Buy to Let First Time Landlords

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Podcast approved by The Openwork Partnership on 24/04/2024.

Can I Buy to Let as a first time buyer?

Yes, you definitely can. However, the lender is likely to assess you on your affordability based on buying a residential property, rather than on the normal Buy to Let criteria.

There are usually minimum income requirements as well, around £25,000 a year, although this does vary from lender to lender. Some are a little bit more lenient, while others may expect you have a little more.

There are different reasons why you might want to get a Buy to Let as your first property. It could be because you’re just living at home with your parents, are priced out of the area where you live, but you want to get on the housing ladder.

So you may be happy to purchase a property outside of your local area, where it’s more cost effective. It’s important to explain the reason why your first home will be a Buy to Let rather than a property for you to live in. It is quite a rare situation, so lenders are likely to want to look into your income a bit more to make sure that you can afford that property.

Can I change my residential mortgage to a Buy to Let? Can I get a Buy to Let mortgage and live in the property myself?

Yes, there are ways that you can change your residential mortgage to Buy to Let. One option is for you to approach your existing lender and seek their consent to let the property out. Some lenders will charge you a fee for this and some won’t.

You’ll probably find that they’ll want you to let your property out using some form of agreement such as an assured shorthold tenancy agreement.

You should try to obtain consent to let rather than just going ahead, to ensure that you’re not in breach of any mortgage terms and conditions. It’s also important for the lender because it gives them the chance to cover off any relevant points with you.

For example, some people don’t realise your property has to be suitably insured when it’s let. Consent to let will also suit you if you perhaps want to move back into the property at some point in the future.

Your second option would be to change your mortgage from residential to Buy to Let. To do this, you’d need to complete a remortgage either with your existing lender or moving to a new lender that accepts first-time landlord applications. As you’d expect, this is where a good broker comes in. We’ll be able to find a lender that meets your needs.

To address the second question, if you were to live in a property that’s subject to a Buy to Let mortgage, then you would definitely be in breach of contract. That wouldn’t be looked at favourably by a lender. So if you ever intend to live in the property, you would need to arrange a residential mortgage from the outset as opposed to a Buy to Let.

What criteria will I need to meet for a first time landlord Buy to Let mortgage?

The best first step is to make sure you have a good credit rating. We’ll touch on this more later. I’d certainly advise anyone – with Buy to Let or residential – to get a copy of your credit report and check if there’s anything that needs addressing.

If you already own a home as a first-time landlord, then a lender will base any affordability calculations on the level of rental income that you will receive along with your tax banding.

If you don’t already own a property, so you’re both a first-time landlord and a first-time buyer, lenders often require a minimum income. Lenders will base your application on your ability to repay the Buy to Let mortgage without relying on the rental income.

Some lenders only accept people who are owner-occupiers already – that means you have to own your own property and have been living in it for a minimum of six months.

This is where a mortgage broker comes in. We look at the lenders and find the right one to meet your needs and circumstances. With regard to documents, that’s all fairly standard. Both the lender and broker will want proof of ID such as a driving licence or passport.

We also need to see proof of income, with payslips and bank statements if you’re employed. If you’re self-employed you will need SA302 tax calculations and your accounts.

Should I get an interest only or a repayment mortgage?

That’s the million dollar question! Most people do tend to go the interest only route, because they want to keep the payments as low as possible. In effect all you’re paying is the interest on that monthly mortgage. You’re not paying back any of the capital, so the payments are significantly lower.

It’s important to say though, that you must have a repayment strategy in place. That may be to sell the property in years to come to fully repay the mortgage.

However, there are people who choose a repayment mortgage. The monthly payment is higher and there is less monthly income retained during those early years, but the property is repaid at the end of the mortgage term.

So what people need to ask themselves is whether they want an additional monthly income, or for the property to give them a lump sum capital gain in later years? The repayment method is usually based on those personal circumstances and key objectives. We would recommend speaking to an accountant or tax adviser with regards to any tax implications or benefits of each option in relation to income and capital gains taxes.

How much deposit will I need?

Generally you should expect to put down 25% or more as a first-time landlord. A lot of people don’t realise that – they assume that they just put down say five or ten percent as with a residential mortgage.

A lender may also ask you for proof of your deposit as part of your application assessment. So it’s important to keep digital records to send across showing proof of your deposit.

