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First-time landlords offered record number of buy-to-let mortgages

Find out how to get on the ladder if you're an aspiring landlord

If you’ve ever considered investing in property, you currently have more choice than ever before, with the number of first-time landlord mortgages on offer at a new high.

In July 2018, the number of buy-to-let mortgages available to first-timer landlords hit 1,268 – the highest on record from Moneyfacts.

Which? explains the mortgage options available to aspiring landlords and things you need to know before leaping in.


First-time buy-to-let hits new high

Over recent years, the number of buy-to-let deals for first-time investors on the market has increased rapidly.

In July 2016, there were 929 mortgages available for novice landlords. By July 2018, this had jumped to 1,268, an increase of 339 products, Moneyfacts data showed.

In the same period, the average rate for a two-year fixed rate mortgage has fallen by 0.36% for first-time landlords.

The average in July 2016 was 3.19%. This decreased to 2.85% by July 2017, and is currently at 2.83%.

Best buy-to-let mortgages for first-time investors

There are a number of attractive fixed-rate buy-to-let deals available for people hoping to buy their first investment property.

A fixed-rate deal offers you certainty over how much interest you’ll pay, and gives you protection from future rate rises. In the current environment, when interest rates are expected to climb over current years, many people are opting for fixed-rate products.

Provider Initial rate Rate fixed until APRC Max LTV
Post Office Money 1.66% 30/09/2020 4.5% 60%
Virgin Money 1.69% 01/10/2021 4.3% 60%
Post Office Money 1.83% 30/09/2020 4.5% 75%
Virgin Money 1.96% 01/10/2020 4.6% 70%
Skipton Building Society 2.3% 30/09/2021 4.4% 75%

Source: Moneyfacts

Alternatively, you could opt for a variable rate or discounted mortgage rate, where your interest rate will fluctuate with market conditions.

Principality Building Society, for example, offers first-time landlords a discount of 3.1% on the lender’s standard variable rate (the default rate the lender charges if you’re not currently on a deal).

This means you would currently pay 1.8% (working out to an APRC of 4.4%), making it competitive to fixed-rate deals.

What first-time landlords need to know

If you’re considering investing in buy-to-let, chances are you’ve already bought your own home and are familiar with the home-buying process.

But buying an investment property differs from buying a residential home in a few key ways. Here’s what you need to know.

1. Affordability is calculated differently

When you’re buying a home, the lender is primarily interested in whether you earn enough to afford the loan.

For a buy-to-let mortgage, the lender will factor in whether the rental income that your property generates can cover the mortgage – and you generally need to show coverage of at least 125%, if not 145% in some cases.

As such, you need to choose your property carefully and make sure you fully understand how much income it’s likely to generate, taking into account the possibility it will be vacant between tenants.

2. Interest-only deals are common

With almost all residential mortgages, you need to both repay the loan and interest each month, so that over time your loan amount grows smaller.

But many buy-to-let deals are interest-only, meaning you don’t make any repayments; your monthly bill will only cover accrued interest.

Interest-only loans make for much cheaper monthly bills, but also come with some drawbacks. You can find out more in our guide to interest-only loans.

3. Mortgage interest tax relief is changing

When you own a buy-to-let property, you can deduct the interest you pay from your taxable rental income, but this relief is being phased out.

From the 2017-18 tax year, landlords have only been able to deduct 75% of their mortgage interest from their income, and this portion will decrease until its eliminated in 2020-21.

Instead, you’ll be able to claim a 20% tax credit on your mortgage interest, disadvantaging higher-rate or additional-rate payers. We explain how it works in our guide to mortgage interest tax relief.

4. Stamp duty rates are different

If you’re buying an investment property, you’ll have to pay a 3% surcharge on the house price, which is charged on top of the normal stamp duty rates.

The sums can be significant. Say you were buying a house worth £400,000. As a first-time buyer, you’d pay £5,000, while all other home buyers would pay £10,000 – but a buy-to-let investor would need to pay £22,000.

You can work out your bill with our buy-to-let stamp duty calculator.

5. You may have to pay capital gains tax when you sell

If you make a profit when you sell a property that’s not your main home, you may need to pay capital gains tax.

In the 2018-19 tax year, you can earn £11,700 before capital gains tax kicks in. The rate  you pay will depend on whether you’re a basic-rate or higher and additional-rate payer.

We explain how much you may need to pay in our guide to capital gains tax on property.

6. Study up on your obligations

As a landlord, you have a responsibility to provide your tenants with a safe home, which may include carrying out repairs to the structure, maintaining heating and water systems, ensuring fire and gas safety checks are done, and other maintenance and safety activities.

When new tenants move in, you’re also required to have an Energy Performance Certificate, and to carry out Right to Rent checks.

In some areas, you may be required to register with the local council, and there are additional requirements if your property qualifies as a HMO (house in multiple occupation).

We cover these rules, and many more, in our guide to becoming a landlord.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

Categories: Money, Mortgages & property

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