Buy to let mortgages for first-time buyers

Buy to let mortgages for first-time buyers

For many people, the dream of owning property is not only about having a place to call home but also a source of income. Buy-to-let (BTL) properties are an attractive option for those looking to invest in real estate as a means of generating income. But can you get a buy-to-let mortgage as a first-time buyer in the UK? In this article, we will discuss the possibilities and challenges faced by first-time buyers seeking buy-to-let mortgages.

Can you get a buy-to-let mortgage as a first-time buyer?

Yes, it is possible. First-time buyers can indeed secure a buy-to-let mortgage. While some lenders may be hesitant to offer mortgages to those without prior experience as property owners, there are several specialist lenders who cater specifically to first-time buyers interested in buy to let properties.

It’s essential to keep in mind that the criteria for obtaining a buy-to-let mortgage may be stricter for first-time buyers. Lenders will assess factors such as your credit history, employment status, and the potential rental income of the property before approving your application. In some cases, you may be required to provide a larger deposit than an experienced landlord, typically ranging from 25% to 40% of the property value.

Is it a good idea to obtain a buy-to-let mortgage as a first-time buyer?

Whether obtaining a buy-to-let mortgage as a first-time buyer is a good idea depends on your individual financial situation, goals, and risk tolerance. There are several factors to consider before deciding if it’s the right move for you:

Financial stability: To qualify for a buy to let mortgage and manage the ongoing costs of owning a rental property, you need to have a stable financial situation. Ensure you have a steady income, a healthy credit score, and a sufficient deposit saved up.

Investment goals: Consider your long-term investment goals and how a buy-to-let property fits into your overall financial plan. Rental properties can provide a steady income stream and potential for capital appreciation, but they also come with risks such as vacancies, unexpected maintenance costs, and fluctuating property values.

Market research: Understanding the local rental market is crucial to the success of your investment. Choose a property in an area with strong rental demand, and be aware of factors such as rental yields, property prices, and the local economy.

Risk tolerance: Real estate investments, including buy-to-let properties, come with risks. Be prepared for potential challenges such as changes in interest rates, economic downturns, or new regulations that could impact your investment.

Time and effort: Managing a rental property requires time and effort, particularly if you plan to handle the property management yourself. Be prepared to deal with tenant issues, property maintenance, and other responsibilities that come with being a landlord.

Diversification: If you’re considering a buy-to-let property as your first investment, it’s essential to think about diversification. Investing solely in one property can expose you to higher risks compared to spreading your investments across different asset classes, such as stocks, bonds, or other investment vehicles.

If you have a clear understanding of the risks and rewards associated with buy-to-let properties, have conducted thorough market research, and are confident in your ability to manage the financial and practical aspects of being a landlord, investing in a buy-to-let property as a first-time buyer could be a good idea. It’s crucial to seek professional advice from financial advisors or mortgage brokers to ensure you make informed decisions based on your unique circumstances.

What criteria will I need for buy-to-let mortgages?

When applying for a buy-to-let mortgage, lenders will consider various criteria to assess your eligibility. While the specific requirements may vary between lenders, the following factors are generally taken into account:

Age: Lenders typically have minimum and maximum age requirements for borrowers. Most require applicants to be at least 18 to 21 years old and have an upper age limit, which can range from 70 to 85 years at the end of the mortgage term.

Credit history: A good credit score is crucial for securing a buy-to-let mortgage. Lenders will review your credit report to assess your creditworthiness and your ability to meet mortgage repayments. Any history of defaults, late payments, or CCJs (County Court Judgements) could negatively impact your application.

Income: Most lenders require a minimum annual income, typically around £25,000, to ensure that you can cover mortgage repayments during periods when your property is vacant or facing unexpected costs. Some lenders may also consider other sources of income, such as rental income from other properties or investments.

Deposit: A buy-to-let mortgage generally requires a larger deposit compared to a residential mortgage. The deposit typically ranges from 25% to 40% of the property value, although some lenders may offer more competitive loan-to-value (LTV) ratios.

Rental Income: Lenders will assess the potential rental income of the property to ensure that it covers a certain percentage of the mortgage repayments, typically around 125% to 145%. This is known as the interest coverage ratio (ICR) or rental coverage. Lenders may also consider the local rental market and the demand for rental properties in the area.

