Three ways to breakdown the buy-to-let barrier and get a mortgage

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The UK’s residential rental market has been strong for over two decades, and data from Statista reveals that aggregate annual rent paid by tenants increased by £59 billion between 2000 and 2020.

Given that the rental market is worth approximately £86 billion, it’s little wonder that people often see it as an easy way to make money.

But as any landlord will tell you, it’s not always easy. Between contract disputes, repair costs, paperwork and taxes, there’s a lot that goes into being a landlord.

Yes, the rewards can be lucrative and, overall, it’s far from the toughest job in the world. But it’s also fair to say that it’s a business with plenty of potential pitfalls.

In fact, it’s a business that most people aspire to get into but stumble at the first hurdle.

Securing your first rental property can be a lot tougher than people expect because of the upfront costs.

Everyone searching for a place to buy knows that deposits are one of the biggest obstacles to overcome. Residential buyers are often asked to put up as much as 20% of the property’s value before a bank will consider approving a mortgage.

Government schemes can help. For example, it’s possible to get a 95% mortgage. The government-backed scheme is open to first-time buyers and existing homeowners looking to get a new build property worth up to £600,000.

Buy-to-let deposits are a different ball game

This means they only have to save up for a 5% deposit. Of course, individual circumstances can affect the size of a residential deposit.

But, in general, it’s between 5% and 20%. For buy to let mortgages, the average minimum deposit is 25%. Some lenders will ask for 40% of a property’s value in certain situations. That’s a huge barrier to entry if you already own a home and you’re looking to save up and get a second property.

Indeed, the average house price in England is £271,000, according to the Office of National Statistics. Securing a buy to let mortgage on a property costing this much would require a minimum deposit of £67,750.

Saving that amount of money can be tough at the best of times let alone when you have an existing mortgage and bills to pay.
But there are ways to maximise your saving power and, in turn, your purchasing power.

If you know you’re going to apply for a buy to let mortgage, setting up an individual savings account (ISA) can be a good option. ISAs offer around 2% interest which, although low, is better than standard current accounts. Even better, a stocks and shares ISA gives you the ability to make tax-efficient investments.

This strategy can be used by savvy homebuyers who want to put their savings into investments and, potentially, earn a better return than a standard ISA. For example, some people may consider index-tracking ETFs, which are accumulative products that reinvest their dividends back into the ETF.

Alternative ways to find a buy-to-let deposit

These products ring-fence any profits from capital gains tax. As long as you’re within the annual limit (£20,000 in 2021/2022), you won’t pay tax on profits gleaned from an investment made via an ISA.

Assuming your investments are profitable, this can be an effective long-term saving strategy that can help you hit your target. Prospective property owners can also look at remortgaging options.

It may be possible to release equity from your current home to get a deposit. However, this strategy has to consider the added cost of borrowing money. What’s more, you need to know how much equity you can release.

The exact figure will vary between lenders. But let’s say you’ve got 40% equity worth £100,000. A lender might allow you to borrow up to 70% of that figure – £70,000. Again, you will have to factor in the long-term cost of borrowing this money on top of getting a buy to let mortgage.

The reality is that there are positives and negatives. Saving in the traditional way will take longer, stocks and shares ISAs don’t guarantee a return, and remortgaging can be costly.

But as long as you weigh up the options and it’s financially viable, you can overcome the biggest barrier to becoming a landlord, namely the deposit.

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