Buy to Let First Time Landlord
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Buy to Let First Time Landlord
Paul Collinson explains Buy to Let mortgages for First Time Landlords
What are the requirements for a first-time landlord to secure a Buy to Let mortgage?
Generally with any Buy to Let mortgage you need a 25% deposit, but we do have a couple of lenders that would go to 80% Loan to Value – so that’s 20% deposit.
Some lenders need you to also be an owner-occupier, or to earn a minimum of £25,000 per year on your main income. But a small number are happy with you not owning your own home, and don’t require that income level.
You can just get a mortgage based on the rental income for the property. It varies with lenders – they all have their own quirky criteria around what they can accept. This is where our research would come into it, as each situation is different with every customer.
How much deposit is usually required for a Buy to Let mortgage?
It’s 20% or 25%. Most of the time it’s 25%, but where you don’t have that, the rate might be slightly higher on a 20% deposit. It will also depend on what the rental is for that property.
Are there any specific mortgage options for first-time landlords?
Not really – the mortgages available for first time landlords are also available for experienced ones. But we are open to more lenders if you are an owner-occupier.
Sometimes there are first-time landlords that can be limited to certain non-experienced criteria. Even though you might not be open to the whole market, certain lenders out there will be able to help.
How do lenders assess the affordability of a Buy to Let mortgage for first-time landlords?
On a residential property where you’re going to live, the affordability is assessed on your main income. It’s different on Buy to Let – it’s assessed on the anticipated rental income of that property.
Lenders measure affordability for Buy to Let mortgages by putting a buffer on the rental income. Some lenders put 125% or 145% on that, which is called the ICR – income cover ratio.
They apply this to ensure that the borrower has enough surplus rental income from the property to pay for repairs and service charges to the property.
It’s complicated, as lenders also apply certain other stress tests to the application, based on an interest rate of up to 6%. Even if the interest rate on a mortgage is lower than that, they stress test it at a higher rate to make sure that it would stay affordable.
They also increase that stress level for high rate taxpayers. All lenders are different in how they make these calculations. But if you come and see us here at Brick to Brick, we can get you an answer within a minute or two on how much you’d be able to borrow.
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What are the common mistakes made by first-time landlords when applying for a Buy to Let mortgage?
Sometimes you will get an estate agent valuing the anticipated rental income slightly higher than is realistic. Then, when you give us that figure and we put in the mortgage application, we can find that the lender’s valuer puts the rental income slightly lower. That means they will lend less than we anticipated.
So it’s a good idea to do a bit more research on the rental income for that property. It’s better to approach this with ourselves here at Brick to Brick, then we can avoid applying more than once, which can affect your credit rating.
Are there any tax implications that first time landlords need to be aware of?
We can’t offer tax advice, so we generally advise customers to check with HMRC online about what the tax rules are. These have been tightened over the years and there are certain limits on what you can offset against the rent for income tax.
It’s not as much of a benefit as it used to be, and Buy to Let is less of a money making machine than it once was. But people still make money out of it and property value still ends up increasing in the long run. You will still have an extra asset, which is always a good thing.
The main point with Buy to Let mortgages is that the amount you can borrow is reduced if you are a higher rate taxpayer.
What factors determine the interest rate for a Buy to Let mortgage?
The main factors are whether you have 20% or 25% to put in, and whether there are any issues on your credit file. The interest rate is slightly higher if you have a 20% deposit rather than 25%, and potentially if there are any issues with your credit record.
What’s the difference between a fixed rate and a variable rate Buy to Let mortgage for a first time landlord?
A fixed rate is the most popular one, where clients want stability of monthly payments so they know what exactly is going out of their account every month.Variable rates are for those who are happy to take the risk of a potential rate increase during the mortgage term – as rates can go up as well as down. These are less popular, generally.
There aren’t many variable rates or tracker rates available for Buy to Let mortgages. They’re few and far between, and fixed rates are the most common option.
What is the typical loan term for a Buy to Let mortgage for first-time landlords?
The typical loan with Buy to Let and residential is for 25 years. Residentials have extended out to 35 and 40 years now, with people living longer and because it helps on the affordability side. But on Buy to Let for first-time landlords or non-first-time landlords, it tends to be 25 years.
It also depends on whether it’s interest only or capital repayment. On a capital repayment mortgage, the amount of the repayment will vary depending on whether the term is 25, 30 or 35 years – but on interest only, whatever the term is, your monthly payment remains the same.
What type of property is the best investment for a first-time landlord?
It’s entirely up to the landlord and how much they have for the deposit.
Landlords may have different strategies around what they may want to invest in and the type of tenant they want. Some landlords go for normal tenancy agreements with professionals, some may aim for assisted living via councils and charities, because that means guaranteed rent for a certain number of years.
Some investments are safer than others in different areas. If you are buying in a more rundown area, the property may not get as well looked after. It depends how much money you have to put in and the areas where you’re looking.
Also, a two-bedroom terraced house or a two-bedroomed flat will fetch different rents in different areas. You’ve got to look at your rental yields and put the whole picture together, because it’s not a simple question to answer. A lot of factors are involved.
If you had the money for a deposit for a four-bedroom place, you could also use it as serviced accommodation or an Airbnb. Please check with your local council on whether that’s allowed. A flat on a leasehold could be tied in – you might not be allowed to do certain things.
Come and chat to us here at Brick 2 Brick. We can talk about the whole scenario together and see what works for you.
How can a mortgage broker help if somebody is looking for a Buy to Let mortgage for the first time?
We can help here by finding out the key criteria. You may be a First Time Buyer and first-time landlord. That does limit the options, but we do have some available.
We will find out the whole picture first and then search for the most suitable deal based on your criteria and circumstances. So that’s how we will help. We’ll support you all the way through to completion of your mortgage, and until that property is ready to be rented to a tenant of your preference.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
