Investing in buy to let property makes a great deal of sense, said the British Landlord Association (BLA) in an article on the 18th of May 2020 – while at the same time also warning that it is by no means a route to getting rich quick.
Being a landlord is no walk in the park, insists the BLA, and it is likely to come with its moments of stress, hard work and, above all, good judgment in your investment decisions. A lot of the qualities it is going to take might require a mature head and at least a little experience of the property market in general.
The question arises, therefore, whether you are likely to be cut out for the role of a landlord if you are a first-time buyer – and, more critically perhaps, whether you are even likely to get a mortgage as such an investor.
Although a buy to let (BTL) mortgage for a first-time buyer is perfectly feasible, it is likely to be a more challenging process than for those who have proven experience in the property market. You will be swimming against some of the conventional rules on eligibility for a buy to let mortgage.
The conventional rules
Although lenders have different criteria when assessing applications for buy to let mortgages, they typically expect borrowers to:
- own their own home – outright or with the help of a mortgage;
- have minimum earnings of at least £25,000 a year;
- invest in residential property;
- have a healthy credit history;
- be neither too young (over 21) nor too old (aged less than 75 when the mortgage will end); and
- have available a deposit of between 25% and 40% of the purchase price of the let property.
These are the criteria identified by just one website – My Wallet Hero on the 18th of May 2020 – but are also reflected quite widely across the mortgage lending market.
Buy to let mortgages for first-time buyers
Like so many of the so-called “rules” surrounding mortgages, it is nevertheless quite possible to secure a buy to let mortgage as a first-time buyer. But the application may not be as smooth, you are likely to be assessed far more cautiously, and the pool of potential lenders is likely to be much smaller.
The principal reasons for such caution, of course, have already been mentioned: if you are a first-time buyer, you have little experience in what has recently become a far tougher market. A lender is necessarily wary of your ability to make a go of the business and may harbour concerns about your maintaining the mortgage repayments from the rental income you receive.
Those doubts may be expressed in the type of buy to let mortgage offer made to you as a first-time buyer:
- you are likely to need a bigger deposit than more experienced buy to let investors, for example – at least 25% of the value of the let property you want to buy and, possibly, as much as 60%;
- the loan to value (LTV) ratio is, therefore, likely to be lower than some investors might be offered – a maximum of 75%, for instance, falling to as low as 40%;
- you are unlikely to be offered the most favourable or competitive rates of interest; and
- your credit rating, of course, becomes more important than ever as a measure of your financial responsibility and reliability.
Interest-only buy to let mortgages
Nevertheless, if a lender is content with the assessment and approves your application, you are likely to be offered the same type of mortgage as the vast majority of other buy to let investors – namely, a so-called interest-only mortgage.
Just as the term suggests, with an interest-only mortgage, your monthly mortgage repayments only cover the interest charged by your lender. Repayment of the capital is delayed until the end of the mortgage term – which may be as far as 25 years away.
Most landlords aim to make that capital repayment through the sale of the let property – and typically bank on making their greatest profit from this transaction because of the expected increase in property prices throughout the market over 25 years or so.
That is a further risk you take since property prices might have fallen during the interim. So, when it is time to repay the outstanding capital balance on your buy to let mortgage, the property is worth less than you paid for it at the beginning of the mortgage. In that case, you must make up the repayment of capital from your own pocket – and will have made a loss on your venture as a buy to let property investor.
If you are a first-time buyer looking to invest in a buy to let property, you may find using the services of a specialist broker will help you understand and access the most suitable product for your own unique circumstances.