Buy to Let First Time Landlord

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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.

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Whether it’s your first time, moving home or just looking for a better rate we would love to hear from you.

What is the difference between a fixed rate and a variable rate Buy to Let mortgage for a first-time landlord?

They’re exactly the same in terms of whether it’s Buy to Let or on a residential basis. A fixed rate will give you a flat rate for a certain period of time. It will naturally protect you against interest rate increases, but equally you’re not going to benefit from any rate reductions.

A variable rate is the polar opposite. It will move up and down either in line with the lender’s standard variable rate, or in line with the Bank of England base rate. So you will be affected by rate increases, but if the rates come down – which is something I’m sure we’re all praying for – you’re going to benefit from that more quickly.

So there are benefits and drawbacks to both. Speak to us and we’ll recommend what’s best for you based on your circumstances.

What is the typical loan term for a Buy to Let mortgage for first time landlords?

There isn’t necessarily a typical loan term. I would say that four out of five people looking at a Buy to Let mortgage will take the mortgage on an interest-only basis – so they’re only paying off the interest rather than the capital.

You could have an interest only mortgage of anything between five years and 25 years – the monthly payment is going to remain the same. The term isn’t linked to the monthly payment – it’s more about your plans for the property. If you’re later on in life and seeking to get some income behind you for the next 5 to 10 years and then sell the property, that’s what you’d base the mortgage on.

If you were the one out of the five taking the mortgage on a repayment basis, the term will make a difference. The longer the mortgage term, the lower the monthly payment.

There isn’t really a typical mortgage term. A lot of people have it in their head that it’s 25 years – but a good broker will explore your circumstances and your future plans and tailor something to your specific circumstances.

What type of property is the best investment for a first time landlord?

It will depend on where you are in the country, where you are in your personal life and your own circumstances. It’s very important to buy logically rather than emotionally.

I’m an old soul at heart – I love a good Georgian house, but it might not make the best rental property because it’s going to have more upkeep. Typically you’d want something newer and in a better condition.

You’ve also got to look at demand in certain areas. For example a small, remote village might not be a suitable place because of travel links. A lot of people prefer to live with good travel options for work.

In terms of the actual property itself, typically people prefer to buy a house rather than a flat or a leasehold property, as these have service charges and ground rent which comes out of your pocket. There are other complications in terms of increased solicitors’ bills for a leasehold property.

So typically, people look at houses: two to three bed terraced and semi-detached. It’s important to speak to local estate agents and find out what properties are in demand and realistically what rent they will generate.

How can a mortgage broker help somebody looking for a Buy to Let mortgage for the first time?

There are a lot of lenders that you as a client couldn’t access directly, even on the high street, because they only deal with mortgage brokers like us.

So if you’re looking to take that step into becoming a landlord, you need to engage a mortgage broker. You’re probably not going to get access to the best rates yourself. We’ll work with your circumstances: what you want to achieve for the property and your long-term aspirations.

You might buy one property, then you might buy a second, a third… I have clients with over 30 properties. It’s one of those things that evolves over time. So it’s definitely worth building that relationship with a broker. That way, we can help you not just for now, but in the future as well.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.

The information contained within was correct at the time of publication but is subject to change.