Buy to Let First Time Landlord
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Buy to Let First Time Landlord
Scott West talks to us about the Buy to Let mortgage process for first-time landlords.
What are the requirements for a first time landlord to secure a Buy to Let mortgage?
The main things lenders are looking for are age, income, credit history, property type and experience. Most lenders are going to want you to be 21 although some will do 18 – as long as you’re an adult you can consider it.
Some lenders will require you to have a minimum income which is typically £20,000 or £25,000 from sources other than property. You need to have an existing income stream.
Your credit needs to be clean or very close to clean, particularly for a first-time landlord. Property types like HMOs, student lets and properties for vulnerable tenants – all the stuff that’s really high yield – aren’t really suited to first-time landlords.
That’s for experienced landlords. Lenders won’t lend to you for these, so keep it simple with your first property. By two-bedroom terraced houses or flats in areas that have good rental demand.
It’s all about the plausibility of the entire application – if you want to buy your first Buy to Let property, but you have no income, no experience and no real business plan in place, a lender’s not going to have faith that it will work. We need to create a narrative that a lender can understand.
How much deposit is usually required for a Buy to Let mortgage?
Pretty much every lender will require a minimum of 25%. A few lenders may take 20%, which is an 80% mortgage – but pairing those up for the first time landlord doesn’t usually work. The rates are also quite a bit more expensive if you go to 80%.
Are there any specific mortgage options for first-time landlords?
Not particularly. First time landlords have no properties, which means you can use pretty much any lender in the market. Things changed in 2017 when the PRA and the FCA amended how they determine if you’re an experienced landlord.
If you’ve got four or more properties, you’re experienced. If you’ve got less, you’re not seen as a professional landlord. Some lenders won’t actually take on professional landlords.
As a first-time landlord, then, there are no real restrictions on lenders.
You might want to consider personal ownership versus limited company ownership. Setting up a limited company is often a sensible option from a tax and ownership perspective, but speak to an accountant to confirm what’s right for you.
How do lenders assess the affordability of a Buy to Let mortgage for a first-time landlord?
Affordability is assessed the same way as for anybody else. Lenders use ICRs – Interest Coverage Ratios, plus a stress test. So if the mortgage payment is going to be £1,000 a month, they’ll stress that by 25% or 45% extra, and that covers tax liability, maintenance of the property and rental voids. It essentially gives you a buffer.
Your mortgage payment might be £1,000, but the lender will say you need £1,400 or £1,250 in rental income to give you that buffer. We can run through that with you on individual properties.
In terms of personal income, lenders look at pay slips and so on just to cover off the plausibility point. You’ve got to be able to live outside of the rental income.
They will also look at the location. Is it local to you? Are you trying to buy a very high value property as your first one? Does it make sense? That’s a really key point for a first-time landlord.
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What are the common mistakes made by first-time landlords when applying for a Buy to Let mortgage?
Underestimating costs is a big one. A lot of clients fail to account for maintenance, rental voids and letting fees. Up front there will also be stamp duty – and accountant fees if you’re doing this through a company.
Choosing the wrong property is also fairly common. If you’ve not been a landlord before, you don’t really know what you’re looking for. You might just buy a property local to where you live, which might make sense on paper but there are other things to consider. Is it a good rental area? Are you going to have the right tenants? Is it a good yield? Does it fit the business model?
Ownership structure is really important, and you need to consider carefully whether limited company or personal ownership is right for you. In most instances, limited companies are a better option if you plan to own multiple properties – from an income point of view and when you eventually sell them . Again, your accountant will give you bespoke advice on that.
Are there any tax implications that first time landlords need to be aware of?
Stamp duty liability for the purchase is key. It will depend on whether you currently own your own home or not, and whether you’re buying through a company. There are stamp duty calculators online you can use.
Also, that rental income is going to be taxed somewhere, whether it’s in your personal name or company name. There are some allowable expenses for a company which you don’t get in your personal name – so speak to your accountant on that one.
There’s also capital gains tax – not a concern for today, because you’re buying, but at some point you may want to sell the property. At that point there will be capital gains tax to pay based on the increase in the value of the property. It’s important to be aware of that.
What factors determine the interest rate for a Buy to Let mortgage?
Loan to Value is a key one. As we said earlier, you need a 25% deposit and a 75% mortgage, that’s the standard.
If you increase your deposit and we go down to a 60% Loan to Value, rates get slightly better. If you’ve got a 50% loan to value, they get better again. There are no further breaks from there, so no need to deposit more than 50%.
Borrower profile is another factor, which means your credit history and income, depending on what we’re doing with the application.
Property type is important – and for HMOs and student lets, rates are higher than for single houses and single flats.
The market also influences the rate. Obviously people have seen rates increasing over the last two years because of inflation and base rate rises [podcast recorded in November 2024]. Some lenders are linked to the Bank of England base rate, and others are independently funded and track differently.
What’s the difference between a fixed rate and a variable rate Buy to Let mortgage for a first time landlord?
With fixed rates, the clue is in the name. If the interest rate is 5%, it will stay at that level for the two, three or five years that you choose. It doesn’t increase and you will pay exactly the same amount every month on your mortgage.
It’s good for budgeting and good for cashflow, which suits people who like certainty around what they’re doing.
Variable rates change, based on the factors we just discussed. It can offer a bit of flexibility, as you will obviously benefit from rates going down, but you will also be subject to rates going up – so it’s a risk.
If you’re willing to hedge your bets on the market, historically variable rates have been cheaper than fixed rates, and they usually allow for overpayments as well. So if you’re planning to make large overpayments to the mortgage, a variable option might be better for you. Again, we can discuss that.
What is the typical loan term for a Buy to Let mortgage for first-time landlords?
The loan term actually is irrelevant, because almost all Buy to Let clients want an interest-only mortgage. In that case, you’re only paying the interest, not the capital, so a loan of £200,000 today will still be £200,000 in 10, 15 or 20 years.
The interest payment will be always fixed, so the term itself doesn’t make a difference to your payments. Most people like to go for a 20-25 year mortgage, just in case. If they come to the end of their fixed term with a lender and never remortgage, they still have 20 or so years left.
What type of property is a good investment or the most suitable investment for a first time landlord?
Standard residential properties will be the winning strategy. Low maintenance is what you’re looking for. You want to be targeting tenants like young families and professionals. It’s wise to avoid students.
You need strong rental demand, so make sure you know the area. Flats can be cheaper and a good way into the market, but be mindful of lease terms. As the lease shortens, the value of the property can decrease and it can be quite expensive to renew that.
Location of amenities is important – train stations, schools and shopping centres can all make a property more desirable for renting. There are lots of things to look for. Keep it simple, don’t go really big and complex with the first few properties.
How can a mortgage broker help here? Is there anything else you’d like to add?
Some lenders are broker-only. To get the most suitable rates options on the market, you need to come through a broker, regardless. We can obviously give you a good steer as a first time landlord. You probably don’t have a huge idea of what’s available and the right way to plan things. We can help you with that.
We can give you comfort that you’re going in the right direction. We hold your hand through the entire process, if you need it, to ensure a smooth transaction
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.
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