Buy to let for first-time buyers

Yes, you could buy a property to let out to tenants as a first-time buyer. But you’ll have to jump through a few more hoops than usual to get a mortgage.

A buy-to-let mortgage is designed for those who want to invest in property and rent it out. If you want to live in it yourself, you’d need to look instead at a standard residential mortgage.

As a first-time buyer – someone who’s never owned a residential property in the UK or abroad – you represent a bigger risk to lenders as you won‘t have a track record as either a homeowner or a landlord.

This means you might find it harder to get a mortgage. 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.

Lenders will also take into account your age, credit score, type of job and income.

It might not be the traditional route to ownership, but a buy-to-let property could be a smart move for some first-time buyers.

• If buying a home in your preferred area is out of reach, investing elsewhere in a cheaper property while you continue to rent is a way to get on the ladder.

• Historically, property in the UK has been a relatively steady long-term investment. House prices do fall - and have crashed previously – but have largely followed economic growth over decades.

• Rental income from a buy-to-let property can give you a financial boost.

• With many unable to afford to buy their own place, you‘ll find a strong demand for homes to rent in many parts of the country.

Of course, being a landlord isn’t plain sailing – there are plenty of potential pitfalls as well. Asking for some sound buy-to-let advice from an expert mortgage broker should help make the process far less stressful.

There is a lot to weigh up before taking steps to invest in a buy-to-let property:

1. First-time buyers usually need bigger deposits

Saving up for the deposit for a buy-to-let may be your biggest challenge. Lenders tend to want between 25% and 40% of the property value, but could even ask for 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 might even help you to secure lower mortgage rates.

2. Other costs applicable to buy-to-let properties

Some other costs you may have to pay (but may not be exclusive to buy-to-let mortgages) include:

Stamp duty

Stamp duty is a tax on the price of a property. A couple of key points to note:

• You won’t get the first-time buyer discount available in England or Scotland as the buy-to-let won’t be your main home 

• If you already own a property or buy with someone who does, you’ll have to pay the second home surcharge.

You could use our stamp duty calculator for guidance to find out more about the costs you may need to pay.

Surveys

To check the property’s condition. Surveys can flag up any structural issues or areas in need of maintenance. Getting a survey done makes good sense, especially on older properties, as they can uncover problems that could be costly to repair.

Solicitors’ fees

Solicitors’ fees cover conveyancing, which is the legal side of your house purchase. Your solicitor handles all the paperwork to transfer ownership of the property to you.

Landlord buy-to-let insurance

Landlord buy-to-let insurance isn’t required by law, but lenders will generally require you to have at least buildings insurance in place before they’ll consider you for a mortgage.

Specialist landlord cover can help protect you if something goes wrong with the property or the tenancy, such as loss of rent in the event of theft or a fire.

3. You need a good predicted rental income

To be eligible for most buy-to-let mortgages, lenders want to see that the rent you’re expecting to earn will more than cover the mortgage.

In most cases, they’re looking for rental income that’s at least 125% of your monthly mortgage payments – but it’s likely to be more for first-time buyers.

Lenders will also take a close look at your personal income and job situation. If your tenants stop paying rent or there’s a gap between tenancies, can you keep up with the mortgage repayments?

One way to potentially boost your chances is by putting together a solid business plan. This is especially important if you’re planning to build a buy-to-let property portfolio over time. Show lenders you’ve thought through:

• What the property will cost 

• How much rent you’ll bring in 

• What kind of returns you’re expecting

4. Most buy-to-let mortgages are interest-only

When it comes to buy-to-let mortgages, most people pick interest-only, which means:

• You're only paying off the interest each, not the actual loan amount. 

• At the end of the mortgage term, you still owe the full amount you originally borrowed.

The upside is your monthly payments are much lower - which can leave you with more rental income, especially if your property is earning well.

But unless you make extra payments to pay down the original loan along the way, you’ll need an alternative plan to pay it off when the mortgage term ends. You may be able to:

• Extend your buy-to-let mortgage towards the end of the term 

• Sell the property.  

Be aware that property prices can go down as well as up. If the market dips, you might not sell for as much as you’d hoped. That could leave you with a shortfall you’ll need to cover.

Some buy-to-let investors choose a repayment mortgage instead. This allows you to gradually pay down both the interest and loan itself over time, usually 25 years. By the end of the term, the mortgage is paid off. 

5. Being a landlord brings big responsibilities

Owning a rental property is a lot more than a straightforward investment – you’re also taking on new responsibilities.

As a landlord, you’re potentially on call 24/7 to deal with all sorts of problems. These can range from a leaking roof to a broken boiler, and replacing old kitchen appliances or sorting pest control.

One way to make life easier is by hiring a letting agent. They’ll handle a lot of the legwork, but that convenience comes at a price.

You’ll usually pay a percentage of your rent - e.g. 10% to 15% - for varying degrees of service.

Depending on what you need, they could:

• Advertise your property

• Find tenants and run the necessary checks. (All landlords must now legally 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 neglect to carry out repairs, your tenants can take you to the small claims court.

6. Tax is payable on your rental income

When you earn money from renting out property, it's treated as income and subject to income tax at your usual rate.

You’re taxed on what’s called your ‘net rental income’. This is the amount of rent left after you deduct the bills for any allowable expenses, including:

• Any letting agent fees 

• Maintenance (e.g. the cost of replacing a broken washing machine or fridge) 

• Insurance (landlord insurance, for example)

Landlords used to be able to deduct mortgage interest from their tax bills but this is no longer allowed. Instead, you get a 20% tax credit based on the amount of mortgage interest you paid over the tax year.

• The first £1,000 of rental income on your property is tax free.

• Across the tax year, which runs from April 6, your rental income is then added to any other income you earn such as your salary to work out which tax band you’re in.

To pay any tax you owe on rent from your property, you’ll usually have to fill in a self-assessment tax return with HMRC.

7. Can you cover times when there’s no rent coming in?

There might be times when your rental property is empty, or your tenants fall behind on payments. These gaps are known as void periods and underline how important it is to have a safety net.

Having money stored away in a savings account could give you the buffer you need. If you're able to, it makes sense to put aside three months’ rent to cover emergencies.

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.

What should I do if I’m refused a buy-to-let mortgage as a first-time buyer?

1. Understand why you were refused

Try to find out exactly why your application was declined. Lenders should give you a reason, but if they don't, it's okay to ask. Common reasons include:

• You don’t have a big enough deposit 

• Your income is too low 

• The predicted rental income is too low. 

2. Review your finances

Take a good look at your finances:

• Credit report – check your credit report for any issues. Don’t forget you can do this for free with agencies such as Equifax, Experian, or TransUnion 

• Income and expenses – make sure your income is stable and can cover the mortgage repayments, even during void periods 

• Savings – topping up and building extra savings can show financial resilience to lenders.

3. Seek professional advice

Working closely with a knowledgeable mortgage broker can be invaluable as they:

• Understand the market and can match you with suitable lenders and find alternatives if you’re rejected 

• Can help you present your application in the best light 

• Have access to exclusive deals not available if you went directly to a lender.

4. Explore other property investment routes

If buy-to-let isn’t feasible right now, there may be other investment options available to you. You could think about joining forces with someone who has plenty of property experience and a healthy financial standing.

Or you may just need to take some time to get your financial affairs in good shape so you can try again in the future. This includes building up a bigger deposit, improving your credit score, and working on a solid business plan.