How much deposit do I need for a buy to let mortgage?

The standard answer is 25 per cent

Typical buy to let lending is capped at 75 per cent loan to value. On a £200,000 purchase that is a maximum loan of £150,000 and a deposit of £50,000. Some lenders go to 80 per cent, so a £40,000 deposit on the same property, but the rate premium is usually noticeable and the rental cover test gets harder to pass at the larger loan size.

That headline figure is only half the story. Buy to let lending is assessed on the rent as well as the property value, and on plenty of cases it is the rent, not the 75 per cent cap, that decides the maximum loan. When that happens the deposit has to rise to fill the gap.

When the rent forces a bigger deposit

Lenders apply an interest coverage ratio, or ICR, test. The expected rent has to cover a stressed interest calculation by a set margin, typically 125 per cent for limited companies and basic rate taxpayers and 145 per cent for higher rate taxpayers borrowing in a personal name. How that calculation works in full is covered in our guide to how lenders stress test buy to let affordability.

Here is the effect on the deposit. Take the same £200,000 purchase with an expected rent of £950 a month, which is £11,400 a year. A lender stressing at 5.5 per cent with a 145 per cent ICR will lend a maximum of £11,400 divided by 0.055 times 1.45, which is £11,400 divided by 0.07975, roughly £142,900. That is below the £150,000 the 75 per cent cap would allow, so the deposit rises to about £57,000, roughly 28.5 per cent of the price.

Run the same rent through a 125 per cent ICR, the usual test for a limited company, and the maximum loan is £11,400 divided by 0.06875, about £165,800. That is above £150,000, so the 75 per cent cap binds and the 25 per cent deposit stands. Same property, same rent, different deposit requirement. You can test your own figures in our buy to let affordability calculator.

Where the deposit can come from

Lenders care about the source of the deposit, not just the size. The usual acceptable sources are:

• Savings. The simplest route. Expect to evidence the build-up with bank statements.
• Equity from another property. Commonly released by remortgaging an existing home or rental. Lenders treat this as a normal source, though the new borrowing is factored into affordability.
• A gift from family. Most lenders accept gifted deposits from close relatives with a signed letter confirming no repayment is expected. Gifts from friends or more distant relatives are harder to place.
• A director's loan into a limited company. For limited company purchases the deposit usually enters the company as a director's loan, which can later be repaid from rental profits without a dividend tax charge.

Borrowed deposits, such as unsecured loans or credit cards, are declined by almost every lender. Builder incentives and vendor gifted deposits are restricted too.

First purchase, tighter rules

Deposit requirements also interact with experience. A number of lenders hold first time landlords at 75 per cent even where their normal range reaches 80, and a few want more background income before lending at all. What lenders look for from a first purchase is covered in our guide to first time landlord mortgages.

The costs on top of the deposit

The deposit is the largest cheque but not the only one. A realistic budget also covers:

• Stamp duty. Buy to let purchases attract the additional property surcharge on top of the standard bands, which adds a five figure sum on many purchases.
• Valuation and lender fees. Valuation fees vary by property value, and many buy to let products carry an arrangement fee, often around 2 per cent on the keenest rates, which can sometimes be added to the loan.
• Legal costs. Conveyancing on a purchase, plus the lender's legal work.
• A cash buffer. Lenders increasingly like to see funds left over after completion, and void periods arrive whether or not the budget allowed for them.

What decides marginal cases

Where a case sits close to the line, the levers are usually the ICR basis rather than the deposit itself. A five year fixed product is often stressed at the pay rate rather than a higher notional rate, which lifts the maximum loan. A limited company structure moves the ICR from 145 to 125 per cent for a higher rate taxpayer. And a realistic rent figure supported by an ARLA letter or comparable evidence can settle a valuer's doubt. The deposit question is rarely just a percentage. It is the meeting point of the LTV cap, the rent and the structure of the borrowing.