20% Buy to Let Mortgage

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20% Buy to Let Mortgage

Anthony Mcquilliam talks to us about 20% Buy to Let mortgages. 

Podcast approved by The Openwork Partnership on 02/12/2024.

Can you get a 20% Buy to Let mortgage? How does this work?

You could. There are one or two lenders that will even allow you to have a 15% deposit mortgage.

But because it’s a bit more niche with 20% and 15% deposit mortgages, there are fewer lenders. And, because the lenders are taking on more risk, the interest rates will be substantially higher than on a standard 25% deposit mortgage.

That means the property would have to have great yield – because the higher the interest rates are, the less the lenders tend to lend you. Rates are higher and you’re putting down less deposit, so the affordability may not stack up to lend enough on that particular property.

Who is eligible for a 20% Buy to Let mortgage? What criteria do I need to meet?

It depends on the lender – some require no minimum income, while others may need you to earn £25,000 or more. You’ll need to have the deposit available and, depending on the lender, you may need good credit. Some lenders could still help if your credit is less than perfect.

Those are the main criteria, but a lot of the Buy to Let applications stem back to rental income against the mortgage payments. Interest rates are slightly higher for 20% deposit mortgages, so although it could be doable, it can strain the affordability stress tests. Because of that, you may not be able to borrow as much as with a 25% deposit.

Do many lenders offer 20% Buy to Let mortgages?

No – the vast majority of lenders cap it at 25%. The second you start looking at the 20% area, a lot of lenders fall away and you’re really just looking at specialist lenders. That being said, a good handful of lenders will allow you to do that.

If the deal stacks up enough, you believe it will drive cash flow and you don’t want to invest all your funds into a property, it could still be worth doing. But certainly not all lenders do this. A lot of lenders cap the deposit at 25%.

How does a 20% deposit affect the mortgage term?

With Buy to Let, the deposit you put down doesn’t have an effect, because you could usually choose the term you want. If you’re going down the interest only route, whether you have a two-year or a 30-year term, the monthly repayment would be the same. It’s based on the interest, not the actual capital loan itself.

If you’re going down the repayment route, the term of the mortgage would make a difference to the monthly repayments. But the size of the deposit doesn’t affect the term. You could chop and change that depending on your situation and your plans and goals.

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How much can you borrow with a 20% or a low deposit Buy to Let mortgage?

It depends on the interest rate at the time. If interest rates are lower, they tend to lend you more, because it’s all based on the rental income and the lender’s affordability stress test.

If at the time you’re applying a 20% deposit has a higher interest rate, they won’t lend you as much.

It’s very difficult to tell you how much you could borrow. Speak to your mortgage broker about what you believe the property would rent out for. We could run the calculations for you and let you know what you could borrow on a 20% mortgage – and also on a 25% deal to see if it makes a difference.

It usually does, because the interest rates tend to be a bit cheaper on 25% deposit mortgages.

What if I’m self-employed? Can I get a 20% Buy to Let mortgage?

You could. The same kind of criteria applies as for an employed person getting a 20% deposit Buy to Let mortgage – in that some lenders won’t need you to prove any income at all. It’s purely based on the rental income from the property.

With other lenders there may be minimum income criteria. If that lender’s minimum income is £25,000 a year, for example, as long as your tax calculations prove you earn that, there’s no real difference compared to an employee.

Can you get a 20% Buy to Let mortgage if you have bad credit?

Yes. It depends on the lender and on how bad the credit is. If you had credit issues four years ago and you’ve kept your payments up to date since, it may not cause much impact.

But if you’ve defaulted, had a CCJ or were declared bankrupt last month, that will have a big effect. It’s not black and white, but there are lenders that will be okay with you not having perfect credit.

What are the costs involved here? Are there any other costs we need to consider?

If you’re looking at a Buy to Let mortgage with a 20% deposit, the most important and most expensive part is getting the deposit together.

A deposit is the first thing you need. You’ve then got the solicitors fees and valuation fees, if the lenders charge you those. They will tend to charge product fees, especially down the limited company Buy to Let route. You could add that to the mortgage if you want to, or pay it upfront.

You’ve then got mortgage broker fees. Generally the fees involved are not dissimilar to 25% deposit mortgages. The only difference is you’ve got less deposit to put down.

How do I apply for a 20% Buy to Let mortgage? Any differences in that process?

It depends. If you’re going to a traditional high street bank to get this sorted out, it’s not impossible, but you’re going to really limit the options. A Buy to Let specialist broker will have access to a lot more lenders than if you research online or go directly to a bank.

Have that conversation with a broker who’s dealt with a lot of Buy to Let deals in the past. Not only could they help you get the finance, but if the property is just not going to stack up financially or won’t be profitable, we could bring that to your attention. We’re a second set of eyes and a safety net to make sure you’re not investing in properties that aren’t going to work out for you.

What else do we need to know about a 20% deposit Buy to Let mortgage?

We’ve covered a lot, but the main point is that there are options available with a 20% deposit. In some situations you may feel that’s the right option. But if you could get an extra 5% deposit together, it really opens you up to cheaper rates and a lot more options.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Approved by The Openwork Partnership on 02/12/2024.