Property value and type: The value and type of property you want to purchase can impact your eligibility for a buy-to-let mortgage. Lenders may impose restrictions on the types of properties they’re willing to finance, such as high-rise flats, non-standard construction, or properties with multiple units.

Mortgage affordability: Lenders will use a combination of your income, credit history, and the property’s rental income to determine if you can afford the mortgage repayments. This is known as a mortgage affordability assessment and may include stress tests to ensure that you can still afford the repayments if interest rates rise.

Existing debt and financial commitments: Lenders will also consider your current financial commitments, such as loans, credit card debt, and other mortgages, to determine your ability to meet the buy-to-let mortgage repayments.

Keep in mind that the specific criteria and requirements may vary between lenders, so it’s essential to research and compare different mortgage products to find the best option for your situation. Consulting with a mortgage broker who specialises in buy-to-let mortgages can help guide you through the application process and identify suitable lenders based on your circumstances.

What documents will I need to apply?

When applying for a buy-to-let mortgage, you will need to provide several documents to verify your identity, income, and financial situation. While the specific requirements may vary between lenders, the following documents are generally requested during the application process:

Proof of identity: Lenders will require a valid form of identification to confirm your identity. This could include a passport, driver’s license, or national identity card.

Proof of address: You will need to provide proof of your current residential address, typically in the form of a utility bill, council tax bill, or bank statement dated within the last three months.
Proof of Income: To verify your income, lenders may request your most recent payslips (usually the last three months), P60, or tax returns (particularly if you are self-employed). If you have additional sources of income, such as rental income from other properties, you may need to provide relevant documentation, like rental agreements or bank statements.

Bank statements: Lenders will typically ask for three to six months worth of bank statements to assess your financial stability and spending habits. This allows them to evaluate your ability to manage mortgage repayments.

Property details: You will need to provide details about the property you wish to purchase, including the address, purchase price, and property type. Additionally, you may be asked for a rental market analysis or an estimated rental income for the property.

Solicitor details: Lenders may require the contact information for your chosen solicitor, who will be responsible for handling the legal aspects of the property purchase.
Proof of Deposit: If a family member is gifting you money, you might need to provide proof of the gift, such as bank statements or a gifted deposit letter.

It’s essential to have all the required documentation in order and readily available to ensure a smooth application process. Lenders may request additional information or documents based on your specific circumstances, so it’s crucial to maintain open communication with your mortgage broker or lender throughout the process.

Buy-to-let mortgage rates for first-time buyers

Buy-to-let mortgage rates for first-time buyers can vary depending on several factors, such as the lender, loan-to-value (LTV) ratio, mortgage term, and the applicant’s credit score. While it’s challenging to provide specific rates without considering individual circumstances, first-time buyers can generally expect higher interest rates compared to experienced landlords.

Some factors that can affect buy-to-let mortgage rates for first-time buyers include:

Loan-to-Value (LTV) ratio: The LTV ratio represents the percentage of the property’s value that you’re borrowing. A lower LTV ratio usually results in more favourable interest rates, as it presents a lower risk to the lender. As a first-time buyer, you may need to save a larger deposit to secure a lower LTV and more competitive rates.

Credit score: A strong credit score can help you secure better mortgage rates, as it indicates a lower risk to the lender. First-time buyers should ensure they have a healthy credit score before applying for a buy-to-let mortgage.

Mortgage term: The length of the mortgage term can also impact interest rates. Longer terms may have higher interest rates due to the increased uncertainty over an extended period.

Fixed or variable rate: Mortgage rates can be fixed or variable. Fixed rates remain the same for a predetermined period (typically 2, 3, or 5 years), while variable rates can change over time, usually in line with the Bank of England’s base rate. Fixed rates offer more predictable monthly payments, while variable rates may provide lower initial rates but can increase over time.

Lender’s criteria: Each lender has its criteria and risk appetite, which can affect the mortgage rates they offer to first-time buyers. It’s essential to shop around and compare mortgage rates from different lenders to find the best deal for your circumstances.

