Buy to Let First Time Landlord

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Buy to Let First Time Landlord

Carolyn talks about Buy to Let first time landlords and how the mortgage process works.

What are the requirements for a first time landlord to secure a Buy to Let mortgage?

The main difference with Buy to Let mortgages is that the vast majority of lenders require a 25% mortgage. A couple will accept 20% mortgage deposits. But really, you’re looking at 25%.

They will also consider the rental value of the property. There’s a calculation around the rent versus the value. So although 25% is the minimum deposit, if the property will get a low rent, lenders might not lend as much as 75%.

So the deposit and the rental value are the key things they consider. You will also need a good credit profile, and some lenders require a minimum earned income from the client – but others don’t.

Are there any specific mortgage options for first-time landlords?

The majority of lenders will want somebody applying for a first-time Buy to Let mortgage to be a homeowner. If you don’t own a residential property, they would often say no.

A lot of that is around the circumstance – they’re concerned about why you would want to buy a property for somebody else to live in when you don’t own a home.

There are a couple of lenders who will consider this if you’re not a homeowner, though. A common scenario is where somebody lives in a marital home but doesn’t happen to be on the mortgage there.

We’ve also had clients living with a parent who requires care, who want to get on the property ladder themselves. They’re just not wanting to live in that property whilst they’re still caring for the parent.

There are a few scenarios where that would make sense. The vast majority of people are just looking at this as an investment, though, and may already be a homeowner.

How do lenders assess the affordability of a Buy to Let mortgage for a first time landlord?

They will do a calculation around the rental value and price of the property. Each lender’s calculation is a little bit different.

They will also look at the tax banding of the person applying for the mortgage. If you’re a higher rate taxpayer, more of the rent you receive will go out in tax. You therefore might be able to borrow less than a basic rate taxpayer. The calculations are complicated and they do change quite regularly.

Some lenders will allow you to use your own income to top up any shortfall in the affordability. If you’ve got quite a high salary, are a higher rate taxpayer and the rent doesn’t justify the borrowing you’re looking for, some lenders allow you to use your income. It’s known as top slicing. Not all of them offer that, but it’s something to bear in mind.

What are the common mistakes made by first-time landlords when applying for a Buy to Let mortgage?

The biggest mistake we see is people not fully thinking through why they want a Buy to Let property.

There are lots of scenarios where it makes perfectly good sense and it’s the right solution. But the environment of Buy to Let property ownership has changed quite dramatically in the last few years, and not all the circumstances are as advantageous as they once were.

We would always encourage people to think of reasons not to buy a property before they go ahead. If they still then think it’s the right thing for them, that’s fair enough. We don’t want to be unduly negative, but it’s important to look at all the downsides with a client first.

We also try to look at it in the context of overall wealth planning. If you’re sitting on a 25% cash deposit, are you best to invest that in a property, or are there other options or financial products that might give you a better return? We would look at all of that as a whole before you commit.

Are there any tax implications that first-time landlords need to be aware of?

It’s really important. If you are employed on PAYE and therefore have no reason to do a tax return, that will change when you have a property. When you take on a Buy to Let property, you’re obliged to notify HMRC that you’ve done so and you will need to complete a tax return every year, whether or not you’ve made any profit.

On that tax return, you’ll put down all the rent you’ve received and all your expenses. Note that not all legitimate expenses are tax-deductible. I would always recommend having a conversation with an accountant about that, to make sure you’re doing the right thing and taking advantage of any allowances.

If somebody’s on basic rate tax or perhaps not using their tax free allowance, it might be better for them to own the property in their name only, rather than jointly with somebody on a higher rate of tax.

The tax implications are important – both on a monthly basis and an annual basis. When you come to sell the property, you will also be liable for capital gains tax on any profit. That’s also something worth planning for.

What are the factors that determine the interest rate for a Buy to Let mortgage?

Every lender that offers Buy to Let products will set their own interest rates. An awful lot goes on in the background to determine that interest rate, which is much the same for any mortgage product.

The lender will be looking at how much it costs them to acquire the money; what profit margin they need; what the bank of England base rate is and lots of complex things that we probably don’t need to be aware of.

At the moment, in May 2024, interest rates for Buy to Let and residential are fairly comparable. That can and does change.

We’ve certainly seen Buy to Let interest rates at higher levels than residential. But in any case, you’re always shopping from the product range available. You can’t take a Buy to Let product on a residential property and vice versa. You can only apply for what’s there.

What is the difference between a fixed rate and a variable rate Buy to Let mortgage for a first -time landlord?

At the moment, for both Buy to Let and residential, most people look at fixed rate products. That means the interest rate you pay will be set in stone for a period of time.

Fixed rates tend to be cheaper than the variable rates by a significant margin, and will stay the same regardless of what happens in the economy or with the Bank of England for the period that you’re fixed.

Variable rates will go up and down, depending on a lot of different factors and at the lender’s discretion. They don’t necessarily follow the Bank of England base rate, but are usually in sync with it to some degree.

Variable rates are something we would only really consider if rates looked likely to go down and there could be gains to be made. The only real downside to a fixed rate is that you are tied in. So if you did want to sell the property or repay the mortgage, it’s likely there will be an early repayment charge. It could be thousands rather than hundreds of pounds.

What is the typical loan term for a Buy to Let mortgage for first time landlords?

The loan term is much more flexible with Buy to Let than for residential. With residential mortgages, the lender is interested in when you are planning to retire. They often don’t want to lend to you post retirement, unless you’ve got a very secure pension or plans to repay the mortgage.

We all expect that once we become retired we’ll own our homes mortgage-free. With Buy to Let, we generally expect people will sell them at some point and realise their investment.

Generally speaking, the longest term is about 35 years. So if a client wants to keep the property, we would probably take the mortgage over the longest term possible. That gives them the most flexibility in deciding when to sell. They will probably want to do that when the market is good. They may take a couple of years to explore the idea of selling, so we don’t want the mortgage term to run out too soon.

What type of property is the best investment for a first time landlord?

There isn’t a straightforward answer to that. A lot of it comes down to your objectives and why you’re doing this.

Different properties may give a better yield or income on a monthly basis, while others might give better capital growth. So it’s about whether you want money on a monthly basis or in the long term.

Some people might be buying a property as an investment whilst they’re living with parents who need care. Their Buy to Let property might ultimately be their home in retirement.

There are lots of different plans and requirements. I would always have a very thorough conversation with a client about why they are doing this and what we’re hoping to achieve. It helps to speak to letting agents in the area you’re considering, to see what people are looking for and what returns you’re likely to get.

How can a mortgage broker help a first time landlord?

It’s really important to spend time with a mortgage advisor. It’s useful to have that probing conversation about why you want to do this and what you want to achieve.

Are there any better ways to invest? Hopefully that will confirm that you’re doing the right thing, but it’s an important conversation to have.

Also, many Buy to Let lenders only operate through intermediaries like myself. If you go direct to a lender you won’t have access to the full range of options. Certainly a lot of specialist Buy to Let lenders are more flexible and could offer more suitable products, and you do have to come to a mortgage advisor to get hold of those.

YOUR HOME 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.