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How Much Deposit Do You Need for a Buy-to-Let?

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    Buy-to-Let Investment: A Safe Bet in Uncertain Times?

    The buy-to-let sector is one of the safest markets during times of economic uncertainty. In 2023, the property market managed to withstand huge inflation rates and the Bank of England’s rising base rates. Mortgage interest rates rose to keep up with these changes. However, those same rates have already started to come back down.

    If you are looking for long term investments that pay off, the buy-to-let market should be your first port of call. House prices are falling due to the cost of living crisis and other external factors. In addition, rental demand is high.

    But where do you start when buying rental property?

    You may be wondering how much deposit you need for a buy-to-let mortgage. In addition, you may need some help finding the best places to buy to let.

    We’ve got you covered.

    This article will cover everything you need to know about mortgages, buy-to-let hotspots, the best real estate investments and more.

    Read on for more information.

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      What Is Buy-to-Let?

      Buy-to-let investments involve purchasing a property and renting it out to tenants.

      Buy-to-let landlords will find the best real estate investment by performing due diligence and area research. They will make money from the tenant’s monthly rental payments.

      There are two ways to purchase property:

      • Buying outright with cash
      • Applying for a buy-to-let mortgage.

      This article will focus on buy-to-let mortgages. Let’s dive into them.

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      Can Anybody Get a Buy-to-Let Mortgage

      If you plan on buying a rental property, a mortgage will be your best bet. Investors need to meet certain eligibility criteria. These rules may change based on the lender. Often, the lender will ask for the following:

      • Proof that you own your home, either outright or with another mortgage.
      • A good credit score without too many other borrowings (credit cards).
      • Proof of employment income or other earnings. These must be separate from other rental earnings if you are already a buy-to-let landlord. Lenders usually require investors to earn over £25,000 per year.
      • You meet the maximum age limit. This is often around 75 years old. However, certain lenders may have lower limits.
      • Your rental income should cover the 125% of your mortgage repayments.

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        How Do BTL Mortgages Work?

        While buy-to-let mortgages are similar to other mortgages, there are some notable differences. These include:

        • Different fees
        • Varying interest rates
        • A larger minimum deposit (more on that in a moment)
        • Interest-only agreements. Landlords pay monthly interest but only pay the capital amount at the end of the mortgage term.
        • Most buy-to-let mortgages are not regulated by the FCA (or Financial Conduct Authority). However, there are some exceptions to the rule. If you want to rent the property to a family member, it counts as a consumer BTL mortgage and is assessed with the same rules as a typical residential mortgage.

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        How Much Deposit Do You Need for a Buy-to-Let Investment?

        Typically, you’ll need a 25% deposit minimum for a buy to let property investment. This equates to a loan-to-value ratio of 75%.

        Some lenders may ask for a more substantial buy-to-let deposit. This could be as much as 40%. However, the larger deposit will earn more favourable rental yields in the long run.

        Remember, you still need to have income each month after you have paid your mortgage payments. You’ll need extra money to pay for repairs on the property and other costs.

        It may take longer to save for a more substantial deposit, but this will ensure you receive a better mortgage rate. You can then charge the same amount of rent and achieve a better yield.

        If you want to work out how much rental income is required to cover your buy-to-let mortgage costs, check out our buy-to-let costs calculator.

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          Where Can You Get a Buy-to-Let Mortgage?

          BTL mortgages are available from most notable banks. However, investors can also find specialist lenders as well.

          How Do You Choose the Best Mortgage Lender?

          We recommend seeking mortgage advice before committing to any mortgage term. This will help you find the best deal for your investment strategy. It will also ensure you don’t run into any money issues during void periods (when the property is untenanted).

          Comparison websites are an excellent starting point for first-time buyers looking for the right mortgage deals.

          Some of the best websites for comparing the best mortgage include:

          Keep in mind that comparison websites don’t always give the same results. Be sure to use several sites before moving forward with a mortgage application. You should also research the product and features. In addition, the headline rates may be appealing, but be mindful of other fees involved as well.

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          What Other Costs Do You Need to Consider With a Buy-to-Let Investment?

          One of the biggest costs involved with any buy-to-let investment is taxes.

          The three main taxes on a buy-to-let property are:

          • Stamp Duty Tax
          • Rental Income Tax
          • Capital Gains Tax

          Let’s take a look at them in greater detail.


          Stamp Duty Tax

          All buy-to-let properties require landlords to pay stamp duty tax.

          When buying a second property, you will need to pay a £% surcharge on other stamp duty purchases.

          This applies if you are not a first-time buyer (or you own your home) and buying additional buy-to-let properties.

          Stamp duty also applies if you have a leasehold or freehold property.


