How much deposit does a first time landlord need?
There is a general rule-of-thumb when it comes to mortgage deals – the larger the deposit you can supply, the less of a risk you represent, and so the more favourable the deal you will be able to get. As a first-time buyer applying for a Buy-to-Let mortgage, in the eyes of the lenders you are a higher lending risk than usual, and so they will inevitably ask you for a higher than average deposit.
You should expect to provide at least 25% of the property’s value up front, although in some rare cases a lender may ask for up to a maximum of 60% as a deposit. This may sound like a demanding criteria, but you should remember that the larger the deposit you can provide, the more likely that your mortgage application will be accepted, and the better interest rate you will be offered.
The rent will cover the mortgage anyway – what’s all the fuss about?
While it might be true that the rent you set will cover the mortgage (and perhaps a little extra for profit), in reality this only happens when everything goes to plan and the property is let. There will probably be times when your property stands empty between tenancies – leaving you with no income during that period, but still with mortgage repayments to honour.
You should also bear in mind the additional costs of home ownership and your duties of a landlord – such as landlord insurance, agency fees, property maintenance and repairs – which you will also need to cover. This will all have an impact on the level of rent you need to set, and how this fits with the prevailing market rates at that time and in that location.
It is important to have a contingency plan in case your property has no tenant for a period of time – or perhaps a tenant who is defaulting on their rent payments – leaving you with no income. A good rule of thumb when planning your annual cash flow forecast is to allow for at least one or two months per year when the property could be untenanted. This way, you are likely to run a surplus profit, and be in a good place financially if you experience problems.