While first-time buyers may face higher interest rates due to their lack of experience as landlords, researching and comparing mortgage products can help identify competitive rates. Working with a mortgage broker who specialises in buy-to-let mortgages can provide valuable insights and guidance on securing the best mortgage rates for your situation.

Should I get an interest-only or repayment mortgage?

Deciding between an interest-only or repayment mortgage for your buy-to-let property depends on your financial goals, cash flow requirements, and risk tolerance. Each type of mortgage has its advantages and disadvantages, which you should consider before making a decision.

Interest-only mortgage:

In an interest-only mortgage, you only pay the interest on the loan each month, and the principal balance remains unchanged. At the end of the mortgage term, you must repay the original loan amount in full, either by refinancing, selling the property, or using other funds.

Advantages:

Lower monthly payments: Since you only pay the interest on the loan, your monthly payments will be lower compared to a repayment mortgage. This can improve your cash flow, especially if the rental income exceeds the mortgage payments.

Tax benefits: Interest payments on a buy-to-let mortgage can be tax-deductible, which could potentially reduce your tax liability.

Disadvantages:

No principal reduction: The loan balance remains unchanged throughout the mortgage term, which means you will still owe the full loan amount at the end of the term. This could be problematic if property values decline or you’re unable to refinance or sell the property.

Higher overall cost: As you’re not paying down the principal, the total interest paid over the mortgage term is usually higher than with a repayment mortgage.

Repayment mortgage:

In a repayment mortgage, your monthly payments include both principal and interest. Over the mortgage term, you gradually pay off the loan balance, eventually owning the property outright at the end of the term.

Advantages:

Principal reduction: With a repayment mortgage, you build equity in the property over time, which can be beneficial if property values increase.
Lower overall cost: As you pay down the principal balance, the overall interest paid over the mortgage term is typically lower than with an interest-only mortgage.

Disadvantages:

Higher monthly payments: Monthly payments are higher than interest-only mortgages, as they include both principal and interest. This could affect your cash flow, particularly if rental income is not significantly higher than mortgage payments.

Limited tax benefits: The principal portion of your monthly payment is not tax-deductible, which may result in higher taxable income compared to an interest-only mortgage.

Before deciding between an interest-only or repayment mortgage, consider your financial goals, cash flow requirements, and risk tolerance. If you prioritize cash flow and tax benefits, an interest-only mortgage may be a better choice. However, if you prefer to build equity in the property and pay off the loan balance over time, a repayment mortgage may be more suitable. Consult with a financial advisor or mortgage broker to discuss your options and determine the best course of action based on your unique circumstances.

How much deposit will I need?

As we mentioned earlier, the deposit required for a buy-to-let mortgage typically ranges from 25% to 40% of the property’s value, depending on the lender’s criteria, your financial situation, and the potential rental income of the property. As a general rule, the larger the deposit, the more favourable the mortgage terms and interest rates you may be able to secure.

How much can I borrow for buy-to-let mortgages?

The amount you can borrow for a buy to let mortgage depends on various factors, including your personal financial situation, the rental income of the property, and the lender’s criteria. Lenders typically assess buy-to-let mortgages differently than residential mortgages, with a greater emphasis on the potential rental income rather than your salary.

Here are some factors that can influence how much you can borrow:

Rental income: As we mentioned earlier, lenders usually require that the rental income of the property cover a certain percentage of the mortgage repayments, typically around 125% to 145%. This is known as the Interest Coverage Ratio (ICR) or rental coverage. The higher the rental income, the more you may be able to borrow.

Personal income: Some lenders may also consider your personal income when determining how much you can borrow. They may require a minimum annual income, typically around £25,000, to ensure you can cover mortgage repayments during periods when the property is vacant or facing unexpected costs.

Loan-to-Value (LTV) ratio: The LTV ratio represents the percentage of the property’s value that you’re borrowing. A lower LTV usually results in more favourable mortgage terms and interest rates, potentially allowing you to borrow more. However, this also requires a larger deposit.

Credit history: A strong credit score can help you secure better mortgage rates and terms, which may impact the amount you can borrow. Lenders will review your credit history to assess your ability to meet mortgage repayments.

Affordability assessment: Lenders will use a combination of your income, credit history, and the property’s rental income to determine if you can afford the mortgage repayments. This is known as a mortgage affordability assessment and may include stress tests to ensure that you can still afford the repayments if interest rates rise.

