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Buy to Let First Time Landlord
Harry talks us through Buy to Let mortgages for first-time landlords.
Podcast approved by The Openwork Partnership on 24/07/2024
What are the requirements for a first-time landlord to secure a Buy to Let mortgage?
The requirements for a first-time landlord do vary depending on the lender. Most lenders will require you to already own your own home. A couple will allow you to be a first-time landlord and First Time Buyer, but generally there aren’t very many options to do that.
Lenders have different stipulations on how long you need to have owned your own home. With some it’s six months, with others it could be longer than that.
Most lenders also require you to have a minimum income. We’ll get into this in more detail in a moment.
How much deposit is usually required for a Buy to Let mortgage?
Typically, a 25% deposit is required. Some lenders may require 30%. Occasionally, there are some 20% deals, but not too many around are at the moment. [podcast recorded in June 2024]
Are there any specific mortgage options for first-time landlords?
Not really. They tend to just fall under the general Buy to Let mortgage umbrella. The main thing as a first-time landlord is just to meet that lender’s criteria – because they don’t all lend to first-time landlords.
So it’s key to find the right lender if you’re new to this. A mortgage advisor will help you do that.
How do lenders assess the affordability of a Buy to Let mortgage for a first-time landlord?
Generally, affordability is assessed on the rental income that the property is going to generate. Lenders will take the rental income and apply a stress test to it, to dictate the loan size.
It doesn’t really matter what your income is. As I said earlier, some lenders will have minimum incomes, typically £20,000, £25,000 or slightly higher than that, while others don’t require a minimum income.
Either way, the income itself is not really relevant, however. It’s more to do with the rental income and how that could support the loan you’re looking to get.
What are the common mistakes made by first-time landlords when applying for a Buy to Let mortgage?
A common mistake is not understanding that the rental income needs to be at a certain level to achieve the loan you want. It’s complicated in how the banks apply the calculation, which they call an ‘income coverage ratio’.
So before you go looking at properties and making offers, make sure you understand what rental income that property would achieve. Speak to a mortgage advisor to find out what size loan that rent would get you.
That will avoid the potential error of looking to buy a house to rent out, assuming you’ll make a certain amount per month – but in reality it doesn’t actually work out that way.
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Are there any tax implications that first time landlords need to be aware of?
There are tax implications, and as mortgage advisors we guide our clients where we are able. But our advice is always to speak to a qualified tax specialist, such as your accountant.
What are the factors that determine the interest rate for a Buy to Let mortgage?
Deposit size is the main driving factor in interest rates. They’re generally tiered in 5% bands, based on the Loan to Value. So with Buy to Let these might be 75%, 70%, 65% and then 60%. The more deposit you could put in, the more favourable the rate.
Also, there are lots of different types of rental properties: single homes, multi-unit blocks and houses of multiple occupancy. The more non-standard the property, the more likely it is to cost you more money.
What’s the difference between a fixed rate and a variable rate Buy to Let mortgage for a first time landlord?
The difference in terms of fixed rate versus variable rate is the same whether it’s a Buy to Let mortgage or a standard mortgage.
Generally, the choices are two-year fixed or five-year fixed. Occasionally there are some three, seven or 10 year deals. The benefit of a fixed rate is that your payments are going to stay the same for the next two or five years, giving you that security for the longer term.
The downside is if interest rates are falling, you’re not going to benefit from those falls. That’s where a variable rate comes in, because these track the Bank of England base rate. So if the base rate reduces, your monthly mortgage rate reduces.
The negative to that is if rates go up, your monthly payments will go up. You don’t have the same security knowing that your payment is going to be the same every month.
Something else that’s slightly different in Buy to Let versus standard residential mortgages is that lenders will apply a different stress test on a two-year fix than they will on a five-year fix.
That means they may lend you more money on a five-year fix than on a two-year fix.
That was quite a long answer, but it just emphasises the variability and how a mortgage advisor could help you decide the right way to finance your rental property.
What is the typical loan term for a Buy to Let mortgage for first-time landlords?
Typically, Buy to Let mortgages are interest only. You don’t have to do it that way, but most landlords do. On an interest only mortgage, it doesn’t matter how long the mortgage term is because you aren’t paying back the capital of the loan.
The term will really be dictated by you and your long term plans for that property. It could be as short as five years, all the way up to 35 or 40 years. Some lenders will look to lend well into people’s 80s and 90s, so it all comes down to your longer term plans.
What else do we need to know about Buy to Let mortgages for a first-time landlord?
By definition, it may be a bit more complicated. There are different types of properties and different types of mortgage. It really pays to go into all the options, so talk to a mortgage advisor to navigate the different choices for you.
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.
