Can I Purchase a Buy to Let as a First Time Buyer?

If you are a first time buyer, you may be wondering whether you need to use your first time buyer status on a residential property. For some, the opportunity to get the tax benefits on a buy to let property is appealing.

The great news is you can get a buy to let as a first time buyer. You may want to consider the implications of becoming a landlord as a first time buyer in more detail though, as they can be significant.

Let’s explore whether you can purchase a buy to let as a first time buyer in more detail.

What is a Buy to Let?

Understanding what is buy to let is relatively straightforward. A buy to let is a mortgage product that allows you to purchase a property with the express purpose of renting it out.

Compared to a residential mortgage, buy to let mortgages are far higher risk for lenders and the criteria you will need to meet are different as a result.

Among the heightened barriers for buy to let mortgages is a much higher deposit requirement. If you are considering a buy to let mortgage as an alternative to a residential mortgage with a 10% deposit, a buy to let mortgage is not applicable to your circumstances.

The way lenders assess buy to let mortgages differs in other ways too, for example, you will need to pass a rental stress test as opposed to the affordability calculation you would have on a residential mortgage.

How to Buy to Let as a First Time Buyer?

The route to a buy to let mortgage as a first time buyer is the same as if you were a seasoned buy to letter. Your mortgage requirements will remain the same as any other person applying for a buy to let.

First, you will need to find your rental property and calculate the expected rental returns.

Some properties are unsuitable for buy to let mortgages because the rental income they are capable of generating will be under the buy to let threshold.

Once you have found a suitable property and ascertained the expected monthly rent you will need to contact your mortgage broker to apply for a mortgage.

The broker will find you a product that matches your property and deposit. Did you know some building societies only lend in specific geographical locations?

A key consideration for you and your broker will be sourcing the best interest rate. The higher the interest rate on a buy to let mortgage, the lower your profit margins.

Differences Between a Buy to Let Mortgage and a Residential Mortgage Product

We have outlined some of the differences in lending criteria between buy to let mortgages and residential mortgages.

The actual products are vastly different as well.

Residential Mortgages

Residential mortgages are typically capital and interest repayment mortgages. Each time you make a monthly payment your money pays off some of the capital (amount borrowed) and interest. Over time, the loan amount decreases, and the mortgage becomes cheaper as the interest chargeable on lower capital reduces the value of the debt.

At the end of the mortgage term, providing you have made all your payments on time, your debt will have been paid off in full and you will own the property outright.

Buy to Let Mortgages

A key to understanding what is buy to let is interest rates. Buy to let mortgages are typically interest only mortgages. Every monthly payment made to the mortgage will cover the interest portion of the loan and the capital remains and does not reduce over time. With a buy to let mortgage the capital balance will be the same in year one as it is in year twenty.

You can make capital overpayments to reduce the value of the debt with most lenders although some lenders operate Early Repayment Charges.

At the end of a buy to let mortgage the total amount (minus any overpayments) you originally borrowed will need to be repaid. You may choose to pay the outstanding balance from savings or sell the property to repay your mortgage.

DIY First Time Buyer Buy to Let Landlord

To maximise profit margins, the majority of landlords choose to manage tenants, rental income and repairs directly.

Managing your property yourself will save you on agency fees but you should still be prepared for financial overheads.

For example, the eviction process has become increasingly tenant oriented, and it is now costly and time-consuming if you need to evict tenants from your property. Agencies will typically deal with evictions on your behalf and given these are strict legal processes that go before a court, it is vital you get evictions right.

How Much Deposit Will I Need for a Buy to Let as a First Time Buyer?

To answer the question “how much deposit for buy to let first time buyer?” let’s take a closer look at deposits. The amount of deposit required will depend on your lenders’ requirements and the rental stress test. Typically, you will need to put down at least 25% of the property value.

In cases where the rental stress test is too tight at a 25% deposit, you may be required to put down a much higher deposit to source your desired interest rate.

Source of Deposit for Buy to Let Mortgages

As part of buy to let mortgage requirements, there are strict guidelines lenders have for where your deposit comes from.

The main reason for this is Anti-Money Laundering (AML) regulations.

You will need to show savings being built up over time or investment income paid into your deposit account regularly.

