The buyers’ market for first-time buyers is a tricky place to navigate. Everyone is trying to achieve the same thing, and with the way the market has been over the past few years, not many are hitting that shared objective.
Those that do, finally find themselves on the property ladder where they hope the only way is up. For some, being able to purchase their first property is not only a chance to secure a house that can be called a home but potentially an avenue into the world of buy-to-let.
Things might not be that simple though. First-time buyers can rent out their property, but compared to the route existing homeowners take, it is a little trickier. Much depends on the type of mortgage taken out and what funds are available to get things started.
In this edition of our blog, we look at how a first-time buyer can rent out their property, how beneficial it could be and the key considerations.
Mortgages for first-time buyers
When securing your first property, much will be made about the mortgage and the deposit behind you. The larger the amount you have already saved, the more favourable the rates and terms will be. This can partially open the doors to a buy-to-let opportunity. Below, we cover the two common mortgage options that may be considered by someone looking to rent out the property they have bought.
What is a first-time buyer mortgage?
The first-time buyer mortgage is exactly what it says. A mortgage for those who have never purchased a house before. If you have never invested in, remortgaged, or owned a home, a first-time buyer mortgage will be the loan you may use to finance the purchase. These mortgages tend to have small deposit requirements of around 10% and are purely residential mortgages. This means you can’t purchase the home using this mortgage and then rent it out. When using a residential mortgage, the property is owned, in theory, by the lender, not you. So you are not permitted to make a financial gain on it.
What is a buy-to-let mortgage?
Another option, and one that could allow you to rent your home out, is the buy-to-let mortgage. These mortgages are specifically for people who want to let out the property they have purchased. Many lenders offer buy-to-let mortgages but see them as a risk. If nobody rents the property, is there a guarantee of the mortgage being paid?
As a result, deposit amounts tend to be significantly higher and can be around the 20/25% mark. Something often out of reach for first-time buyers. Furthermore, fees, interest, and any other charges will all be higher than those found on other mortgage products. This is because the lender sees you making money off the funds they lent you, and as a result, feel they deserve some of it too.
In most cases, these mortgages are known as “interest-only.” This means that the amount paid back to the lender each month covers only the interest. The full mortgage is only paid when the mortgage term ends.
Can a first-time buyer apply for a buy-to-let mortgage?
In short yes, but there are criteria to meet. A lender will see somebody with no previous mortgage history as riskier than somebody already established on the property ladder. Add in the risky nature of property letting, and it would be no surprise to see lenders decline to offer a loan on something potentially more volatile.
We mentioned earlier how a typical buy-to-let deposit is around 25%. However, for those who have never borrowed before, a lender, being aware of the risk, could ask for as much as 40%!
Even with the higher deposit funds in place, a lender may still refuse to grant a first-time buyer a buy-to-let mortgage if the projected rental income doesn’t satisfy the requirements.
Each lender has their own criteria, so it is always advised to shop around and learn more about the products available before making any commitment.
Criteria for a first-time buyer applying for a buy-to-let mortgage
There are many lenders that flat-out refuse to offer a buy-to-let mortgage to a first-time buyer. They just see the risk as too high. However, some do, and they will have specific criteria in place to help protect their investment. You will need to:
- Pass the lender affordability test
- Have an excellent credit record
- Prove that your current income and financial position can cover the monthly interest
- Show a projected rental income of at least 125% of the monthly mortgage payments
How can you let your property as a first-time buyer?
If you have been living in the property for a while and then decided that letting it out would be a good option, there are a few options open to you.
Pay off your mortgage
Perhaps the best option but maybe the hardest to achieve is to clear the mortgage. This makes the home yours, and then you can do whatever you like with it. Sell it, rent it out or perhaps seek a change of use!
This can come with costly fees though. Paying too much too early can see the lender saddle you with an ERC (early repayment charge). And this can cost thousands.
Get the consent to let
As we mentioned, clearing the mortgage may be the best option, but it is one not necessarily easy to achieve. If you want to let out your home but are not yet able to clear the mortgage, you could apply for the consent to let. Remember what we said earlier though. You cannot benefit financially from the mortgage, so consider this before taking this step.
Applying for the consent to let does come with very specific criteria. You must not rent out the home for financial gain or have any mortgage arrears for example. If you meet the criteria and the lender agrees to give consent, they have the right to set the rent, find the tenants and set the lease terms.
Remortgaging
You may be able to switch your residential mortgage to a buy-to-let. This can be beneficial as you won’t need a deposit. You’ll just need plenty of equity in the home. This means if you have only recently purchased the property, it is extremely unlikely you will be able to switch. You simply won’t hold enough equity to satisfy the criteria. If you do though, you should weigh up that the interest rate will be higher on your buy-to-let than it is on a residential mortgage and that there are other fees to factor in.
What costs does a first-time buyer have to consider with a buy-to-let property?
Aside from the higher level of deposit needed to secure the mortgage, the higher interest rates of the loan, and the other applicable fees, first-time buyers will also need to factor in other expenses.
- Stamp duty. With your buy-to-let home not being your main residence, you will not be eligible for any of the first-time buyer tax breaks. This means additional costs to bear. However, if you do not own another property, you can avoid this and just pay the standard rate.
- Surveys. Surveys are a vital part of any property purchase and need to be completed to show whether there are any issues with the property.
- Solicitors fees. Your conveyancing will cover all the legal parts of the purchase process.
- Landlord but to let insurance. Renting out a property comes with a degree of risk. Whilst this is not a legal requirement, it could protect you from exorbitant costs.
Responsibilities of a first-time buyer renting out their home
Being new to letting out a property will no doubt throw you into a world of new experiences. It’s a steep learning curve. With all the costs and checks we have already mentioned there are also key responsibilities, both legal and from a customer service perspective that should be taken into consideration:
- Gas safety checks, EPCs and fulfilling safety regulations.
- Maintaining the property and rectifying faults.
- Collecting rent payments.
- Securing any rental deposit in the relevant protection scheme.
- Be on call to assist tenants with issues.
- