Buy to Let First Time Landlord

What are the requirements for a first time landlord to secure a Buy to Let mortgage?

The majority of lenders want you to be a residential homeowner, where you already own a property that you live in. But that’s not always the case. Some lenders out there will give you a mortgage based on your first property being a Buy to Let, but the requirements are slightly different.

The standard requirements are a 25% deposit – that’s quite typical with the Buy to Let market. Again, some lenders will accept less. The amount you can borrow is calculated from a combination of a few factors, but predominantly the rental income rather than your own personal income.

How much deposit is usually required for a Buy to Let mortgage?

It’s typically 25%. Some lenders will allow you to have a 20% deposit, but you’ll tend to find that the stress testing that they do in the background can be quite tricky. So although you might be able to put down a 20% deposit, the lender might not actually lend you enough.

Pre-Covid, some lenders allowed a 15% deposit, but the interest rates were very high. Currently, there’s nothing like that but, who knows, it might come back one day.
[Podcast recorded in September 2023]

Are there any specific mortgage options for first time landlords?

No – the majority of lenders will lend to you whether it’s your first property on a Buy to Let basis or your second or third. There are no specific products for your first rental property, your second or your third.

It can get trickier once you become what’s known as a portfolio landlord, which is where you own four or more mortgaged Buy to Let properties. You will find that some lenders may not give you a mortgage on that basis. But in terms of the conversation we’re having today, there’s not really a difference between first Buy to Lets or or second Buy to Lets.

How do lenders assess the affordability of a Buy to Let mortgage for a first time landlord?

It will differ depending on whether or not you already own a residential property. If you do already own a home, there are typically three factors that affect what you can borrow.

First is the rental income, second is your income tax bracket – whether you’re a basic rate taxpayer, higher rate taxpayer or if you’re lucky enough to be an additional rate taxpayer. The third factor is the type of product you take. A lot of lenders now will lend a larger mortgage amount on a five-year fixed rate, for example, compared to a two-year fixed rate.

If you don’t already own a property, so this would be your first purchase and you’re intending to rent it out, lenders will often base it on your ‘residential affordability’ – using your income rather than the property income.

The reason is to protect the lenders against ‘back door’ residential transactions: where someone might have a good deposit but not enough income to support buying a home. In the past, people would buy a property on a Buy to Let basis and then move into it.

So many lenders will often base a mortgage for a First Time Buyer, First Time Landlord on residential affordability, to prevent people bending the rules.

What are the common mistakes made by first time landlords when applying for a Buy to Let mortgage?

There are definitely a few things to sort of consider. One is that your standard high street lender may not actually offer you a Buy to Let mortgage. They might have a Buy to Let offering, but only give access to these via brokers.

Another thing that’s quite important is to engage with an accountant. Rental income is a taxable form of income, of course, so an accountant will make sure you’re in the best financial position on the tax side of things.

Are there any tax implications that first time landlords need to be aware of?

Obviously this is not to be construed as tax advice. But as an example, let’s imagine an employed person on £50,000 a year – they’re very close to the higher rate of tax. If they had a Buy to Let in their personal name, the rental income might push them over the tax threshold and they then find themselves paying 40% tax on the rental income they receive.

So you could find that with the tax implications and higher interest rates at the moment, a property that looks profitable on face value might actually end up delivering a loss.

We’ve done other podcasts about buying a property through a limited company. That might be an option to make your tax bill smaller. Or, going back to the example of the person on £50,000, if they are buying with a partner who is at home looking after the children, it could potentially make sense for the rental income to go under the partner’s name. That could reduce the amount of tax.

Do speak to an accountant as always for finer details on how that would work. It’s very important to get their advice, especially nowadays with interest rates as high as they are.

What are the factors that determine the interest rate for a Buy to Let mortgage?

I’m not going to quote any interest rates, but there are a few different factors. A common one is the amount of deposit you’ve got. So, for example, a 25% deposit is generally the bare minimum but if you add a larger deposit, interest rates might be lower.

The type of product you take can also make a difference. A two-year fixed rate and five-year fixed rate will have different rates.

Some lenders will have minimum income criteria. For example, you might need to be earning £25,000 a year to get a mortgage with some lenders, so it can obviously affect rates if you don’t meet those criteria.

It depends on your personal circumstances as well. If you have missed payments and CCJs and other adverse credit issues on your file, the standard high street lenders might not lend to you. You might therefore be looking at higher interest rates with specialist lenders.