Navigating Buy-to-Let Mortgages for First-Time Buyers

Nikka Sulton

Navigating Buy-to-Let Mortgages for First-Time Buyers

While many believe that buy-to-let mortgages are primarily for seasoned landlords and property developers with extensive portfolios, the reality is that first-time buyers can also qualify for these mortgages, offering a potential entry point into property ownership.

It’s essential to recognize that not all lenders readily extend buy-to-let mortgages to first-time buyers, but a significant number do. However, it’s worth noting that as a first-time landlord, you might face certain financial considerations. Lenders may view you as a higher risk and, consequently, assign a higher interest rate to your mortgage. Nevertheless, partnering with a professional mortgage broker can be invaluable in securing the best possible deal tailored to your unique circumstances.

If you’re considering a buy-to-let mortgage as a first-time buyer, this guide will provide you with comprehensive information to navigate the process successfully and embark on your journey into property ownership, even if you don’t intend to reside in the property yourself.

Can a first-time buyer purchase a buy-to-let?

Yes, it’s feasible for a first-time buyer to venture into the realm of becoming a buy-to-let landlord. However, securing a buy-to-let mortgage as a first-time buyer can present additional hurdles compared to applying for a standard residential mortgage.

It’s essential to understand that many lenders exhibit a preference for applicants who possess prior experience in rental property management or already own property. The rationale behind this preference is rooted in the belief that property ownership and tenant management demonstrate a certain level of financial responsibility and familiarity with the housing market.

For first-time buyers looking to enter the buy-to-let arena, it’s advisable to prepare diligently, considering the potential challenges associated with securing financing for investment properties.

Is it a good idea for a first-time buyer to invest in buy-to-let?

Investing in a buy-to-let property before purchasing your own residential property might seem unconventional at first glance, but it can be a strategic move with tangible benefits.

Here’s a straightforward look at why this approach makes sense:

1. Affordability Gap: One compelling reason to consider a buy-to-let investment as your initial property purchase is affordability. If you find that the area you aspire to live in is beyond your current budget, but you can comfortably cover the expenses of a property elsewhere, this investment can bridge the financial gap. Earning a rental income that exceeds your mortgage payments becomes an additional source of savings, helping you accumulate funds for your future dream home.

2. Building Borrowing Credibility: Owning a buy-to-let property and consistently meeting mortgage repayments showcases your responsible and reliable borrowing behavior. This track record can significantly strengthen your application for a residential mortgage in the future. As a result, more lenders may be inclined to collaborate with you, potentially offering preferential interest rates and a wider range of mortgage products.

3. Asset for Security: A buy-to-let property also provides you with a valuable asset that can serve as collateral when seeking other forms of financing. For instance, if you’re self-employed and require a secured business loan to expand your professional ventures, this property can be used as collateral, provided your chosen lender is willing to accept a tenanted property.

Investing in a buy-to-let property as your initial step into the property market is a pragmatic approach that can lead to improved financial stability and open doors to future homeownership.

What rates will I pay on a buy-to-let mortgage?

Interest rates on buy-to-let mortgages typically surpass those on residential counterparts. Additionally, first-time buy-to-let property owners might encounter even higher interest rates due to perceived lending risks associated with their lack of landlord experience.

Several factors play a role in determining the interest rate you can secure:

1. Deposit Size: The size of the deposit you can afford significantly impacts the interest rate offered by a lender. A larger deposit generally results in a more favorable rate.

2. Credit Score: A clean credit history works in your favor, enhancing your mortgage application. Maintaining a positive credit score is crucial.

3. Expected Rental Yield: The projected rental income from the property also influences the interest rate. Higher rental yields may lead to better rates.

4. Income Beyond Buy-to-Let: Lenders consider your income from sources other than the buy-to-let property. A stable income stream can strengthen your mortgage application.

Navigating these factors thoughtfully can help you secure a more competitive interest rate for your buy-to-let mortgage, despite the inherent differences and higher rates associated with this type of investment.

Should I get an interest-only or repayment mortgage?

Many seasoned landlords opt for interest-only buy-to-let mortgages, where monthly payments cover only the interest. This lowers your monthly expenses, allowing you to accumulate rental income.

However, for first-time buyers, there’s a crucial consideration. Interest-only mortgages are temporary. When the term ends, you must repay the entire mortgage balance, typically through selling the property or refinancing the mortgage, extending the term.

Alternatively, a repayment mortgage steadily reduces the outstanding balance, although monthly payments are higher. This approach safeguards your investment, especially during market downturns or unexpected life events.

A repayment mortgage is also essential if you plan to use the property as collateral for secured borrowing. Most loans are capped at around 80% of the property value. If your mortgage balance isn’t sufficiently reduced, you won’t meet this threshold, known as an 80% buy-to-let mortgage.

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

Obtaining a guarantor for a buy-to-let mortgage is atypical and doesn’t enhance approval prospects. Buy-to-let mortgage decisions hinge on rental income, not the borrower’s personal earnings.

If you have a willing guarantor who already owns property, another option is to include them as a joint borrower on a sole proprietor mortgage. This could make your application more appealing to lenders concerned about your lack of property ownership history.

This arrangement differs from a standard guarantor role and requires discussion with the individual involved. Ideally, mortgage repayments should be covered by rental income, relieving the guarantor from payment obligations. However, tax implications may arise and need consideration.

Available lenders and eligibility criteria

As of August 2022, approximately 30 lenders are open to considering first-time buyers’ applications for buy-to-let mortgages. This includes prominent high street banks like NatWest and Barclays, along with specialized mortgage lenders.

However, it’s important to note that eligibility criteria can be stringent. For instance, certain lenders exclusively offer buy-to-let mortgages to first-time buyers residing in employer-provided accommodation. Alternatively, some lenders stipulate that at least one applicant must be a property owner, while a first-time buyer can act as the second or subsequent applicant.

Here are some additional key criteria:

1. Deposit

Buy-to-let mortgages necessitate more substantial deposits compared to residential mortgages, a fact that holds particularly true for first-time buyers. To secure such a mortgage, you should have a minimum of 20% to 25% of the property’s value available as a deposit.

2. Rental Income

When applying for a buy-to-let mortgage, it’s essential to note that most lenders typically demand that the rental income from the property should be sufficient to cover approximately 125% to 145% of the monthly mortgage repayments. First-time buyers in particular may find themselves at the upper end of this range in terms of requirements.

3. Applicant Income

If you’re a first-time landlord without prior experience, lenders may have reservations about your ability to maintain a steady rental income without extended vacant periods. Consequently, they might scrutinize your other sources of income. While not all lenders impose an additional minimum income requirement, some may expect it to fall within the range of £25,000 to £40,000.

4. Applicant Age

Residential mortgages typically require a minimum age of 18. In contrast, buy-to-let mortgages commonly stipulate a higher minimum age of 21 or 25. This applies equally to first-time landlords.

5. Credit History

Buy-to-let mortgages typically don’t place significant emphasis on the applicant’s credit history since rental income is expected to cover repayments. However, for first-time buyers, especially those with bad credit, it may raise concerns for lenders due to potentially higher risk factors.