Buy to Let First Time Landlord Part 2 of 2
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Buy to Let First Time Landlord Part 2 of 2 Frequently Asked Questions
Listen below as Michael Webb talks all about Buy to Let First Time Landlord Part 2 of 2
In less than 30 minutes, you’ll know a lot more about how to get a Buy to Let First Time Landlord Part 2 of 2
Buy to Let First Time Landlord (Part 2 of 2)
Michael Webb returns to talk more about Buy to Let First Time Landlords.
How much deposit will I need for my first Buy to Let property?
Products do drop in and out of the market, but as standard you should be aiming to have a 25% deposit plus any associated costs like legal and stamp duty. There is the potential to find products for a 20% deposit, and historically there have been 15% products available as well. But most First Time Landlords should be aiming for a 25% deposit.
How can I determine how much I can borrow for a Buy to Let mortgage?
This will be based around the rental income you can achieve. Typically we want to reach a 75% loan to value – or whatever the product is dictating.
You need to then look at the rental calculation and the stress testing that lenders are doing, in conjunction with the mortgage broker. There are calculators that you could potentially find online, but the actual borrowing you’re offered will vary lender-to-lender.
The most common calculation can be quite strict, where the rent has to be at least as much as the mortgage at an interest rate of 5.5% interest rate or higher. Commonly lenders want your rent to meet 145% of that figure.
In the last six to eight months things have changed quite significantly and rates started to rise in early 2023. It means those stress tests have become more difficult to meet, and therefore sometimes more deposit is required.
However, lenders have started to recognize this and develop products to allow for it. Some have reduced the interest rate and then used the pay rate – but they have also added a very large arrangement fee to the mortgage to manipulate that rental calculation.
How much stamp duty do First Time Landlords have to pay?
It will depend on the purchase price, and whether you own any other properties. If you’re a First Time Buyer-First Time Landlord, typically you will not pay the 3% surcharge on stamp duty. However, you will also not benefit from any first time buyer incentives.
It’s best to work it out via the stamp duty calculators. These are easy to use – just click whether you are buying an additional property or if it will be your only property. You put the purchase price in and it will work your stamp duty out for you.
Bear in mind that stamp duty legislation is constantly changing. It’s a hot topic for the government at the moment.
What factors determine the interest rate for a Buy to Let mortgage?
First and foremost it’s how competitive the market is. Factors determining rates in the market include how each lender is funded – do they have their own funds, in which case savings rates are a factor, or are they funded on the commercial market and relying on swap rates?
Obviously the Bank of England base rate also has an effect on the market. You need to look at the deals lenders are offering and what Buy to Let structure you’re looking for. Very generally, a Buy to Let mortgage in your own name is likely to be cheaper than one in a limited company name.
Other factors are the individual’s credit file. If you have an immaculate credit file, a really good income and you’re a homeowner, you’re likely to get a better interest rate.
How can I easily compare lenders as a First Time Landlord?
The easiest way is to deal with a mortgage broker. In fact, it’s going to be very difficult for you to compare deals any other way, because a lot of Buy to Let lenders only deal with mortgage brokers. Their deals aren’t necessarily advertised on sourcing sites on the internet.
Lenders also put out exclusive deals via brokers. We need to have very good relationships with the lenders to know that certain products are even there, because they’re not appearing on our search engines.
Are there plenty of mortgage lenders for First Time Landlords?
Yes, the standard Buy to Let market is fairly open, although if you are a First Time Buyer buying to let, that market is much more contracted.
If you’ve never owned any other property and your first ever property is going to be a Buy to Let there are regulations in place. You have to fit not only the lender’s Buy to Let criteria, but also their residential affordability criteria. It’s to make sure you’re not buying something that you couldn’t purchase on a residential basis.
If you’re already a residential homeowner and you’re becoming a First Time Landlord, that market is much bigger. Most lenders will consider lending to you as long as you fit all their criteria.
What is the typical loan term for a Buy to Let mortgage for First Time Landlords?
Most mortgages have a typical term of 25 years. That’s been the UK standard for many years.
But there are things to consider when looking at the term of a Buy to Let mortgage: the age of the applicants; the lender’s maximum age at the end of the mortgage; changes in the future for the borrowers and other things, like how long you intend to keep the property.
We would make recommendations on the most appropriate loan term for anyone looking for a Buy to Let mortgage.
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What is the difference between a fixed rate and a variable rate Buy to Let mortgage for a First Time Landlord?
With a fixed rate you know what your mortgage payments will be. Your rate will not change for two, three, five, seven or 10 years – so you are signing up to stability in your mortgage payments.