          Income Tax

          Income tax is paid on rental returns. Investors must declare their rental returns on a Self Assessment Tax Return.

          Rental returns are taxed according to the same rates for any other business or employment income.


          Capital Gains Tax

          This tax applies to profits made on asset sales.

          You’ll have to pay capital gains tax whenever you sell a buy-to-let property.

          Capital gains tax is higher for buy-to-let properties. The tax rates are 18% for basic-rate taxpayers. However, additional-rate taxpayers can expect 28%. The rate is only 10% (basic rate) and 20% (additional rate)) on other assets.

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          Want to become a successful buy to let investor? Get our free investment guide today for all the latest tips!

          Download Guide Guide - Buy to let investment guide

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          What Else Do You Need to Know About Purchasing a Buy-to-Let Property?

          There are many things you need to keep in mind when buying a property.

          Firstly, we would recommend familiarising yourself with property law. If you understand your rights as a landlord and the rights of your tenant, you’ll ensure a positive relationship between yourself and the people living on your property. This way you won’t be on the end of any nasty surprises from disgruntled employees.

          It is also important to keep abreast of government advice on how to buy a home. Regulations and rules are constantly changing. Landlords should ensure they do things according to local legislation.

          For example, the government declared that all buy-to-let properties must have an EPC rating of ‘C’ by 2028.

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            How to Find the Best Areas for a Buy-to-Let Investment

            Once you understand buy-to-let mortgages and other buy-to-let need-to-knows, you’ll need to come up with a strategy. This involves finding the right areas to invest in property.

            But how do you find the best areas for investment? Well, there are numerous things you should consider. These include:

            • Property Prices
            • Rental Yields
            • Capital Growth Potential
            • Appeal to Tenants

            Let’s break those factors down.


            Property Prices

            Property prices directly affect the amount of deposit you’ll need to pay for a buy-to-let mortgage.

            2023 has seen property prices drop in the face of rising interest rates and inflation.

            As such, it represents a good opportunity for people to get into the buy-to-let market for the first time.

            However, property prices will differ depending on the region you are interested in.

            For example, if you are considering property investment in London, you need to know that prices are much higher than other places in the country. These properties will require a bigger deposit than usual.

            Conversely, Liverpool property investment offers much better value properties. As such, your required deposit would be much lower than if you invested further south.

            If you want to know the most up-to-date property prices, consult the UK House Price Index.


            Rental Yields

            Rental yields are the returns on a buy-to-let investment through rental income. This figure is represented as a percentage. You can calculate rental yield by taking the annual rental income and dividing it by property value. Multiply that figure by 100 and you’ll have your potential rental yield for the year.

            Investors can use this percentage to better understand their property investment’s value.

            Much like property prices, rental yields fluctuate depending on the area.

            For instance, Manchester offers potential rental yields of 9.12% and London has even better potential yields of 10.2%.


            Capital Growth Potential

            Property investors should also consider an area’s capital growth potential as well as rental yields and the value of the property.

            Economic experts like Savills offer forecasts for capital growth based on different regions in the UK. This can be used to identify areas that are set to enjoy an economic boost in the near future.

            For example, Savills predicts that the North West, North East and Yorkshire will experience a significant 11.70% growth in capital by 2027. This will see jobs become more readily available in those areas, not to mention rising house prices and rental costs. As such, investors may want to consider the affordability of these areas now compared to how much property will cost in a few years.


            Appeal to Tenants

            Landlords also need to consider how the area appeals to tenants.

            For example, if you are interested in student property investment, you would want to find an area with a large student population. In that case, you would want to consider Liverpool, thanks to four top universities (University of Liverpool, Liverpool John Moores University, Edge Hill University and Liverpool Hope University) in the area.

            You should also consider local amenities, transport links, arts and culture and crime in those areas.

            Remember: tenants will pay higher monthly payments for nicer areas.


            Read Buy-to-Let Property Guides

            If you are considering investing in an unfamiliar area, consider checking out a buy-to-let guide to get a better idea of the local property market.

            We have plenty of buy-to-let guides on our website, such as:

            Invest With RWinvest Today

            If you are considering a buy-to-let property investment, chat with RWinvest today.

            We can answer all your questions about buy-to-let mortgages and deposits. We can also talk you through our property investment opportunities. We specialise in off-plan and student accommodations in up-and-coming hotspots.

            In addition, our services also cater to the hands-off type of buy to let landlords, who prefer to focus on expanding their portfolios instead of managing tenancy issues.

            Whether you are new to property investment or a seasoned veteran looking to expand your portfolio, we can help meet your investment goals.

            Speak to us today for more information.

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            Reece Pape

            Reece Pape is a property writer at RWinvest. Reece is passionate about keeping property investors updated on must-have information and housing market news, utilising the latest property market statistics and data.


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