Existing debt and financial commitments: Lenders will consider your current financial commitments, such as loans, credit card debt, and other mortgages, when determining how much you can borrow.

To get an estimate of how much you can borrow for a buy-to-let mortgage, you can use online mortgage calculators or consult with a mortgage broker who specialises in buy-to-let mortgages. Keep in mind that the specific amount will depend on your unique circumstances, the property’s rental income, and the lender’s criteria.

Can I get a buy-to-let mortgage as a first-time buyer if I have bad credit?

Obtaining a buy-to-let mortgage with bad credit can be challenging, but it is not impossible. Lenders view applicants with bad credit as higher risk, which may result in less favourable mortgage terms, higher interest rates, or even outright rejection. However, there are steps you can take to improve your chances of securing a buy to let mortgage despite having bad credit:

Improve your credit score: Before applying for a mortgage, take proactive measures to improve your credit score. This may include paying off outstanding debts, ensuring all bills are paid on time, and addressing any errors on your credit report.

Save for a larger deposit: A larger deposit can lower the loan-to-value (LTV) ratio, which may help offset the risk associated with bad credit. Lenders may be more willing to approve your mortgage application if you can provide a deposit of 30% or more of the property’s value.

Demonstrate a strong rental income: Lenders will assess the potential rental income of the property when considering your mortgage application. If the property can generate a high rental income, it may help alleviate some of the risks associated with your bad credit history.

Opt for a specialist lender: Some lenders specialise in working with borrowers who have bad credit or complex financial situations. While these lenders may charge higher interest rates, they are more likely to consider your application and offer a buy-to-let mortgage tailored to your circumstances.

Use a mortgage broker: A mortgage broker with experience in buy-to-let mortgages for borrowers with bad credit can help you navigate the application process, identify suitable lenders, and negotiate on your behalf. They can also provide guidance on improving your credit score and meeting the lender’s criteria.

While having bad credit can make obtaining a buy-to-let mortgage more challenging, it is still possible with the right approach, persistence, and professional guidance. Focus on improving your credit score, saving for a larger deposit, and working with a mortgage broker to identify suitable lenders and mortgage products tailored to your circumstances.

Can you get a buy-to-let mortgage with a guarantor?

Using a guarantor for a buy-to-let mortgage is less common than for residential mortgages, but it is still possible in certain circumstances. Some lenders may consider a guarantor for a buy-to-let mortgage if the primary borrower has insufficient income, a poor credit history, or lacks experience as a landlord. However, the availability of such mortgages may be limited, and the specific terms and conditions will vary between lenders.

A guarantor is someone who agrees to take on the responsibility of the mortgage repayments if the primary borrower is unable to meet them. Typically, a guarantor is a close family member or friend with a strong credit history and sufficient income to cover the mortgage repayments.
If you’re considering using a guarantor for a buy-to-let mortgage, keep the following points in mind:

Guarantor requirements: Lenders may have specific criteria for guarantors, such as a minimum income level, a strong credit history, and homeownership. The guarantor should be aware of these requirements and ensure they meet the lender’s criteria.

Limited lender options: Not all lenders offer buy-to-let mortgages with a guarantor. You may need to work with a mortgage broker to identify suitable lenders that consider guarantor-supported buy to let mortgages.

Risk to the guarantor: Acting as a guarantor involves risk, as they become responsible for the mortgage repayments if the primary borrower fails to meet them. The guarantor should fully understand these risks and be willing to accept them before agreeing to act as a guarantor.

Legal implications: The guarantor may need to seek independent legal advice before entering into the agreement to ensure they understand the legal implications and potential consequences of acting as a guarantor.

Future borrowing capacity: Acting as a guarantor can impact the guarantor’s future borrowing capacity, as the mortgage will be considered a financial commitment when they apply for credit or loans.

Using a guarantor for a buy to let mortgage can help borrowers with less-than-ideal circumstances secure financing. However, it’s essential to understand the potential risks and limitations involved, and both the borrower and guarantor should be fully informed before entering into such an arrangement. Working with a mortgage broker experienced in buy to let mortgages can help you navigate the process and identify suitable lenders.