Typically there will be a penalty to leave that deal early. So if you wanted to go to another lender, sell the property or pay the mortgage off in any way there would be a penalty to do so. That may be between 1% and 5% of your debt.
A variable rate may also carry a penalty – or may not, depending on the product. But that rate will be linked to something. It may be a discount rate, which is pegged lower than that lender’s standard variable rate. If it’s discounted by 2%, for example, if their variable rate is 8%, you will pay 6%.
Your mortgage will track that rate or it may be linked to the Bank of England base rate. Of course, being variable means it can go up or down – and the trend at the moment seems to be up. So you have the risk that your payments could get more expensive, but you also have the possibility that they could get cheaper.
What are some common misconceptions about being a First Time Buy to Let Landlord?
Probably the most common misconception is that it’s very difficult to get into Buy to Let and get your first property. But in fact the most challenging part is acquiring the deposit.
If you are sitting on capital, then it would be fairly easy as long as you have a good credit rating and you’re a homeowner. It’s straightforward to locate a property and get a mortgage.
Your first property is probably more challenging than any others, and you will have to answer more questions from lenders. Properties two, three and four are probably the easiest, then once you get to five and above, the paperwork starts to get a bit more complex. That’s because you’re then classed as a portfolio landlord.
So the main misconception is that it’s difficult, but it’s typically not that challenging. A good mortgage broker would be able to guide you through the process of getting a first time Buy to Let mortgage.
What extra costs should I consider when becoming a First Time Landlord?
So there’s a few things to consider. First and foremost, stamp duty is usually a shock to people. That can be quite a significant chunk of money in addition to your deposit.
There’s likely to be a mortgage broker fee and a survey fee at some level, whether that’s a basic mortgage valuation all the way up to a building survey. Then there are rental costs – letting agent costs and potentially management costs for the property. Obviously there are your legal fees to purchase, too.
These are the main costs to consider. Some of them would be the same as with a residential mortgage – but of course stamp duty is likely to be higher. The legal fees may be slightly higher, particularly if the property is already tenanted.
If you’re buying an HMO (House in Multiple Occupancy), there would be licensing and compliance costs on the property.
Before anyone gets into being a First Time Landlord, I not only recommend speaking to a Buy to Let mortgage broker, but also to a rental agent about the legal compliance requirements to rent a property. That is becoming more and more regulated as time goes on. It’s not as simple as just putting someone in a property nowadays.
Gas safety certificates, electrical certificates and energy ratings are required and there’s other compliance that you need to go through, all of which are additional costs to being a landlord.
Should I get an interest only or repayment mortgage for my first Buy to Let property?
The vast majority of Buy to Let mortgages are on interest only. But that doesn’t mean you shouldn’t have that conversation with your mortgage broker. You need to consider what your goals are for the property.
If you want a property with no mortgage in the future then you need a repayment mortgage or an ability to pay that interest only mortgage off at the end. There will be different strategies and there’s different tax implications to both as well.
You should consider both, although most people do end up on interest only. On interest only you should look at whether overpayments are available with no penalties – again, something to talk to your mortgage broker about.
What documents are required to apply for a Buy to Let mortgage as a First Time Landlord?
These will differ from lender to lender. But most mortgage brokers are going to have a set requirement. You’re going to need proof of your income with three to six months worth of payslips and corresponding bank statements, to show your income and outgoings.
You will also need proof of your deposit. If that’s sourced from savings you’ll need a savings statement, and if there are large transfers into that account you need to evidence the original source of that money. Buy to Let lenders will ask a lot of questions if it doesn’t look like it’s been acquired over a long period of time.
If you’ve been able to save £1,000 a month for the last five years they may only ask for three months of statements, because they can see the regular accrual of that money. But if £10,000 has been transferred in, you need to evidence where that’s come from. People can be rather shocked at the requirements to evidence where their money has come from. Buy to Let mortgage applications are probably the most rigorous on these questions.
Other things you need are proof of ID and proof of address: passport, driving licence, utility bills confirming your address within the last three months. There will also be an electronic check by your mortgage broker, solicitors and the lender – these will appear on your credit file.
If there is adverse credit, you will need to provide your credit file. As things move on and you buy more properties, there might be more documents such as business plans and portfolio spreadsheets.
Are there any tax implications that First Time Landlords need to be aware of?
The rental that you receive is taxable income that sits on top of your earned income. It may push you from one tax bracket to another. Also, the way mortgage payments and interest are dealt with as a cost has changed – and while we can’t get into tax advice on this podcast, you do need to be speaking to a mortgage broker and a tax advisor at the same time. That way you get the right information, relevant to your own individual circumstances.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.