Speak To An Expert

Our highly experienced Advisers are ready to help you with either buying or remortgaging a home, protecting your property and lifestyle along with saving you time and effort, ensuring you have a competitive deal right for you.

How much can I borrow?

It does vary from lender to lender. Normally lenders look at the monthly payments of the mortgage against the rental income.

It also depends very much on the amount you’re going to borrow against the value of the property – the Loan to Value. Lenders apply a stress test to this, so when you come to a mortgage broker it’s important to know how much your property is going to rent for.

Lenders typically want a monthly rental payment that’s at least 125% of the monthly mortgage  payments based on an interest only basis, based on an assessment rate of interest which could be higher than the rate on the product applied for. That’s the calculation they use to decide how much you could borrow.They can also vary their stress tests as well, using rates from the last two years to five years.

There’s also something available called ‘top slicing’ where, if you personally earn over a certain amount, that can boost your affordability on the rental property. So your potential borrowing is not a straightforward calculation that a mortgage adviser can rattle off immediately. People sometimes expect us to give them the answers straight away- but we need to go away and have a look based on your specific situation.

What if I have bad credit?

Don’t let it put you off. Having bad credit doesn’t necessarily mean that you can’t buy your first Buy to Let. It depends on how significant your credit issues have been.

For example, if you missed a payment, that’s not so bad. But if you had a County Court Judgment for not paying a debt, that might become an issue. We like to put customers at ease so that they feel they can be open and honest about any past issues. The more information we’ve got the better advice we can provide, and the better the product.

We can search through all of the lenders at our disposal and try to find someone that can potentially help you based on your circumstances.

Do you have to pay stamp duty as a first time landlord? What other costs are involved?

Whether or not you have to pay stamp duty is very much going to depend on whether you’re a first-time landlord or a first-time buyer. If you’re buying a Buy to Let as an additional property, you’re going to have to pay an additional 3% of the purchase price on top of the standard rate at the moment. If, however, you’re a first time buyer, you may get the benefit of not having to pay any stamp duty at all depending on if the property purchase price is below the threshold or first time buyer exemption amount.

Your broker can advise at the time of your application whether or not your purchase is going to be exempt from stamp duty – as obviously these thresholds change.

There’s a range of other costs to consider and, again, that’s something that we go through with our customers to make sure everything’s been ticked off. As far as the Buy to Let mortgage itself is concerned, you may have to pay a product fee of perhaps £1,000 to £3,000. You’ll have the option to add this to your loan or pay it upfront.

You may also have to pay a valuation fee, and there are solicitors’ or conveyancers’ fees to consider as well. Landlord insurance is another one – you must make sure you’re suitably insured to protect yourself and your tenants. Ongoing property costs are important too – for the upkeep of your property, decorating it, general repairs and unforeseen bills.

Something else that’s coming down the tracks is changes to Energy Performance Certificate (EPC) requirements. As a landlord, you might want to start planning ahead and start upgrading your loft insulation or your windows. That’s not just wear and tear – you’ve got to have one eye on the future as well.

Who offers Buy to Let mortgages for first time landlords?

You can find them with high street lenders – those well-known names that everybody knows  –  as well as some specialist mortgage providers. Finding the right lender can be quite time consuming and difficult by yourself, but we can help you remove the stress from the process.

We’ve gone through some of the complexities here today, and if you’re new to Buy to Let, it’s always a good idea to speak to a mortgage broker for some advice prior to your application.

How do I get my first Buy to Let mortgage? What’s the process?

Because there’s a lot to consider in finding the right mortgage, get a broker on board to help and support you. We save you time by researching what’s available, plus we submit the application for you. We help you to understand what you need and get all your documents together.

A final point before you make a decision about entering the Buy to Let market is to be aware of the additional tax implications. That’s something people don’t always think about – but in effect you’re gaining an additional income, and that will be subject to tax. We’ll always advise you to speak to a tax specialist. You are entitled to tax relief on certain aspects of the property’s upkeep as well such as property repairs, letting agency fees etc.

Also, it might come to a stage when you look to sell that property which might mean capital gains tax is payable.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Any final thoughts?

It’s important to think about the what-ifs… What if your tenant leaves – how could you cover the associated costs with the property? There are rent guarantees and protection schemes available. If you’re going through a letting agent they can chat with you about what’s available.

Protection is always key in this world – for your own property or for a Buy to Let, so do have a think about that side of things.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Podcast approved by The Openwork Partnership on 24/04/2024.

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