Buying a new home and switching your existing home to a buy to let

If you are planning to buy a new home and switch your existing home to a buy-to-let property, there are several factors to consider and steps to follow to ensure a smooth transition:

Obtain consent: As we mentioned earlier, inform your current mortgage lender about your intention to let out your existing property. You will need to obtain their consent, which may involve switching to a buy-to-let mortgage or getting a Consent to Let agreement, depending on the lender’s policies and your circumstances.

Buy-to-let mortgage: If your current lender does not offer buy to let mortgages or you want to explore other options, you can approach other lenders for a buy to let mortgage on your existing property. Keep in mind that buy to let mortgages typically have different criteria, such as requiring a higher deposit and having higher interest rates.

New residential mortgage: Apply for a residential mortgage for your new home, taking into account your financial situation, including the rental income from the buy to let property, which may impact your borrowing capacity.

Tax implications: Consider the tax implications of owning a buy-to-let property, including income tax on rental income, capital gains tax when selling the property, and the additional stamp duty surcharge for second homes when purchasing your new property.

Landlord responsibilities: Familiarise yourself with your responsibilities as a landlord, such as ensuring the property is safe and well-maintained, complying with regulations, and providing the necessary certificates (e.g., Energy Performance Certificate, Gas Safety Certificate).
Insurance: Update your home insurance policy to cover the property as a buy to let and consider getting landlord-specific insurance, which can cover risks like loss of rent, property damage, and liability claims.

Tenancy agreement: Create a tenancy agreement that outlines the terms and conditions of the rental arrangement, including the rent amount, deposit, and tenants’ rights and responsibilities.
Property management: Decide whether to manage the property yourself or hire a property management company to handle tasks like finding tenants, collecting rent, and addressing maintenance issues.

Stamp duty land tax (SDLT): When purchasing your new home, you will likely be subject to the additional 3% SDLT surcharge for second homes, as you will own more than one property. Remember to factor this cost into your budget.

Seek professional advice: Consult a financial advisor, mortgage broker, or tax professional to help you navigate the complexities of owning a buy to let property and purchasing a new home.

By carefully planning and considering all aspects of converting your existing home to a buy-to-let and buying a new home, you can successfully manage both properties and maximise your investment potential.

Do I have to pay the stamp duty surcharge for buy-to-let mortgages?

If you are purchasing a buy-to-let property or a second home in the UK, you will generally be required to pay the stamp duty surcharge. The surcharge is an additional 3% on top of the standard residential Stamp Duty Land Tax (SDLT) rates in England and Northern Ireland, Land and Buildings Transaction Tax (LBTT) in Scotland, or Land Transaction Tax (LTT) in Wales.
However, there are some circumstances where you may be exempt from the stamp duty surcharge:

Main residence replacement: If you are selling your main residence and buying a new main residence, you may not have to pay the surcharge, even if you own other properties. This exemption applies if the new property is purchased within three years of selling the previous main residence.

Property value below the threshold: If the property’s purchase price is below the threshold for paying SDLT, LBTT, or LTT, you will not need to pay the surcharge. In England and Northern Ireland, this threshold is £40,000 for SDLT, while in Scotland, it is £40,000 for LBTT, and in Wales, it is £40,000 for LTT.

Certain types of property: The surcharge may not apply to some types of property, such as caravans, houseboats, or mobile homes.

Multiple dwellings relief: If you are purchasing multiple dwellings in a single transaction, you may be eligible for multiple dwellings relief, which can reduce the overall SDLT, LBTT, or LTT due, including the surcharge.

Inherited properties: In some cases, inherited properties may be exempt from the stamp duty surcharge, depending on the specific circumstances and ownership structure.

The SDLT rates for buy-to-let and second homes, including the 3% surcharge, are as follows:

Up to £125,000: 3% SDLT
£125,001 to £250,000: 5% SDLT
£250,001 to £925,000: 8% SDLT
£925,001 to £1.5 million: 13% SDLT
Over £1.5 million: 15% SDLT

Given the complexity of stamp duty regulations, it is essential to consult the relevant government resources or seek advice from a financial advisor to determine if you are required to pay the stamp duty surcharge in your specific situation. Keep in mind that tax regulations and rates can change over time, so always ensure you have the most up-to-date information.

