Buy to Let Deposit & Loan to Value Guide
Understanding Deposits and LTV for Buy to Let Mortgages
The amount of deposit you have can make a significant difference when arranging a Buy to Let mortgage.
It affects how much you need to borrow, the loan-to-value of the mortgage, the range of products that may be available and, in some circumstances, whether the expected rent is sufficient to support the borrowing required.
However, the deposit is only one part of the transaction.
A landlord also needs to consider purchase costs, mortgage fees, legal costs, property condition and the financial reserves needed after completion.
Putting every available pound into a property deposit can therefore be very different from having a properly planned Buy to Let investment.
This guide explains how Buy to Let deposits and loan-to-value work and some of the issues landlords should consider before purchasing a rental property.
What Is a Buy to Let Deposit?
The deposit is the part of the property purchase price that is not being funded by the mortgage.
For example, imagine you purchase a rental property for £200,000.
If you provide £50,000 yourself and borrow £150,000 through a mortgage, your £50,000 represents the deposit.
The mortgage represents the remaining portion of the purchase price.
The relationship between these two figures is normally expressed using loan-to-value, commonly abbreviated to LTV.
What Does Loan-to-Value Mean?
Loan-to-value compares the mortgage amount with the value of the property.
The basic calculation is:
Mortgage amount ÷ property value × 100 = LTV
Using the previous example:
£150,000 ÷ £200,000 × 100 = 75% LTV
The remaining 25% would represent the equity or deposit contribution at purchase.
Loan-to-value is one of the important factors lenders use when determining which mortgage products may be available.
Why Does LTV Matter?
Mortgage lenders divide their products into different loan-to-value ranges.
Generally, the lower the LTV, the more equity you have in the property.
A lower LTV can potentially provide access to a wider choice of mortgage products or different pricing, although this depends on the lender and market conditions.
LTV can also affect how much flexibility you have if the lender's valuation is lower than expected.
It is therefore useful to understand both your deposit in pounds and the resulting loan-to-value.
How Much Deposit Do I Need for a Buy to Let?
There is no single deposit requirement that applies to every Buy to Let mortgage.
The amount required can depend on:
lender;
mortgage product;
property type;
expected rent;
applicant circumstances;
ownership structure;
landlord experience; and
overall transaction.
Specialist properties can also have different requirements from straightforward residential Buy to Let properties.
Rather than assuming a particular deposit will always be sufficient, it is better to establish the likely mortgage options for the specific transaction.
A Larger Deposit Can Change Your Mortgage Options
Suppose you are considering a £250,000 property.
If you borrow £200,000, the mortgage represents 80% of the purchase price.
If instead you borrow £187,500, the mortgage represents 75%.
If you borrow £150,000, the mortgage represents 60%.
The property has not changed.
What has changed is the amount being borrowed relative to its value.
Different LTV levels can potentially provide access to different mortgage products.
This is why increasing or decreasing a deposit can sometimes change the mortgage options available.
A Bigger Deposit Does Not Automatically Mean a Better Decision
It can be tempting to put as much money as possible into the property to reduce the mortgage.
That can have advantages, but it also reduces the cash you retain outside the property.
For a landlord, cash reserves can be extremely important.
Unexpected costs could include:
repairs;
replacement appliances;
maintenance;
insurance excesses;
periods without a tenant;
property improvements;
safety work; and
other unforeseen expenses.
There is therefore a balance between reducing the mortgage and retaining sufficient financial reserves.
Don't Forget the Costs on Top of the Deposit
If you have £60,000 available, that does not necessarily mean you have £60,000 available purely as a mortgage deposit.
A property purchase can involve additional costs.
Depending on the transaction, these could include:
property purchase taxation;
mortgage arrangement fees;
valuation fees;
legal fees;
searches;
surveys;
insurance;
letting costs;
initial repairs;
refurbishment; and
professional advice.
The exact costs depend on the property and circumstances.
These should be considered before deciding how much of your available capital can realistically be used as the deposit.
Where Can a Buy to Let Deposit Come From?
A deposit might come from several sources depending on lender criteria and individual circumstances.
Examples can include:
personal savings;
proceeds from another property sale;
equity released from another property;
investment proceeds;
inheritance;
retained funds; or
other acceptable sources.
Lenders and solicitors will normally want the source of deposit to be clearly established.
Evidence may therefore be required showing where the money originated.
Why Does the Source of Deposit Matter?
Mortgage lenders and solicitors have responsibilities concerning the source of funds used in property transactions.
