Considering a Buy-to-Let Mortgage: First-Time Buyers Guide
The UK private rental market has increased dramatically since the turn of the century, more than doubling from 2 million homes in 2000 to 4.6 million in 2022. While there was a slight decline during and in the aftermath of the pandemic, the long-term trend remains upwards. Consequently, it is easy to see why this market attracts experienced and first-time investors.
Due to the variables associated with the private rental market, and the cost of financing a buy-to-let mortgage, rates are higher than residential mortgages. Consequently, first-time buyers can encounter significant challenges when looking at the risks associated with a buy-to-let mortgage. However, there are ways to improve your chances of a buy-to-let mortgage as a first-time buyer.
The buy-to-let market
While some private landlords have decided to exit the market due to growing costs and regulations, the long-term growth trend in private rental accommodation remains intact. In recent months we have experienced an increase in rental rates, with many tenants reverting to short-medium term rental accommodation while struggling to find a deposit to buy their own home.
Recently, we have seen a tightening of the buy-to-let mortgage market as interest rates continue to rise. Still, a mix of rental cover and additional income will dictate the availability of buy-to-let finance, especially for first-time buyers.
As some background, when it comes to the type of properties owned by landlords, a recent report highlighted the breakdown as follows:
- 54%, terraced housing
- 47%, flats (individual units)
- 44%, semi-detached house
- 21%, houses in multiple occupations
- 14%, detached house
- 13%, flats (multiunit blocks)
- 9%, bungalow
- 3%, short-term/holiday lets
A breakdown of private landlords by age shows that just over 30% are between 55 and 64, with the extended range of 45 to 74 accounting for more than 70% of private landlords. However, there is growing interest from younger age groups.
Why do first-time buyers look toward buy-to-let properties?
The subject of buying to mortgages and first-time buyers prompts the obvious question; why not buy your own home before a private rental property? There are many reasons why a buy-to-let purchase could be an individual’s first property acquisition:-
- Living with a partner, not on ownership documents
- Inherited their current home
- Still living with parents
- Living in employment-based rented accommodation
- Long-term plans to live in the property (currently unable to afford a residential mortgage)
Those who can demonstrate practical knowledge and experience in owning and running their home will likely attract more buy-to-let lenders. However, some individuals genuinely look towards the buy-to-market as their first property experience.
Understanding Buy-to-Let Mortgages
There are several differences between buy-to-let mortgages and residential mortgages, which increase the perceived risk. These include:-
- Buy-to-let mortgages tend to be interest-only
- Residential mortgages are majority repayment arrangements
- Funding levels are predominantly based on rental cover for buy-to-let mortgages
- Residential mortgage funding is calculated on employment income multiples
- Periods of vacancy can put pressure on a private landlord’s finances
- Regulatory requirements and maintenance can increase the cost of managing a buy-to-let
- LTV ratios are lower for buy-to-let mortgages due to a perceived higher risk
The criteria for a buy-to-let mortgage are tighter than those for residential mortgages, and this is even more pronounced for a first-time buy-to-let applicant. When applying for a buy-to-let mortgage, first-time buyers will need to meet the following criteria:-
- 25% minimum deposit, potentially as high as 40%
- Rental income cover between 125% and 145% of mortgage repayments (usually at the higher end)
- Minimum employment income of £25,000 per annum (may differ between lenders)
- Good credit history showing solid financial management
- Minimum age of 21 (possibly 25)
As a lender, many would prefer a buy-to-let investor to own/owned a property and therefore have a degree of practical and financial experience in this area. However, as competition continues to grow in the buy-to-let market, there are more opportunities for first-time buyers to enter the private rental market.
Before we look at the process of applying for a buy-to-let mortgage, first-time buyers may be interested in the following information:-
- Commercial activities, such as private rental, do not qualify for the various government mortgage schemes to help first-time buyers
- While the 3% second home charge will hit traditional buy-to-let investors, this may not apply to first-time buy-to-let investors
Preparing for a Buy-to-Let Mortgage Application
Before applying for a buy-to-let mortgage, you must prepare your finances to meet the appropriate criteria. When researching the market, you will notice different conditions for different buy-to-let lenders. Some will specialise in the buy-to-let mortgage market for first-time buyers and will be a little more sympathetic to your situation.
Here at Somers Financial, our team have deep-seated knowledge of the mortgage market, with particular expertise in buy-to-let. As an independent mortgage broker, we can reach out to the broader market to find a buy-to-let lender that best fits your specific situation. We can also help you with the application process.
