Buy to let for first-time buyers
Taking the buy-to-let route can be great way to get your foot on the property ladder and enjoy an extra income. From the size of the deposit to the extra costs you need to consider, we’ll help you weigh up the pros and cons of getting a buy-to-let mortgage as a first-time buyer.
Can a first-time buyer get a buy-to-let mortgage?
Yes, you could, but you’ll have to jump through a few more hoops than buyers already in the property market.
As a first-time buyer, that is, someone who’s never owned a residential property in the UK or abroad, you’re an unknown quantity for lenders. You don’t have a proven track record either as a homeowner or a landlord which makes you a greater risk.
This means you might find it harder to get what you’re looking for or to get what you can afford. Many providers don’t even offer buy-to-let for first-time buyers, and those that do are likely to:
- Ask for a larger than average deposit
- Charge higher interest rates
- Look for a higher projected rental income to cover repayments.
Your age, credit score, type of employment and income will also be taken into consideration.
Should first-time buyers invest in buy to let?
The buy-to-let route still has genuine potential for first-time buyers.
- If you can’t afford to buy in your area, investing elsewhere in the country while you keep renting is a way to get on the property ladder.
- Property tends to be a relatively safe long-term investment. Of course, prices go down as well as up, but historically, the value tends to increase over time.
- The rent from a buy-to-let property can give you a good income and the lower your buy-to-let mortgage rate, the higher your potential profit margin.
- If someone can’t afford to buy their own place, they’ll be looking to rent – and that’s where you come in.
As well as the advantages, you need to be aware of the potential pitfalls of becoming a landlord. Getting some sound buy-to-let advice from an expert mortgage broker should make the process far less stressful.
What to consider before investing in a buy-to-let property
There are several things to consider before investing in a buy-to-let property:
Deposits for buy to lets are usually bigger for first-time buyers
Getting the deposit for a buy to let may be your biggest challenge. Typically, lenders are looking for between 25% and 40% of the property value, but it could be as much as 60%.
However, the more you can save for a mortgage deposit, the more equity (or ownership) you’ll have in the property. This could make you a safer bet for lenders and potentially give you access to more competitive mortgage rates.
Other fees apply to buy-to-let mortgages
- Stamp duty is a tax on the price of a property. As your buy-to-let won’t be your main home, you won’t benefit from stamp duty tax breaks for first-time buyers available in England or Scotland. But if you don’t own another property, you won’t have to pay the second property surcharge. If you already own a property, or you’re buying with someone else who already owns a property, you’d be liable to the second property surcharge. You could use our stamp duty calculator for guidance to find out more about the costs you may need to pay.
- Surveys to evaluate the property’s condition and flag up any structural issues or areas in need of maintenance.
- Solicitors’ fees to cover conveyancing - the process of moving the legal ownership of a property from one person to another.
- Landlord buy-to-let insurance. This isn’t a legal requirement, but it could minimise the risks associated with renting out a property.
- Repairs to the property or, alternatively, ground rent, which is the fee you have to pay to the freeholder if you own a leasehold property.
- Property maintenance. If you’re buying an old property, you might have to spend a lot more on property maintenance.
- Furniture and white goods. How much you spend on these will depend on who you want to rent to. Families tend to have their own furniture and could want unfurnished properties, while students and young people may prefer furnished accommodation. Most renters want white goods, like fridges and washing machines.
- Letting agency fees if you choose to use a letting agency.
- Rent guarantee insurance. This is an optional extra, but it could offer protection if your tenants don’t pay their rent.
You need a good predicted rental income
To be eligible for most buy-to-let mortgages, predicted rental income usually needs to cover 100% of the mortgage plus an extra 25%, but it’s likely to be more for first-time buyers.
This means your income and employment status are very relevant to prospective lenders. They’ll want to know whether you can cover repayments if the rent doesn’t come in.
Having a solid business plan for your investment property which details costs versus predicted revenue can give your case extra credibility. This is even more applicable if you’re planning for this to be the first of several buy-to-let properties.
It also pays to choose a buy-to-let property in an area that you know well, so you’ve got a good understanding of the sort of people who are looking to rent and where the best locations are.
Most buy-to-let mortgages are taken out on interest only
Most buy-to-let mortgages are taken out on interest only, meaning that you only pay the interest on the loan each month. The capital debt – the full mortgage value – will still need to be paid off at the end of the agreed term.