Simply showing that money is currently in a bank account may not always be enough.
You could be asked to provide evidence demonstrating how the funds accumulated.
For example, this might involve:
savings statements;
evidence of a property sale;
investment statements;
inheritance documentation;
evidence of additional borrowing; or
other supporting documents.
The exact evidence required depends on the circumstances.
Keeping a clear record of the deposit can help avoid unnecessary delays.
Can My Deposit Be Gifted?
Potentially, depending on lender criteria and the circumstances.
A lender may want to know:
who is providing the gift;
their relationship to the applicant;
the amount being gifted;
where the funds originated;
whether repayment is expected; and
whether the person providing the funds expects any ownership interest in the property.
Gifted deposits in Buy to Let transactions can be treated differently between lenders.
A gift should therefore be disclosed rather than treated as personal savings.
Can I Borrow the Deposit?
This depends heavily on the lender and the source of the borrowing.
Using borrowed funds for a deposit can increase overall financial commitments and risk.
A lender will need to understand the source of funds and may consider the additional debt when assessing the application.
Some forms of borrowed deposit may not be acceptable to particular lenders.
You should therefore establish whether the proposed source is acceptable before committing to a purchase.
Can I Release Equity From My Home for a Buy to Let Deposit?
Potentially.
Some property investors fund a Buy to Let deposit by raising additional borrowing against another property they own.
For example, a homeowner with sufficient equity may consider additional borrowing or remortgaging to release capital.
However, this means increasing borrowing against the existing property.
The existing lender or new lender will need to assess affordability, loan-to-value, purpose of borrowing and other criteria.
Early Repayment Charges may also need to be considered.
If borrowing is secured against your residential home, the implications should be understood carefully.
Can I Release Equity From Another Buy to Let?
Potentially.
An existing landlord may have equity in another rental property.
Subject to lender criteria, the property could potentially be remortgaged or additional borrowing considered to release some of that equity.
The released funds might then contribute towards another property purchase.
However, the existing property still needs to satisfy the relevant lender's requirements.
These may include:
maximum LTV;
rental affordability;
property value;
mortgage balance;
applicant circumstances; and
purpose of the additional borrowing.
Increasing borrowing on one property to fund another also increases overall portfolio debt.
Using Equity to Grow a Property Portfolio
Using existing property equity can allow an investor to recycle capital into additional purchases.
For example, a property may have increased in value since it was purchased.
If mortgage criteria allow, part of that increased equity might potentially be released.
However, increasing leverage across a portfolio can also increase financial risk.
Higher borrowing can mean:
larger mortgage commitments;
greater exposure to interest-rate changes;
less equity protection if property values fall;
increased rental affordability requirements; and
greater pressure during rental voids.
Portfolio growth should therefore be considered alongside overall debt and cash flow.
How Does the Deposit Affect Rental Affordability?
Deposit and rental affordability are closely connected.
The larger the deposit, the smaller the mortgage required.
A smaller mortgage generally means the property needs to support less borrowing under the lender's rental affordability calculation.
This can become important where the expected rent does not support the mortgage originally requested.
Increasing the deposit may reduce the mortgage sufficiently for the property to satisfy the lender's calculation.
However, whether this works depends on the lender and the size of the affordability shortfall.
A Simple Example
Imagine two investors buying identical properties for £200,000.
One needs a £160,000 mortgage.
The other needs a £140,000 mortgage.
The expected rent is identical because the properties are identical.
However, the second investor is asking the lender to provide £20,000 less.
That lower mortgage amount may make the lender's rental affordability calculation easier to satisfy.
This demonstrates why deposit size and rental affordability should not be considered separately.
What Happens If the Rent Doesn't Support the Mortgage?
If the lender's rental affordability calculation does not support the amount required, several possibilities may need to be considered.
Depending on the circumstances, these could include:
increasing the deposit;
reducing the mortgage amount;
considering a different lender;
considering a different mortgage product;
reviewing whether another affordability methodology is available; or
reconsidering the property.
Not every option will be available or appropriate.
The important point is that having the minimum deposit for a lender does not necessarily mean the maximum mortgage will be affordable.
Deposit Requirement vs Affordability Requirement
These are two separate tests.
A lender might theoretically allow mortgages up to a particular LTV.
That does not automatically mean every applicant can borrow up to that LTV on every property.
The property must also satisfy the lender's rental affordability requirements.
For example, your deposit might be sufficient for the product, but the expected rent might not support the mortgage amount required.
Both tests need to work.
What Happens If the Mortgage Valuation Is Lower Than the Purchase Price?