Documentation required
While the type of documentation required can vary between lenders, you will typically need to supply the following paperwork:
- 3 to 6 months wage slips/accounts if self-employed
- Employment contract, if a relatively new job
- Address confirmation, including utility bills, bank statements, etc
- Identification documentation such as driving licence, passport
- Landlord reference if you have used rental accommodation in the last 12 months
Property research
When it comes to choosing the area and type of rental property, you must take into account the following:-
- Local rental rates
- Property prices
- Potential for long-term appreciation
- Typical tenant
There is also the need to produce a detailed report highlighting the value of the property and the potential rental income. An industry-qualified company should create this report, as it will be used to calculate the potential funding available. Ultimately, this will be based on rental income v mortgage interest payments and the level of cover.
Typical tenant
When it comes to the “typical tenant”, according to a recent government report, the most common demographic of tenants amongst private landlords are as follows:-
- 48% couples without dependent children
- 42% couples with dependent children
- 47% single occupants
- 24% lone parents
- 17% house sharers
- 4% extended family
While the breadth and variation of the UK buy-to-let market is immense, the above breakdown does give you an idea of the most common demographics. As a private landlord, this may change throughout your life, but buy-to-let mortgage providers are laser-focused on the rental cover against mortgage interest payments. In simple terms, your ability to cover monthly payments going forward!
Finding the Right Lender
When looking for the right buy-to-let mortgage, first-time buyers need an adviser with experience and an in-depth understanding of the market. As an independent mortgage broker, Somers Financial has access to the full range of buy-to-let lenders. It is essential to match your requirements as a first-time buy-to-let investor with the criteria of individual mortgage lenders.
There are numerous factors to take into consideration, such as:-
- Minimum deposit
- Rental income requirements
- Affordability test
- Headline interest rates
- Fees
- Property restrictions
As mentioned above, most buy-to-let mortgages are interest only, although there is the option of taking out a repayment mortgage. However, there are still a variety of different options available for each mortgage type, such as:-
- Fixed-rate
- Tracker
- Variable rate
- Capped and Collar
While adding a degree of regular employment income or guarantor will not harm your application, the focus will always be on interest rate cover.
The Buy-to-Let Mortgage Application Process
In some ways, the application process is relatively straightforward after the preparation work. After all, you have the relevant documentation, figures and answers to any questions a lender will likely ask. However, it is crucial to maintain focus and a professional approach, especially during the application process.
Our experience and connections in the buy-to-let mortgage market ensure that we know the makeup of individual lenders, including:
- Preferred timelines
- Approach to different documentation
- Areas of potential delay
- Preferred client demographic
- Financial limits
- Competitiveness compared to the overall market
At the moment, buy-to-let variable mortgage rates are heading towards double digits with expectations of a further increase in the short term. When you also consider the enhanced deposit requirements for a typical buy-to-let mortgage, the services of a mortgage broker may prove invaluable.
The Somers Financial team not only have experience across the market but our close relationship with some of the larger/specialist lenders allows us to negotiate improved terms. While there is always potential to enhance terms, this is even more important in the current uncertain environment.
Post-Application Considerations
After applying for a buy-to-let mortgage, first-time buyers may be tempted to sit back and take a breather after what can be a hectic time. Unfortunately, this is only the start, but we can help and guide you through post-application activities involving:-
- Legal advice
- Letting agents
- Property managers
- Insurance cover
- Maintenance budgets
- Tax implications
As a buy-to-let landlord, every day your property is empty, you must make up the funding shortfall. Consequently, it is crucial to hit the ground running once you have that mortgage application approval, ensuring the property seller is ready to complete.
Conclusion
When it comes to mortgage applications, there are numerous factors to consider concerning residential and buy-to-let mortgages. The overarching requirement is preparation, research and the ability to hit the ground running as soon as your mortgage application is approved. Advertising and confirming tenancies can take anything from just a matter of days to weeks, with every empty day a further drain on your finances.
Here at Somers Financial, we have tremendous experience in the general mortgage market and particular expertise in the buy-to-let sector. When looking at a buy-to-mortgage, first-time buyers will often face hurdles and challenges that require professional assistance. Our strong relationship with individual mortgage providers allows us to negotiate on behalf of clients, revising terms and conditions to suit their needs and finances. Proactive, innovative and forward-thinking, we see each client scenario as unique.
Sources:-
https://www.onlinemortgageadvisor.co.uk/buy-to-let-mortgages/first-time-buyer-btl/
https://ukmoneyman.com/first-time-buyer-buy-to-let/
https://www.sandradavidson.com/buy-to-let-mortgages-first-time-buyer/
https://www.money.co.uk/mortgages/buy-to-let-mortgages/statistics
https://www.buyassociationgroup.com/en-gb/2022/03/08/uk-buy-to-let-8-7m-homes/
https://www.uswitch.com/mortgages/buy-to-let-statistics/
https://www.moneyhelper.org.uk/en/homes/buying-a-home/buy-to-let-mortgages-explained