Buying a home is a complicated process, whether it’s your first venture into property or you’ve worked through it all before. Factor in the way affordability has become much harder to achieve, and for first-time buyers, the challenge to obtain a property of their own is perhaps more difficult than ever.
Sometimes, though, those who do manage to purchase a home as a first-time buyer have bigger aspirations than just becoming a homeowner. They see the potential for venturing into the world of rentals and letting out the home. Rental property is in high demand – albeit a lower demand than a year ago – with, according to Zoopla, an average of 15 households chasing each rental property. This is more than double the pre-covid average, where just six households would be after the same home.
It’s such demand that sees first-time buyers finding opportunities within the rental sector, but it’s an opportunity they can’t always take. First-time buyers can rent out their home but when compared to the route existing homeowners have to take, things are a little different. From mortgages to cash reserves, it can be a minefield. In this blog, we explain how a first-time buyer can secure a buy-to-let mortgage and explore the world of being a landlord.
What mortgages can a first-time buyer get?
Unless you have vast cash reserves, buying your first property will come via a mortgage. However, the mortgage you use will depend on circumstances, and how much money you have saved already. The larger the amount you have, the less you need to borrow. This can open doors to cheaper rates, more suitable terms and even the buy-to-let mortgage you would need to let your home out. Below, we explore the two most common mortgage types you may be able to secure as a first-time buyer.
First-time buyer mortgage
The most common option for those looking to buy their first home is the first-time buyer mortgage. Offered to those who have never owned or part-owned a property before, the first-time buyer mortgage is in place to help people take their first step onto the property ladder. With deposits set as low as 5%, the focus is on making the move into property ownership affordable. These mortgages are only available for residential properties and cannot be used for commercial means, which includes using the property as a rental. The reason for this is that the home is technically owned by the lender and not yourself, and it would be against the terms of the agreement for you to make a financial gain off the home they have lent you the money for.
Buy-to-let mortgage
The buy-to-let mortgage is the one to select if you are looking to rent out a home. Not all lenders will offer a BTL mortgage, as the risk is sometimes considered too high. For instance, if the property stays vacant and you can’t find a tenant, can the mortgage still be paid? That being said, plenty of lenders see an opportunity in offering a buy-to-let mortgage and do so with certain caveats in place. A buy-to-let mortgage will have a deposit requirement of significantly higher amounts than a standard residential mortgage, which sometimes makes it unobtainable for first-time buyers. Deposits are often set as high as 25% of the property value, and based on the current UK house price average of £281,000, this means you would need approximately £70,000. Buy-to-let mortgages will also see the lender attach slightly higher fees and potentially higher interest rates, too. These extra costs make it something that first-time buyers have to seriously consider before becoming a landlord.
Finally, perhaps one of the most important factors to consider is how the interest works. Many buy-to-let mortgages work as interest-only mortgages meaning that each month, your payments are for the interest on the amount borrowed and not the capital itself. Then, once the mortgage term ends, the mortgage amount is paid in full. This can be daunting as if you do not have a plan in place, you’ll need to find a new mortgage, sell the home or find the funds from elsewhere.
Can you apply for a buy-to-let mortgage as a first-time buyer?
You can apply for a buy-to-let mortgage as a first-time buyer, but it might prove difficult to find a lender unless you speak to a specific fee free mortgage broker like Mortgage Saving Experts.
Lenders want to guarantee they can get their money back. If you have no lending history as a homeowner, you may be seen as a much bigger risk compared to those who have borrowed in the past. This could mean that the 25% deposit requirement commonly seen on buy-to-let mortgages shifts closer to the 35% mark (or higher in some cases).
Should those deposit funds be achievable, a lender may still have some questions. They will want to know that you have a plan in place that shows your rental income will not only cover but exceed the monthly mortgage payments. If you cannot demonstrate this, the lender may find it hard to say yes.
What do you need to do to get a buy-to-let mortgage as a first-time buyer?
As with anything property-related, prepare, save, research and ask for advice. There are many lenders who will simply not offer a first-time buyer a buy-to-let mortgage, but there are also plenty who do.
Firstly, check your credit score and ensure that you have an excellent record. Missed payments, CCJs and arrears on multiple credit accounts will likely have a negative impact on your credit score.
Next, show the broker and lender that you have a projected rental income that is in excess of 125% of the monthly mortgage payments.
You’ll then be subject to an affordability test from the lender to see if you can afford to borrow from them. They will also request proof that your current financial situation is secure and that your employment or income is not likely to change significantly within the coming months.
This process can be daunting, especially if it’s a new situation for a first-time buyer. However, a good mortgage broker will be able to put you at ease, explaining the best and most affordable options available.
Can you let your home out with a first-time buyer mortgage?
As mentioned earlier, a first-time buyer mortgage is purely for residential use; making your home a rental shifts it into the commercial category. Although, if you have been living in the home for a while and feel that letting it out may be a practical option, there are some things you can do:
Clear the mortgage
This could be a little unrealistic in the short term as you would need to have substantial sums available, but if you can clear the mortgage and make the home yours outright, you are free to do as you wish with it. However, be aware that early repayment charges could be incurred if you are paying off a large sum early, which can be very high in some cases.
Remortgaging
Sometimes, you may be able to move from one mortgage type to another. This will depend on the criteria set out by the lender, and you will need to hold significant equity in the home already. Otherwise, a lender is much less likely to let you move the mortgage. For first-time buyers, this can be difficult as it could take years to build up sufficient equity to satisfy the lender. If you have managed to meet the lender’s requirements, you should be free to move to a buy-to-let mortgage, but you’ll need to factor in the new interest rates (which are higher), the arrangement fees and other costs that may be added to it. Speaking to a remortgage expert will help you find the best solution if remortgaging is an option you’d want to consider.
Ask for consent to let
You may be able to approach your lender and ask for the consent to let. This is worth considering if clearing the mortgage is too unrealistic a possibility. The only potential drawback is that if you are granted consent to let, you cannot make a financial gain from letting the property out. The lender may also dictate the rent amount, the terms of the agreement and even find tenants.
Key responsibilities of a first-time buyer renting out a home
If you have successfully secured a buy-to-let mortgage as a first-time buyer, it is worth remembering that this isn’t where your responsibility for the property ends.
Not only will you have to ensure the payments on the buy-to-let mortgage are paid, but before you can begin the search for suitable tenants, you’ll need to ensure that you have buy-to-let landlord insurance in place, that stamp duty has been paid and that all surveys have been completed.
After that, you’ll have further work to do to make sure your tenants can live safely in your home and that you fulfil your legal obligations as a landlord.
This would include, but is not limited to: collecting rent payments, maintaining and repairing the property, booking in gas safety checks, arranging for EPCs to be issued, being readily available to assist tenants with property issues and drawing up tenancy agreements.
This process involves a lot of hard work, but can be very rewarding. Perhaps the most challenging aspect is the mortgage itself, and that is where the team at Mortgage Saving Experts are on hand to help. Our years of experience mean we can help you navigate the confusing world of mortgages easily and without stress or worry. Why not call our team today and learn more about what we can do for you?