This is sometimes referred to as a down valuation.
Imagine you agree to purchase a property for £250,000.
The mortgage lender's valuer assesses it at £235,000.
The lender may calculate its maximum mortgage using the lower valuation rather than the agreed purchase price.
This could mean you need to provide more of your own money if you still intend to purchase at the agreed price.
Alternatively, the transaction may need to be renegotiated or reconsidered.
Why a Down Valuation Can Affect Your Deposit
Suppose your mortgage is being arranged at a particular maximum LTV.
If the property is valued lower than expected, the maximum mortgage available at that LTV may also reduce.
Your original deposit calculation was based on the higher purchase price.
You could therefore face a funding gap.
This is one reason it can be sensible to retain some financial flexibility rather than committing every available pound at the beginning of the transaction.
Can I Negotiate After a Down Valuation?
Potentially.
A lender's valuation does not automatically change the price you agreed with the seller.
However, the valuation may provide a reason to reconsider the purchase price.
Whether the seller is prepared to renegotiate is a matter between the parties.
If the price remains unchanged, you may need to provide additional funds or consider alternative financing, subject to the circumstances.
Does a Bigger Deposit Guarantee Mortgage Approval?
No.
Deposit size is only one part of mortgage underwriting.
Even with substantial equity, a lender may still consider:
rental affordability;
credit history;
personal income;
property type;
property condition;
applicant age;
landlord experience;
ownership structure;
existing borrowing;
source of funds; and
wider portfolio position.
A large deposit can strengthen some aspects of an application, but it does not override all lender criteria.
Does My Credit History Still Matter?
Yes.
Buy to Let lending still involves a credit assessment.
A lender may consider:
missed payments;
defaults;
County Court Judgments;
existing loans;
credit card balances;
mortgage history; and
other financial commitments.
Different lenders have different approaches to adverse credit.
Having a large deposit does not necessarily mean credit issues will be ignored.
Does Personal Income Matter?
It can.
Some lenders have personal income requirements for Buy to Let applicants.
Others may use personal income in certain affordability assessments.
Income may also be relevant where the lender wants to understand the applicant's overall financial resilience.
A strong deposit therefore does not necessarily remove personal income requirements.
Does the Property Type Change the Deposit Requirement?
Potentially.
More specialist properties can have different maximum LTV limits or lender requirements.
Examples can include:
HMOs;
holiday lets;
multi-unit properties;
unusual construction;
flats above commercial premises;
properties requiring substantial work; and
other specialist investments.
A deposit that works for a standard house rented to one household may not necessarily work for a more specialist property.
HMO Deposits
HMO mortgages can involve specialist lender criteria.
The lender may consider:
number of bedrooms;
number of occupants;
licensing;
landlord experience;
valuation method;
expected rental income; and
property configuration.
Maximum LTV and deposit requirements can therefore differ from those available for standard Buy to Let properties.
Holiday Let Deposits
Holiday-let mortgages can also have their own criteria.
Lenders may consider expected income, location, occupancy, property type and applicant experience.
The deposit requirement should therefore be established using lenders that are comfortable with the proposed holiday-let use.
Limited Company Buy to Let Deposits
Purchasing through a limited company does not remove the requirement for a deposit.
The lender will still assess the mortgage against the property value and its maximum permitted LTV.
The lender may also investigate where the company obtained the deposit.
If the directors are introducing money into the company, the structure and source of those funds may need to be documented appropriately.
Your accountant and solicitor can advise on the legal and accounting treatment of funds introduced into the company.
First-Time Landlord Deposits
A first-time landlord may have different lender options from an experienced landlord.
Some lenders are comfortable with first-time landlords, while others may have additional criteria.
If the applicant is also a first-time buyer and does not already own their residential home, lender choice may become more restricted.
The deposit should therefore be considered alongside the applicant's experience and wider circumstances.
Should I Use My Entire Deposit to Reach a Lower LTV?
Not automatically.
Reaching a lower LTV band may potentially provide access to a different mortgage product.
However, the benefit needs to be considered against the amount of additional capital being committed to the property.
For example, using another £10,000 of savings to obtain a slightly different mortgage product may not necessarily be worthwhile if it leaves you with almost no emergency reserve.
The mortgage should be considered as part of the overall investment rather than in isolation.
Compare the Overall Mortgage Cost
A lower interest rate can be attractive, but it does not tell you the entire cost of a mortgage.
Buy to Let products can include:
arrangement fees;
valuation costs;
legal costs;
Early Repayment Charges; and
other product conditions.