This means lower monthly outgoings, which could give you the chance to capitalise on your investment and make a healthy profit from your rental income.
But your capital debt won’t go down at all unless you make extra repayments. You may be able to extend your buy-to-let mortgage at the end of the term or you could sell up instead. But don’t assume that this will give you the money you need to pay off the remaining amount.
There’s a risk that if property prices fall, you may not get the price you hope for, and you’d have to make up the difference to pay off the debt.
Some buy-to-let investors choose a repayment mortgage instead. This allows them to pay back both the interest and a small part of the capital every month over a fixed term – usually 25 years – by which time the mortgage should be paid off.
Being a landlord brings big responsibilities
As a landlord, you’re potentially on call 24/7 to deal with any problems, from gas leaks to broken windows.
A letting agency can make your life easier, although of course there’s a cost attached to their services.
Depending on what you need, they could:
- Advertise your property
- Find tenants and run the necessary checks. (All landlords are now legally required to run right to rent checks on any tenant over 18 using the online service at GOV.UK.)
- Handle deposits
- Collect the rent on your behalf
- Do all the necessary paperwork
- Take care of the property maintenance
If you don’t maintain the property to acceptable standards or you neglect to carry out repairs, your tenants can take you to the small claims court.
Having a list of professional tradesmen and women to do the work as needed should ensure you meet the necessary health and safety standards.
Can you cover times when there’s no rent coming in?
You need to make provision for ‘voids’ – times when the property is unoccupied, or tenants aren’t paying their rent. Having money stored away in a savings account could give you the buffer you need.
It makes sense to put aside three months’ rent to cover emergencies.
Frequently asked questions
What are the tax implications of buy to let?
As well as Stamp Duty Land Tax, you also need to pay buy-to-let income tax, which is 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
Fortunately, you can benefit from the Government’s personal allowance – the amount you’re allowed to earn before you need to pay anything. The personal allowance for the tax year 2023/24 is £12,570.
You’re also entitled to a 20% tax credit on interest repayments.
Some buy-to-let investors set themselves up as limited companies. This means they’re subject to the 19% corporation tax rather than individual income tax rates, which are higher.
Always do plenty of research to make sure you’ve factored in all the costs that you’ll need to cover, not only when you buy your property but on an ongoing basis.
Can I have a mortgage guarantor with a buy to let?
As a first-time buyer, having a mortgage guarantor can help you get your foot on the property investment ladder, but there aren’t many lenders that’ll consider it.
A mortgage guarantor is a family member or a close friend who is prepared to cover your mortgage repayments in the event that you can’t.
It’s their income that the lender will take into consideration, and they’ll need to go through the normal credit checks.
If you miss any mortgage payments, they’d have a legal obligation to pay the mortgage provider. They may also be liable for the entire value of the mortgage.
An alternative is to enter into a joint arrangement, sharing the cost of the buy-to-let mortgage with someone else.
Can a first-time buyer with bad credit get a buy-to-let mortgage?
As with all mortgages, a bad credit rating doesn’t necessarily exclude you from getting on the property ladder, but it could make it much more difficult. You’ll almost certainly need to find a specialist mortgage advisor to help you as it’s considered a niche area of the market.
A mortgage guarantor could help, but if you miss any payments, they’re legally obliged to cover the cost. Given that it’s the norm for their property or savings to be used as collateral, they could lose their home if your mortgage isn’t paid.
Can I live in my buy-to-let property as a first-time buyer?
A buy to let isn’t an alternative to having your own home. The terms of the mortgage prevent you from living there and if you do, you’d be in breach of the buy-to-let mortgage conditions.
You might be asked to repay the full amount and you could lose your mortgage facility and your home.
If your circumstances change, your best bet is to talk to your mortgage provider and look at your options. You might be able to convert your buy-to-let mortgage into a residential mortgage instead.
When considering mortgage affordability, it’s important to know that your home or property may be repossessed if you do not keep up with your mortgage repayments. Therefore, you need to ensure that you’re comfortable with the monthly repayments for your agreed term.
All mortgage applications are subject to status and lending criteria, and are based on your individual circumstances. Applicants must be 18+ and a UK resident.
The Financial Conduct Authority does not regulate most Buy to Let mortgages.