Buy to Let First Time Landlord

And on this episode of the mortgage and protection podcast, we have Scott back from Propertyze to talk all about the buy to let mortgage process for first time landlords. It's great to chat with you again, Scott. How's it all going? Very well, thank you. Cold outside, but otherwise not too bad. Well, that's good to hear, but yes, it is, isn't it? We're recording this episode end of November, 2024, so it's turned chilly. Let's get straight into these frequently googled questions that we've got here then. So first of all, what are the requirements for a first time landlord to secure a buy to let mortgage? The things people are probably looking for are age, income, credit history, property type and

experience. So age, most lenders are going to want you to be 21, some will do 18, depends on the lender, but as long as you're an adult, 18 plus most lenders will be able to consider it. Income, some lenders will require you to have a minimum income, 20, 25,000 from sources, not property. So you can't say, well, I'm buying a buy to let, and that's going to be my income, you'd have an existing income stream. Credit history, your credit needs to be clean or very, you know, very close to clean, particularly if you're a first time landlord. Property types, HMOs, student let's, vulnerable tenants, all the stuff that's really high yield, isn't for first time landlords. That's the stuff that comes for experienced landlords,

lenders won't lend to you is the short answer. So keep it simple when your first properties buy, you know, two bedroom terraced houses, flats in areas that have good rental demand, keep it simple with those sorts of experience, just really understanding the plausibility of the entire application. Right? So coming back to income as well, if you want to buy your first buy to let property, but you're, you have no income, no experience, no business plan in place, the lender's not going to really have faith that the process will work. So it's creating a narrative and a story that the lender can understand, I guess is a way of doing it. Right. Okay. Well, a great start there. Some top tips already to take away from the episode. Thank you for that.

So let's follow on then with this question. Of course, it's always a popular one. How much deposit is usually required for a buy to let mortgage? 25%. Pretty much every lender will require a minimum of 25%. There are a few lenders that will take 20%, so an 80% mortgage. Pairing those up for the first time landlord doesn't usually work and the rates are quite a bit more expensive if you go to 80%. So to take away 25% deposit is what you're going to need. That's your starting point. Okay. So that's clear there then. Now moving on to this question, are there any specific mortgage options for first time landlords that we should know about? Not particularly. I mean, first time landlords, you have no properties, which means you can use

pretty much any lender in the market. A little bit of history has changed in 2017 when the PRA and the FCA changed how they kind of determine if you're an experienced landlord or not. If you've got four or more, you're experienced. If you've got less, you're not, I guess, professional landlords. So some lenders won't lend to you if you're a professional landlord. So if you have four or more, they really won't be dealing with you. Or they might need one or two with you in the portfolio. So that's kind of when you get a bit more established as a first time landlord. No real restrictions on lenders. You might want to consider the difference between personal ownership and limited company ownership. If it's a business, limited company is probably going to be the more

sensible option, usually better from a tax perspective and ownership, but speak to an accountant to confirm kind of what's best for you, I would say. Okay. So something to bear in mind there then. Now another question here asks, how do lenders assess the affordability of a buy-select mortgage for a first time landlord? So anything else to add here? So the affordability is the same as anybody else, which is a good start. So the rental coverage ICRs, the interest coverage ratio, lenders kind of take a stress test. So if the mortgage payment's going to be a thousand, they'll stress it by 25% or 45% extra. And that covers tax liability, maintenance to the property rental voids. It kind of gives you a buffer. So a lender to your mortgage payment

might be a thousand, but the lender will say you need 1400 pounds or 1250th rental income to give you that buffer. So the rental coverage is how they calculate it. And we can run through that with you on individual properties, personal income, pay slips, whatever, just to cover off the plausibility point. You've got to live outside of the rental income. Just re-understanding the plausibility, I guess, of the case I kind of mentioned earlier on. Where's the location? Is it local to you? Are you trying to buy very high value properties your first one? Does it make sense for the scenario? I guess it's a really key point for a first time landlord. Right. Okay. So again, lots of pointers there to take away from the episode. Now this next

question, this is a good question, Scott. So what are the common mistakes made by first time landlords when applying for a buy to let mortgage? It is a good one. Underestimating costs is a big one. A lot of clients fail to account for maintenance, rental voids, letting fees. Yeah, those upfront stamp duty, accountant fees, if you've got to do them to company, there's lots of things to cover off thoughts of. Underestimating costs is a really big, big one, I think. Choosing the wrong property. If you're not a landlord before, you dump really shortly looking for, you just kind of buy one that's local to where you live, which might make sense on paper, but there's 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 rather than just being close by? So choosing the wrong property. Another one, incorrect ownership structure. So again, kind of deciding whether it's limited company or personal ownership that's best for you. In most instances, limited companies, the better option if you're going to own multiple properties from an income point and from a disposal point when you sell them eventually. But again, accountant will give you bespoke advice on that. That's kind of the first common mistakes, I think. Yeah, so some useful points there, again, just to be aware of. Thank you for that. Now, moving on to this question, I'm not sure how much you can say, but

