How much down payment do you need for an investment property?

If you are purchasing a property using a buy-to-let (BTL) mortgage, you can expect to pay a higher deposit than for a property bought with a consumer mortgage. How much down payment you will need for your investment property will depend on the lender and your expected rental income.

First, every lender and mortgage product is different, so you might find that one demands a 30% deposit while another will be happy with 25% (although you may have to pay a higher interest rate on the loan). In general, a deposit for a BTL property will be in the 20-40% range.

How much of a down payment you will need for your investment property may also depend on how much rent you are expecting to receive. Lenders will usually stipulate that your rental income is equal to at least 125% or 130% of your mortgage payments. If your expected rental income is below this figure, you may need to opt for a smaller mortgage which will push up the deposit you need.

You can search online housing sites and check with local letting agents to get an idea of average rental asking prices in the area you are looking to invest in.

How to increase your deposit

If you do not have enough funds for the required down payment, there are several options you may want to consider.

Bank loan: If you have a good credit rating, you may be able to take out a standard secured or unsecured bank loan to cover the shortfall in your deposit.

Equity release: If you are over 55, you may be able to access the cash that has built up in your own home, or another investment property, through an equity release product (usually a lifetime mortgage). You will receive a tax-free lump sum or regular payments.

Family and friends loan: This can sometimes be subject to regulation, especially if you intend to live in the property, so it is wise to get legal advice. Regardless, it is a good idea to ensure that the terms of the loan are in writing.

Remortgage: This is similar to equity release, but you will continue to make monthly payments as with your existing mortgage. You also won’t need to wait until you are 55.

Disclaimer: The information above, which is arranged in alphabetical order, should not be regarded as advice. The best way for you to fund your investments will be unique to your situation. You may want to discuss your options with a professional financial advisor.

Using your deposit to maximise your investment returns

Professional investors often base their ROI calculations on the deposit they’ve paid to acquire a property NOT the property’s full value. This is because the mortgage is irrelevant in terms of cash flow and profit and so doesn’t reflect the true returns.

The formula for calculating return on cash invested (ROCI) on a mortgaged property is:

increase in value / down payment x 100%

For example, if a property that was bought, on a 75% mortgage, for 350k increases to 450k in value, the ROCI is 100 / 87.5 x 100 = 114%

If you have a large amount of money to invest, it is usually wise to spread this across a portfolio rather than use it all on a large deposit on one property. For example, if you have 100k to invest, consider putting the minimum down on several properties to benefit most from the returns.

Click this link for more in depth information on how to calculate return on investment.

Need more advice about down payments and BTL mortgages? Come to a free, local Fielding Financial seminar

For more detail on how much down payment you need for an investment property, talk to a Fielding Financial property specialist. We recommend a face-to-face chat through one of our popular free seminars.

We run these regularly, up and down the UK, so book the one that’s closest to you or sign up for our seminar reminders so we can keep you updated with new dates and venues.