Some mortgage arrangement fees can also be substantial relative to the amount being borrowed.
The overall cost should therefore be considered alongside the interest rate and deposit.
Should I Add the Mortgage Fee to the Loan?
Some mortgage products may allow certain fees to be added to the mortgage, subject to lender criteria.
This can reduce the amount that needs to be paid upfront.
However, adding a fee to the mortgage increases the amount borrowed and interest may be charged on that additional borrowing.
It could also affect the loan-to-value calculation.
Whether paying a fee upfront or adding it to the mortgage is appropriate depends on the circumstances and lender rules.
What Is Equity?
Equity is broadly the difference between the property's value and the mortgage secured against it.
For example, if a property is worth £300,000 and has a £180,000 mortgage, there is £120,000 of gross equity before considering selling or refinancing costs.
However, having £120,000 of equity does not mean the full £120,000 can necessarily be withdrawn.
The lender will apply its own maximum LTV, affordability and underwriting criteria.
What Happens to LTV If Property Values Fall?
Loan-to-value changes when either the mortgage balance or property value changes.
Imagine a property is worth £200,000 with a £150,000 mortgage.
That represents 75% LTV.
If the property's value subsequently falls while the mortgage remains around the same level, the LTV increases.
A higher LTV could potentially reduce future remortgage options.
This is one of the risks associated with highly leveraged property investment.
Property values are not guaranteed to rise.
What Happens to LTV If Property Values Rise?
If the property increases in value while the mortgage balance remains the same or reduces, the LTV can fall.
This may potentially improve future refinancing options.
However, future mortgage lending will normally depend on the lender's valuation at the time of the new application.
An online property estimate does not guarantee the value a mortgage lender will accept.
Interest-Only Mortgages and Equity
Many landlords consider interest-only mortgages.
With interest-only borrowing, monthly contractual payments generally cover the mortgage interest rather than reducing the original capital balance.
This means your mortgage debt may remain broadly unchanged unless you make permitted capital repayments.
Your equity position can therefore depend heavily on changes in the property's value and any capital you repay.
Property appreciation should not be assumed.
Repayment Mortgages and Equity
With a capital-and-interest repayment mortgage, monthly payments include repayment of part of the original mortgage balance.
Provided the required payments are maintained, the balance should reduce over time.
This can gradually increase your equity even if the property's value remains unchanged.
However, monthly payments will generally be higher than for an equivalent interest-only mortgage.
The appropriate structure depends on the landlord's circumstances and strategy.
Think About Your Exit Strategy
Deposit and LTV should also be considered alongside your longer-term plans.
Ask yourself:
How long do I expect to own the property?
Do I intend to build a portfolio?
Will I want to release equity later?
Am I planning to reduce debt over time?
What happens if property values fall?
How would I repay an interest-only mortgage?
Do I have sufficient financial reserves?
These questions can be just as important as finding the initial mortgage.
Buy to Let Deposit Checklist
Before committing to a property, consider:
total savings available;
proposed deposit;
resulting loan-to-value;
mortgage amount required;
expected rental income;
purchase costs;
mortgage fees;
legal costs;
taxation;
survey costs;
initial repairs or improvements;
source of deposit;
evidence required for the source of funds;
emergency reserves;
potential rental voids;
property type;
ownership structure; and
longer-term investment strategy.
The amount you can put down and the amount you should put down are not necessarily the same.
Speak to Cambs Ely Mortgages About Buy to Let Deposits
If you're considering purchasing a rental property, we can help you understand how your deposit, loan-to-value, expected rent and mortgage amount interact.
We can also discuss different lender criteria and how changing the mortgage amount or deposit could affect the options available.
Cambs Ely Mortgages provides Buy to Let and property finance advice to landlords and property investors in Ely, Cambridge, Cambridgeshire and across England, with remote appointments available.
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Important Information
The information contained in this guide is intended for general educational purposes and does not constitute personalised mortgage, investment, financial, legal, accounting or tax advice.
Buy to Let deposit requirements, maximum loan-to-values, rental affordability calculations, interest rates and lender criteria depend on individual circumstances, property type, ownership structure and the relevant lender and may change.
Examples in this guide are illustrative only and do not represent a mortgage recommendation or guarantee of borrowing.
Property investment involves risk. Rental income and property values are not guaranteed.
Borrowing against another property to fund a Buy to Let purchase increases the debt secured against that property and should be considered carefully.
Your property may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate some forms of Buy to Let mortgage.