are there any tax implications that first time landlords need to be aware of? Yeah, there's a few key considerations. Stamp duty is the first one, payable when you purchase a property, depending on whether you already own your own home or other properties or it's your first property purchase ever. Your stamp duty will be different. So use a calculator online, speak to an accountant, but that's something to consider. The tax on the rental income, again, is another point to consider. Rental income is going to be taxable, whether it's in your personal name or in limited company, you're going to have to pay tax. There are some kind of allowable expenses for a company, which you don't get in personal name. So speak to your accountant on

that one. But again, there will be tax level either way. Capital gains tax as well. So not a concern for today because you're buying it, but at some point you will want to sell it probably. And there's a capital gains tax to pay based on the increase of the value of the property over that time. So planning for that as well, just being mindful that there is a tax bill payable when you sell it. Right. Okay. So again, I feel like I'm saying this a lot, but there's something to be aware of there. Now let's continue. What are the factors that determine the interest rate for a buy to let mortgage? Loan to value is a key one. So we said earlier on 25% deposit, 5% mortgage. That's your standard. If you increase your deposit and

we go down to a 60% loan to value, the rates get slightly better. If you go to 50% loan to value, they get better again. There's no other breaks further down than that. So no need to deposit more than 50%. Borrow a profile. So your kind of credit history and income, depending on what we're doing with application can make a difference. Property type. So if you've got HMOs, student lets, the rates we hire for those, then there will be four single houses, single flats and market conditions. So depending where we are with the market, obviously people will have seen rates increasing over the last two years because of inflation, base rate. So that those are influenced too. Some lenders are linked to

the bank of England base rates. Some are independently funded. And so they track differently, depends on which lenders we're using based on your circumstances. Right. Okay. And actually with that in mind, the next question follows on, what is the difference between a fixed rate and a variable rate by select mortgage for a first time landlord? Okay. So fixed rates, clues in the name for those ones. So say the interest rate is 5%, just picked a random number with a fixed rate of two, three or five. That rate 5% is fixed for that period for the two, three, five years. It doesn't increase, decrease, you pay exactly the same amount every month on your mortgage. Good for budgeting, good for cashflow. You know, people like certainty what they're doing. It's simple.

Variable rates change based on factors we just discussed. It offers a bit of flexibility. You will obviously benefit from rates going down, but you will then be subject to rates going up. So it's a risk. It depends if you're willing to hedge your bets on the market. Historically, variable rates have been cheaper than fixed rates and did have allowance for overpayments as well. So if your plan is to make large overpayments to the mortgage, a variable option might be better for you. But again, we can discuss that. Right. Okay. So it's all about weighing up those pros and cons there, but there's the differences. Now we've got two or three questions left. So moving on to this one, what is the typical loan term for a buy to let mortgage for first time

landlords? So the loan term actually is very irrelevant because almost all buy to let lenders will want an interest only mortgage. And being interestingly, you're only paying the interest, not the capital. So the loan of £200,000 today will be £200,000 in 10 years, 15 years, 20 years. Your interest payment will be always fixed. So the term itself doesn't make a difference to your payments, but most people like to go for a 20, 25 year mortgage just in case they come to the end of their fixed term with a lender and then never read mortgage. You still got 20 years left or whatever. So yeah. Okay. Brilliant. Which makes sense there. So let's move on to this question. Now you touched on this earlier on, I believe, Scott, but just to confirm, what type of property

is the best investment or the most suitable investment for a first time landlord? Keep it simple. Standard residential properties are going to be your winning point. Low maintenance is what you're looking for. So you want, you want to be targeting tenants, like young families and professionals. You don't want to hate to go to students. You want a strong rental demand, so know the area. Flats can be cheaper, a good way into the market, but be mindful of lease terms where the lease decreases, the value of the property can decrease. It can be quite expensive to renew that. So be mindful of flats and location to a minity. So train stations, schools, shopping centres, those things can make a property more desirable for renting.

So lots of things to look for, but yeah, keep it simple. Don't go really big and complex with your first few properties. Okay. Well, there we go. One big top tip there. Now you've demonstrated this throughout, really Scott, but how can a mortgage broker help here? Is there anything else you'd like to add? Yeah. So some lenders are broker only. Talent advice, we can obviously give you good steer. If you're a first time landlord, you probably don't have a great idea of what's available, what the best way to plan it is. We can help you with that, that process. And just giving you comfort that you're going in the right direction, handholding you through the entire process if you need it to ensure a smooth transaction.

Okay. There we go. Well, thank you for that Scott. Hopefully that's proof useful to anyone listening to this. And I'm sure we'll catch you on another episode soon. Perfectly look forward to it. Thank you. Please note 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.