Buy to let deposit

by Readers Question

7:33 AM, 17th February 2014
About 7 years ago

Buy to let deposit

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Buy to let deposit

I would like to ask why lenders require buy to let landlords to have a 25% deposit whereas residential borrowers only 10%?

I would assume, if both a BTL landlord and residential purchaser defaulted, it would be more risky for a bank to get back their funds [loan] via from a residential purchaser as it would have a higher LTV. Buy to let deposit

So what is the reasoning for this?

Thanks

Danny



Comments

Mark Alexander

7:39 AM, 17th February 2014
About 7 years ago

Hi Danny

It has been proven statistically that people will fight a lot harder to save their own homes from repossession than one which they rent out to somebody else. We all need a roof over our heads after all.

Therefore, it all comes down to risk.

Cost of borrowing reflects risk too. You will often get a much better deal if you put down a 40% deposit than you would if you only have a 20% deposit. The same is also true with residential mortgages. With the "Help to Buy" scheme it is possible to borrow 95% to buy your home, meaning you only need a 5% deposit. However, compare the rates against deals where you have a bigger deposit and you will notice a huge difference.

I hope that helps 🙂
.

Mark Alexander

7:40 AM, 17th February 2014
About 7 years ago

Reply to the comment left by "Mark Alexander" at "17/02/2014 - 07:39":

PS - it is possible to get an 85% mortgage for buy to let, meaning that you would only need a 15% deposit. As per my comment above though, expect to pay more!

Use this calculator to research the market to see the types of buy to let deals that are available and the maximum loans based on each lenders criteria.
.

8:31 AM, 17th February 2014
About 7 years ago

Hi Danny,

A lower deposit is needed for a resi mortgage because the borrowing is based on how much the person earns. It is also a regulated activity, and therefore there are much more stringent checks on applications and also brokers putting them through.

BTL lending is an unregulated activity and is based on the amount of borrowing the RENT will support. However, most lenders like to see circa 125% coverage of the mortgage by the rent, so that means putting in a larger deposit.

Neil Patterson

9:09 AM, 17th February 2014
About 7 years ago

Reply to the comment left by "Vanessa Warwick" at "17/02/2014 - 08:31":

Hi Danny,

As Venessa said BTL is based on the rental income covering the interest only mortgage payments rather than a multiple of earned income.

Therefore most people only have enough income for one main residence, but in theory if the rental stress testing fits you could have an unlimited number of BTL mortgages potentially leaving you and the banks open to substantial losses if a major swing happens to any part the economy.

Hence they will limit your borrowing potential by way of increasing the deposit required.

If you could get 95% I know Mark would have gone Billy bonkers lol.

Peter Hindley

11:11 AM, 17th February 2014
About 7 years ago

Hi Danny
There is also the issue that if the Landlord defaults on the loan, the Lender has to "sort" the Tenant issues out which will eat into their recovery costs.

Howard Reuben CeMap CeRER

11:18 AM, 17th February 2014
About 7 years ago

Danny, consider changing the word "deposit" to "pain money".

If the borrower of an investment property falls in to default and ultimately the property is at risk of being repossessed, they will simply walk away if they have invested little or no 'pain money' in the business in the first place.

The lenders want to have confidence in the future that the borrower will do what they can to maintain mortgage payments and keep the asset alive, and they will only really feel this if you feel the loss too - hence the 'pain'.

As said above, this is a risk management exercise.

You said "it would be more risky for a bank to get back their funds [loan] via from a residential purchaser as it would have a higher LTV. " Actually, it doesn't matter whether the borrower is a residential or BTL borrower, if the LTV is high, the lender stands to lose out more than the borrower does, and that simply isn't good business sense.

You'll always find that the higher the LTV, the higher the interest rate as the lenders factor in the risk cost, but also note that the highest BTL LTV products are not for everybody as the lenders have stricter criteria the higher the risk.

Colin Childs

13:22 PM, 17th February 2014
About 7 years ago

Following on from previous comments. Having an equity stake in any business venture is a key requirement of commercial lending.

Off your topic but in a similar vein. Much gets written in the media regarding SME's being unable to raise finance. Having spent many years in the sector personally. Directors of SME's have an aversion of giving personal guarantees. As they are not prepared to risk their personal assets.

Banks are not in the market to provide risk capital. Lending margins are not set high enough for that.

Jerry Jones

14:34 PM, 17th February 2014
About 7 years ago

Reply to the comment left by "Colin Childs" at "17/02/2014 - 13:22":

> Lending margins are not set high enough for that

Barclays lent my tiny Ltd Co £7k with a personal guarantee - they still wanted 20% APR!!

Neil Patterson

15:20 PM, 17th February 2014
About 7 years ago

Reply to the comment left by "Jerry Jones" at "17/02/2014 - 14:34":

Ouch Jerry,

It would have been cheaper on a BarclayCard !

Jerry Jones

16:40 PM, 17th February 2014
About 7 years ago

Quite. I was moving the setup costs of http://www.peglegs.co.uk off a card in my name, onto a loan in the company's name, to make my personal credit score better. The cashflow aspect was not that important (but still irritating)

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