Some investments are unsuitable for a mortgage deposit, such as cryptocurrency. This is because the nature of cryptocurrency can make it difficult for lenders to track where money has come from.

This may change in the future, but for the time being, your deposit cannot come from a cryptocurrency source.

If the deposit is gifted, the person gifting the deposit will need to complete the AML requirements and show the same details about the source of funds as you would have needed to.

In most cases, lenders will not accept money from overseas. In rare cases where you can demonstrate a clear audit trail for the money, it may be permissible, and you should discuss this with a broker to ascertain if it is possible.

What Are the Requirements for a Buy to Let Mortgage?

There are five main components of a buy to let mortgage requirements.

• The property is mortgageable.
• You have a deposit of 25% or more.
• The rental income far exceeds the monthly interest payment.
• You are a UK resident.
• You have landlord’s home insurance.

Additional to these overarching requirements, you will need to pass a credit check and demonstrate the source of your deposit.

Rental Stress Tests

Lenders operate different rental stress tests depending on their appetite to risk. Some first time buyer buy to let mortgage lenders have very strict rental stress tests, and you may find it difficult to secure a mortgage if your anticipated rental income is not high enough.

Other lenders are a little more flexible although they will still implement a rental stress test.

The general rule is the monthly rental income must greatly exceed the monthly interest payment.

Buying a Buy to Let as a First Time Buyer vs Residential Mortgage

Now we have covered the differences between residential mortgages and buy to let mortgages, including the rules around a buy to let application, it is important to consider your first time buyer status.

Stamp Duty

Did you know you might not be a first time buyer – even if you think you are?

To be classed as a first time buyer you must never have owned a property in the past (including overseas).

If you are purchasing your property with another applicant who is not a first time buyer, then your first time buyer status will be cancelled out.

Once you have lost your first time buyer status (even if you have not benefited from the stamp duty benefit) you cannot get it back. In short, you either use it or lose it.

If you are a first time buyer and qualify as one under HMRCs rules, you will be entitled to a higher stamp duty threshold when purchasing your first property.

If you use your stamp duty benefit for a buy to let property, you will not be able to use it again when you buy your main residence.

You should ideally consider practicality of a buy to let vs a residential property as a first time buyer and also factor in which will save you the most amount of money. You should seek specialist tax advice to ensure you are factoring in all aspects as a first time buyer using a buy to let mortgage.

Buy to Let Management

As a landlord you will incur costs you would otherwise avoid as a residential property owner.

You will be responsible for any costs associated with finding and evicting tenants.

Landlords must also ensure properties have safety certificates and an EPC certificate.

All properties suffer wear and tear, and you are obligated to keep your property in good working order. The onus is on you, the landlord rather than the tenant to cover costs arising from wear and tear.

Be careful to manage your property effectively as the compensation scheme regulator is becoming stricter on landlords including imposing substantial fines where a landlord has failed to make repairs properly.

Insurance and Other Costs

You will need home insurance as a requirement of your buy to let mortgage lender. This will need to be a policy covering the fact the property is rented out.

Landlord policies are not majorly expensive but they will each set varying conditions about how you are to manage the property as a landlord.

Failing to meet an insurers’ conditions could result in your insurance being rescinded or a claim not being paid out.

What Lenders Offer First Time Buyer Buy to Let Mortgages?

Most buy to let mortgage lenders will have a first time buyer product available. However, some lenders choose not to lend on a buy to let basis to first time buyers, deeming their inexperience an additional risk.

You should advise your mortgage broker that you are a first time buyer as part of your initial consultation as this will help them find the right product and best interest rate for your situation. They’ll know the right first time buyer buy to let mortgage lenders to approach.

Speak to a Broker

If you are financially savvy and understand the implications of being a first time buyer obtaining a buy to let mortgage, the venture of becoming a landlord can be profitable and fulfilling.

The key to how to buy to let as a first time buyer is to understand your status as a landlord is a business. You should fully expect to operate your rental property in the way a company would in terms of generating a return on investment.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers provides fee FREE first time buyer buy to let mortgage advice.

Contact Boon Brokers to discuss purchasing a buy to let as a first time buyer today.