Buy to Let First Time Landlord

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Buy to Let First Time Landlord

Charlie talks to us about Buy to Let mortgages for first-time landlords.

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

The main factor with Buy to Let mortgages is that most lenders require a 25% deposit. A couple may accept a 20% deposit depending on rental stress testing.

As a first-time landlord, lenders may want you to have home ownership experience. If not, they may check it’s affordable based on your earned income as well as the rental stress test.

How much deposit is usually required for a Buy to Let mortgage?

Typically, it is a 25% minimum deposit. A couple of lenders might consider a smaller deposit, but for a first time landlord, you’re probably going to need at least 25%.

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

The majority of lenders will want someone applying for a first time Buy to Let mortgage to be a homeowner. If you don’t own a residential property, there is a big chance they won’t allow it.

If they were to consider this, you will probably have to go through further affordability checks.

How do lenders assess the affordability of a Buy to Let mortgage for a first time landlord?
Affordability is worked out a little differently for first time landlords compared with a residential mortgage.

Lenders do a calculation based on the rental value and the value of the property – and each lender’s calculation is a little bit different. Lenders also consider the tax banding of the person applying for the mortgage as part of the affordability.

For example, if you’re a higher rate taxpayer, you aren’t going to be able to borrow as much as a lower rate taxpayer.

Another key thing is the type of fixed deal you opt for. Often on a five year deal you can get a more favourable income stretch than a two year deal.

The calculations are complicated and they do change quite regularly, so I would always recommend seeing a mortgage broker. We can run through your options and find something that suits your needs.

Finally, some lenders will consider ‘top slicing’, where you use your own income to top up any shortfall in affordability. If as a higher rate taxpayer you can’t quite reach enough borrowing based on the rental income on the property, your income could help with the loan required. Not all lenders consider this, but it is something that could help you.

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

As a first-time landlord, it’s important to know that the rental income needs to be declared to HMRC. Even if you’re employed on a PAYE basis, you need to complete a tax return each year – whether or not you’ve made any profit.

On that tax return, you’ll put down all the rent received and all the expenses. It’s important to speak to an accountant about what expenses can and can’t be included, and ensure you take advantage of any allowances.

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

Typically, Buy to Let products have higher interest rates than residential products. Interest rates are driven by inflation, and with high inflation rises over the past couple of years we’ve seen the base rate rise to 5.25% as of July 2024.

Now inflation has reached the 2% goal, and the Bank of England reports that the base rate could come down towards the end of 2024 or early 2025. However, we are still in a fairly volatile time, so this can all change. Swap rates also determine what happens to mortgage interest.

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

Most people look at fixed rate products, which have a static interest rate for a certain amount of time, most commonly two or five years. Fixed rates tend to be the cheaper option right now, especially five year deals [podcast recorded in July 2024].

Variable rates either follow the base rate or the lender’s variable rate, and they can go up or down depending on different factors including the lender’s discretion.

Variable rates are something we would typically consider if rates are likely to go down, because then gains can be made. The only real downside to a fixed rate is that you’re tied in. If rates were to drop, you’ll have to pay an early repayment charge to move on to a more favourable rate.

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

A loan term is much more flexible with a Buy to Let than residential. With residential mortgages, lenders are interested in ensuring your mortgage is repaid by the end of the term.

With Buy to Let, you can take the mortgage on a capital repayment or interest only basis. You can also extend the mortgage term post retirement, because effectively you have someone in the property to effectively cover the payments. There’s less emphasis on it being repaid at the end of retirement.

Generally speaking, the longest term is about 35 to 40 years, depending on age. So if you want to keep the property, we would probably take the mortgage over the longest term possible to give you the most flexibility in deciding when you want to sell the property.

How can a mortgage broker help here?

Using a mortgage broker will give you a clear picture of what you can and can’t borrow. Purchasing as a first-time landlord can be a bit of a black hole, so guidance from someone like ourselves can be very beneficial. We’ll help you ensure you make the right investment.

SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.