This alteration in the rules may result in a higher tax burden compared to the previous approach.


Can I use a buy to let mortgage for an HMO?

Buy-to-let mortgages are generally suitable for standard single lets with assured shorthold tenancy (AST) agreements. If you intend to purchase an HMO (multi-letting rooms/flats), you might need to consider a specialist lender.

Interest rates tend to be higher for properties that deviate from the standard single let. If you have any uncertainties, consulting with an advisor can provide further guidance.



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