How much stamp duty do I have to pay if I am a first-time buyer?

If you’ve never owned a house before and you want to buy one to rent out, you won’t have to pay the higher stamp duty rates for buy-to-let properties. But you won’t be able to get a stamp duty exemption or discount because you’re a first-time buyer. This only applies to people who plan to live in the property.

Instead, first-time buyers who buy a property to rent out will pay the same amount of stamp duty as any other home buyer.

Stamp duty surcharge for overseas buyers

As of April 2021, the UK government has introduced a 2% Stamp Duty Land Tax (SDLT) surcharge for non-UK residents purchasing residential property in England and Northern Ireland. This surcharge is in addition to the standard SDLT rates and the 3% surcharge for buy-to-let properties and second homes. Keep in mind that tax regulations and rates can change, so always consult the latest information from the UK government or a financial advisor to confirm the current SDLT rates.

Can I move into my buy to let property?

Moving into your buy-to-let property is possible, but there are several factors to consider, and you may need to make some changes to your mortgage arrangement.

Mortgage terms and conditions: Buy-to-let mortgages are specifically designed for properties that will be rented out to tenants, and the terms and conditions typically prohibit the owner from living in the property. If you want to move into your buy to let property, you will need to inform your mortgage lender and potentially switch to a residential mortgage, which has different terms, interest rates, and lending criteria.

Lender approval: You must seek approval from your mortgage lender before moving into your buy-to-let property. Failing to do so may breach the terms of your mortgage agreement, resulting in penalties or even foreclosure.

Insurance: If you decide to move into your buy-to-let property, you will need to update your insurance policy. A standard landlord insurance policy will not cover you as an owner-occupier, so you may need to switch to a residential home insurance policy.

Tenancy agreements: If your buy-to-let property is currently occupied by tenants, you must adhere to the terms of the tenancy agreement. You cannot ask tenants to leave without proper notice, and may need to wait until the end of their lease before moving in.

Before deciding to move into your buy-to-let property, it’s essential to consider the implications and consult with your mortgage lender, a financial advisor, or a tax professional to understand the potential consequences and ensure you make an informed decision.

Challenges for first-time buyers when buying buy-to-let mortgages

As a first-time buyer seeking a buy-to-let mortgage, you may face several challenges, such as:

Limited lender options: Not all lenders offer buy-to-let mortgages to first-time buyers, which means your options may be more limited than those available to experienced landlords. To find the best deal, it’s crucial to research and compare various mortgage products from different lenders.

Affordability criteria: Lenders will assess your ability to afford the mortgage based on your income and financial stability. For first-time buyers, this can be more difficult to prove, especially if you don’t have a strong credit history or are self-employed.

Rental income requirements: Lenders often require that the potential rental income from the property cover a certain percentage of the mortgage repayments, typically around 125% to 145%. As a first-time buyer, you may have to demonstrate the property’s rental potential to meet these requirements.

Higher interest rates: Due to the perceived higher risk associated with lending to first-time buyers, you may face higher interest rates on your buy-to-let mortgage compared to experienced landlords.

Tips for first-time buyers

To increase your chances of securing a buy-to-let mortgage as a first-time buyer, consider the following tips:

Improve your credit score: Having a good credit score will make you more attractive to lenders. Ensure you pay your bills on time, avoid using too much credit, and check your credit report for any errors.

Save for a larger deposit: A larger deposit will not only increase your chances of mortgage approval but may also result in better interest rates and terms.

Research the market: Understanding the local rental market will help you choose a property with strong rental potential. This will not only increase your chances of mortgage approval but also contribute to the success of your investment.

Seek professional advice: Speak with a mortgage broker who specialises in buy-to-let mortgages for first-time buyers. They can help you navigate the application process and identify suitable lenders and mortgage products.

In summary, while obtaining a buy to let mortgage as a first-time buyer in the UK may be more challenging, it is not impossible. By doing thorough research, preparing your finances, and seeking professional advice, you can successfully embark on your journey as a property investor.

Related articles:

Things to consider before purchasing a buy to let property

How much deposit do you need for a buy-to-let mortgage?

What do I need to get a mortgage?

What is an interest-only mortgage?

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