Buy-to-let mortgages for first-time landlords
Buy-to-let mortgages to get started in the world of property investments.
Investing in buy-to-let properties can be a lucrative venture, offering the opportunity to generate rental income and build a property portfolio. As a first-time landlord, it is essential to understand the key aspects of buy-to-let mortgages to make informed decisions and maximise your investment returns.
You will discover that there are a lot of topics to consider, including location, business structure, yield, type of investment, and financing options. Understanding them is simpler than you think. They are the key to a successful investment, and we will do this together.
Can a first-time buyer get a buy-to-let mortgage?
Yes! First-time buyers can obtain buy-to-let mortgages. Investing in buy-to-let can be a viable option for first-time buyers, offering the potential for long-term returns and property appreciation. Different lenders have different criteria, but many lenders are willing to approve a mortgage application to a first-time buyer who wants to become a landlord.
Lenders will consider various factors such as:
- credit history
- personal income
- predicted rental income (more about it later)
- the deposit and how much of the property value you want to borrow (LTV: loan to value – the percentage you will borrow related to the value of the property.)
- A typical requirement is a minimum of £25,000 of annual personal income, but some lenders do not require any form of income, relying solely on the rental income of the property.
- While lenders prefer homeowners, our brokers are here to assist first-time buyers in securing buy-to-let mortgages without a residential property – it is not essential for approval, it is just favourable.
- How much you have to put down as a deposit, and what LTV you are looking for.
What are the criteria for a first-time buyer buy-to-let mortgage?
It depends from one lender to another. Your personal circumstances can make a difference, but lenders are more interested in the predicted rental income.
The typical requirement is that the rent must cover 125% of the mortgage payments using a stressed interest rate to allow for payments to increase. Some lenders will require as much as 145% of the stressed interest rate.
What should I consider before investing in a buy-to-let property?
1. Location: finding the ideal investment area
Choosing the right location for your buy-to-let property is paramount to success. Factors such as proximity to amenities, transport links, schools, and employment opportunities can influence rental demand and property value. Thorough market research, consultation with local experts, and analysis of rental trends will help you identify areas with high rental demand and strong growth prospects.
2. Business structure: personal name or limited company?
Deciding on the business structure for your buy-to-let business is an important consideration. You can operate as a personal landlord or establish a limited company which will need to be set up as a Special Purpose Vehicle (SPV). It essentially means the company operates to own/manage/let buy to let properties. Each option has its own implications regarding taxation, liability, and financing opportunities.
Seeking guidance from a qualified accountant will help you determine the most suitable structure based on your circumstances and long-term goals. This decision can affect the number of options you have for mortgages, rates and fees. If your accountant has advised you to purchase using your trading business, please let us know, and we will provide you with the best mortgage options available to you.
3. Yield: maximising rental income potential
Yield is a crucial factor in buy-to-let investments as it determines the return on investment. Higher yields are generally more favourable, but it’s important to evaluate the yield in relation to the location and property type.
Gross yield is the annual rental income generated by an asset, divided by the price of acquiring it.
As an example, if a property generates a rental of £1,000 a month which equates to £12,000 over the year, and you were to purchase this property for £200,000, you would receive a gross yield of 6% per annum.
£12,000 per annum divided by £200,000 investment = 0,06
What are the types of let-to-buy investments?
Once you have decided on who the purchaser will be (you or your limited company), the type of tenant will need to be considered. There are specific mortgage products available depending on the type of investment that will align with your goals:
Standard Tenancy (AST) Single Household:
Renting out a property to a single household under an Assured Shorthold Tenancy agreement offers stability and simplicity for both landlords and tenants.
House in Multiple Occupation (HMO):
HMO properties accommodate multiple tenants who form separate households and share common areas. HMOs can generate higher rental yields but require compliance with specific licensing and safety regulations.
Investing in properties near educational institutions can be lucrative, as there is often high demand for student accommodation. Student let properties typically operate on fixed-term tenancies aligned with the academic calendar.
Renting out a property on platforms like Airbnb allows for short-term rentals, catering to tourists or individuals seeking temporary accommodation. Airbnb properties offer flexibility and the potential for higher rental income during peak seasons. The mortgage for this type of property investment is a holiday let.
Holiday let properties are designed for short-term vacation rentals, often located in popular tourist destinations. While they can offer attractive rental returns, it’s important to consider seasonality and the management requirements involved.
How much can I borrow?
Understanding the financing options available is crucial when entering the buy-to-let market. Buy-to-let mortgages are calculated based on the property’s rental income, which is used to assess affordability. In short, the higher the yield being offered, the higher the loan to value.
