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Can first-time buyers buy-to-let in the UK?

Most first-time buyers will be purchasing their property to live in.  However, in a tougher economy, many are now looking towards making a longer term investment, but can first-time buyers buy-to-let in the UK?

There are several advantages for a first-time buyer to purchase a buy-to-let property:

  • You can buy property in a cheaper area and earn a higher yield from it.
  • Your rental income from a property will give you an additional income or cover a portion of your living expenses.
  • Your stamp duty will be markedly lower than it would be for an experienced landlord with multiple rental properties.

It is also worth noting that property prices have been relatively involatile so far this year.  This means it could be a good time to buy before, as is expected, prices start to rise again.

However, these benefits are, as we’ll explain, counterbalanced but several challenges.

Can my first property purchase be a buy-to-let?

The short answer is yes but it is not straightforward process which may be why so few people take this route.

Admittedly the government has recognised how hard it is to get your foot onto the property ladder.  They have launched a few schemes to make it easier, but these schemes are focused on creating homeowners not landlords.

This means most would be landlords have to pursue a buy-to-let mortgage from a recognised lender.  This is not easy.  Lenders consider first-time buyers to be a high risk borrower which means their terms can be challenging.

First of all you will need to find a lender that offers first-time buyers a buy-to-let mortgage.  For security. many will want to see that you have either had a residential mortgage in the past or currently live in a property that you own (this could be because you have inherited or been gifted the property).

Most lenders will also want you to have at least 12 months’ previous letting experience as, in their eyes, the risk of lending will decrease if you can show you know how to manage a rental property.

If you are unable to meet both these criteria, you may want to engage a broker.  They will know who is currently willing to lend to a first time buy-to-let landlord.  However, you need to be prepared that they may charge a significant arrangement fee and higher interest rates on the loan.

They will also want to see that you as the borrower meets their buy-to-let requirements.  With regards to the property, it will need to be in mortgageable and rentable condition and will realise a monthly rental income of 125% of your monthly mortgage payments once let.  From your perspective these are you will need to earn more than £25k per year, be under 75 and have a good credit score.

You will also need to put up the required deposit.

Officially a residential mortgage requires a 5% deposit although the average deposit is actually around 15%.  For a buy-to-let mortgage the minimum deposit is 15% although the average is 25%.  This rises to between 40% and 50% if the first-time buyer has no previous home ownership or landlord experience.

If you can cover the required deposit, you will also need to pay close attention to the way your mortgage is structured.

Many buy-to-let mortgages are interest only.  This is because as you’re only paying back the interest, monthly payments are lower which increases monthly profits.  However, it also means that at the end of your mortgage you will need to pay back the full amount of your mortgage which will likely mean you will need to sell the property.  As the price will probably have increased, the sale will still yield a profit for you once the mortgage has been repaid but, obviously, you will no longer have the property to let or to live in.

However, if you’re looking to save money on your investment, according to Lloyds Bank, some mortgages will let you apply with up to three people, spreading the cost of the investment and the profits. This would mean a less substantial yield on your investment but limit the risks associated with renting out a property.

To smooth the mortgage process, you could potentially use a guarantor.

Guarantors are more common for obtaining a residential mortgage.  However, some lenders will consider accepting their guarantee for a first-time buy-to-let if you don’t meet their full requirements.  Again, a broker should know which lenders will accept a guarantor and which won’t.

You must also be aware of the stamp duty liability associated with purchasing a buy-to-let property.  If you are buying your first property to let, you will eligible for the first time buyer relief applicable on the purchase of a first property. However should you then buy a property to live in the stamp duty maybe subject to the additional property surcharges.

Finally, if you are considering a buy-to-let as your first property purchase, please remember that being a landlord comes with responsibilities.  These include rent collection, repairs, upkeep, and redecoration, all of which are fundamental to maintaining your flow of rental income and, by extension, your ability to repay your mortgage as agreed.

While buying to let is not the usual route for first-time buyers, it is possible.  If you’d like to discuss an investment idea with our experienced property team, please contact us today.