Buy-to-let offers an alternative route on to the property ladder, but is it the right move for first-time buyers who are struggling to buy in their area?
If you’ve saved up a deposit but can’t afford to buy a property where you live, you might be considering investing elsewhere in the country while continuing to rent.
Despite a raft of reforms hitting profits in the last few years, buy-to-let investment remains very popular, but it’s not for the faint-hearted.
Here, you can learn about the various responsibilities of being a landlord, and get the lowdown on how buy-to-let mortgages work for first-time buyers.
- If you’re looking to invest in property, you can get expert advice on your mortgage options by calling Which? Mortgage Advisers on 0800 197 8461.
Why first-time buyers invest in property
If that applies to you, you might be casting your gaze elsewhere in the country, and considering whether buy-to-let might be a better route on to the property ladder.
On paper, this isn’t a bad idea. You’ll be investing in an asset that could serve you well financially in the long run, or even act as a home in retirement.
Before taking the plunge, however, you’ll need to be 100% sure you’re fully aware of the responsibilities you’d have as a landlord.
First-time property investment: five key things
Unlike putting your money into a savings account, property investment has a tangible effect on other people, namely the tenants living in the home you’ll be letting out.
With that in mind, you should think carefully about whether you’re ready to sign up for the commitments of being a landlord.
As well as ensuring the safety of your tenants, you’ll need to adhere to a range of regulations, including the staged replacement of mortgage interest tax relief.
To get a taste of what it’s like to be a landlord, read our article on 16 things buy-to-let landlords need to know in 2019.
Letting agent fees ban
Many landlords leave the day-to-day running of their properties to a managing agent, who looks after everything from sourcing tenants to dealing with maintenance.
This part of the letting process is about to become more expensive, however, with the government’s ban on letting agents charging fees to tenants, which is due to come into force from June.
The ban will mean agents won’t be able to charge tenants for administrative tasks such as referencing and inventories, meaning landlords will have to foot the bill.
While every landlord envisages their property being let to a tenant for 365 days a year with no problems, things don’t always run so smoothly.
Void periods – times when the property sits empty – can result in a good investment quickly turning into a dud.
This means you’ll need to budget for unexpected expenses and the possibility of losing rental income between tenancy periods, during renovation work, or – in the worst case scenario – because you’ve had to evict your tenants.
Stamp duty is a double-edged sword for first-time buyers looking to invest in a property.
First, the good news. As you don’t already own a home, you won’t need to pay the 3% stamp duty surcharge for investors and second homebuyers, potentially saving you thousands of pounds.
The big downside, however, is that you won’t qualify for the cut to stamp duty for first-time buyers that was introduced in the 2017 Budget. And when you do come to buy your first property to live in, you’ll miss out again because you already own a property (or owned one in the past).
- Learn more about property tax rates and rules in our full guide on stamp duty.
Buy-to-let for first-time buyers isn’t just for cash buyers, but the bigger the deposit you’ve saved, the better the deal you’ll be able to obtain.
That’s because the market for first-time-buyer buy-to-let mortgages is relatively small, and some lenders don’t open their product ranges to first-time buyers at all.
When applying for a buy-to-let mortgage, you’ll need to be able to prove the property will be profitable. Most lenders need to be convinced that rental income will cover around 145% of mortgage payments before they’ll consider offering you a loan.
- Find out more about lending rules in our full guide on buy-to-let mortgages.
Buy-to-let mortgages for first-time buyers
So how difficult is it to get a buy-to-let mortgage as a first-time buyer?
Of the 2,255 buy-to-let mortgages currently on the market, 421 are available to first-time buyers – a little under one in five.
As the table below shows, mortgages are available at between 60% and 80% loan-to-value (LTV). For a competitive deal, though, first-time buyers will realistically need a deposit of at least 25%.
|Max loan-to-value||Number of deals|
Source: Moneyfacts. 16 January.
Which lenders offer these mortgages?
Buy-to-let mortgages for first-time buyers are offered by 25 lenders, including high street names such as Barclays, NatWest and a host of building societies and specialist lenders.
Not all providers offer deals across the full range of LTVs, however. The table below shows the maximum LTVs currently on offer for first-time buyers.
Lowest rates for first-time buyers
The table below shows the cheapest deals by initial rate for first-time buyers across all buy-to-let mortgage types. All of these chart-topping deals came with two-year introductory terms.
As you can see, the gap in cost between the cheapest deal at 75% and 80% LTV is 1.25%, meaning that first-time buyers can theoretically get a loan at 80% LTV, but it will be much more expensive.
It’s also worth noting the 75% LTV mortgage on offer from Barclays actually beats the best rates available from other banks at 65% LTV.
|Max LTV||Type of deal||Lender||Initial rate||Revert rate||APRC||Fees|
|65%||Discounted variable||Leek United||1.79%||5.69%||5.3%||£199|
Source: Moneyfacts. 16 January. Note that these deals may not be available on all types of buy-to-let property. For example, some lenders refuse loans on Houses in Multiple Occupation (HMOs) or charge different fees for portfolio landlords. Always do your research and seek independent advice.
Fees on buy-to-let mortgages
Buy-to-let mortgages often come with higher fees than residential deals, and some deals charge more than £2,000 upfront.
As with standard residential mortgages, some providers will offer deals with a lower fee in exchange for a higher initial interest rate.
There are signs that some lenders are moving away from high fees in favour of fee-free and cashback products, as they look to entice landlords by cutting the upfront costs of obtaining a loan.
How to get a buy-to-let mortgage
Getting a mortgage can be confusing, so as a first-time buyer it can help to get advice from a whole-of-market mortgage broker.
It’s especially important to consider taking expert advice when it comes to buy-to-let deals, as more than half of the products currently available are only on offer through intermediaries – such as brokers – rather than directly from lenders, as shown below.
|Availability||Number of deals|
|Direct from lenders only||116|
|Direct or through an intermediary||77|
|Through an intermediary only||228|
Is buy-to-let still worthwhile?
As you might have gathered, becoming a landlord in 2019 can be a complicated business, but that doesn’t necessarily mean it’s a bad idea.
Before investing in property, you’ll need to do lots of research into the local market and be confident that the property will be able to achieve good capital growth (increase in value over time) and rental yield (the percentage of the property’s value brought in by rent each year).
With the housing market slowing down, properties are no longer enjoying the significant capital growth they once were. And as uncertainty over Brexit continues, it’s best to proceed with caution.
Good rental yields can still be found, though. The latest tracker from Your Move claims that investors in the North East of England are enjoying returns of around 5%.
To learn more about the pros and cons of property investment, check out our story on whether buy-to-let is still worthwhile in 2019.
Advice on buy-to-let mortgages
If you’re considering investing in buy-to-let and would like advice on your mortgage options, call Which? Mortgage Advisers on 0800 197 8461 or fill in the form below for a free callback.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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