Most lenders offer products up to 75% loan-to-value (LTV), requiring a minimum deposit of 25%. However, some lenders may offer up to 80% LTV, providing more flexibility. Our experts can help you explore options such as top-slicing, fixing payments, and enhanced loan amounts to maximise your borrowing potential.
Out-of-the-box solutions to help your affordability
In London and the South East, where generally yields are lower, a larger deposit may be required, although there are several ways to increase the amount you can borrow when facing lower yields.
Personal affordability assessments (sometimes called top-slicing) are a resource to help your affordability.
If the rental income is too low to allow you to borrow the loan to value you need, we can go to lenders that will accept the use of your personal disposable income to prove the mortgage you require is still affordable (up to the max LTV limits being offered).
Proving affordability long-term
In 2016 the Prudential Regulation Authority laid down new rules for lenders requiring them to use specific calculations for affordability.
One of the rules laid down offered lenders the opportunity to offer more favourable lending amounts when long-term affordability could be proved. Long-term affordability was classed as a term of five years or more. This means we are able to secure a higher loan from many lenders when a five-year fixed-rate mortgage is taken.
How much will my buy-to-let mortgage cost?
We have a free calculator for that too!
You will need to know:
- How much you want to borrow
- If you want a repayment of capital and interest or interest only
- The number of years you need to pay it back
- The interest rate (top tip: go to our Instagram, we post a reference rate every week).
What are the other fees besides the mortgage payments?
There are other fees you need to have in mind when checking if your investment has a good potential to bring positive returns.
- Stamp duty
- Surveys from an independent company to check the property condition
- Solicitor’s fees
- Buy-to-let insurance
- Property maintenance
- Furniture (generally less needed you you are rent for a family)
- White goods (fridges, washing machines, etc)
- Letting agency fees
- Rent guarantee insurance
- Void periods (1 to 2 weeks per year without receiving rent)
You can start today
Entering the buy-to-let market as a first-time landlord can be an exciting and rewarding journey. By considering essential factors such as location, business structure, yield, type of investment, and financing options, you can make informed decisions and maximise your investment returns.
At Home of Mortgages, our team of experts is dedicated to providing tailored advice and guidance to help you navigate the buy-to-let process with confidence. Start your buy-to-let journey today and unlock the potential of property investment. You can have your first FREE mortgage quote in as less as 15 minutes and have all your questions answered.
Disclaimer: The information provided in this article is for general informational purposes only and should not be considered as financial or legal advice. It is always recommended to consult with qualified professionals regarding your specific circumstances and requirements. By speaking with one of our advisors, you will receive specific mortgage advice tailored to your personal circumstances.
Frequently Asked Questions:
What should I consider before investing in a buy-to-let property?
Before investing in a buy-to-let property, consider factors such as location, rental demand, potential rental income, maintenance costs, landlord responsibilities, and the risks involved. Conducting thorough due diligence and seeking expert guidance will help you make informed decisions.
Can a first-time buyer get a buy-to-let mortgage through a limited company (SPV)?
Yes! First-time buyers can purchase buy-to-let properties through a limited company known as a Special Purpose Vehicle (SPV). This structure offers potential tax benefits and limited liability. However, it's essential to consult with a qualified accountant to determine the suitability and implications of this approach.
How much deposit will I need for a buy-to-let mortgage?
Most lenders require a minimum deposit of 25% of the property's purchase price for buy-to-let mortgages. However, the required deposit may vary depending on factors such as the property type, location, and individual lender criteria. Our mortgage brokers can help you explore the deposit requirements based on your specific circumstances.
What if I have bad credit?
The great news is that there are indeed mortgage options available for individuals with bad credit. The extent of your credit issues may impact the ease of finding a suitable lender, as different lenders have varying criteria. However, we are here to help navigate this challenge on your behalf.
At Home of Mortgages, we have years of experience assessing different credit histories, and we will connect you with the lender most likely to approve your application. We understand the complexities of different lenders' criteria and can provide the expertise needed to find the right bad credit mortgage lender for your specific circumstances.
At Home of Mortgages, we have years of experience assessing different credit histories and we will connect you with the lender most likely to approve your application.
We understand the complexities of different lenders’ criteria and can provide the expertise needed to find the right bad credit mortgage lender for your specific circumstances.
Make it easier for yourself – our friendly advisers are here to help.
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020 8517 1141
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Remember | Your home may be repossessed if you do not keep up repayments on your mortgage.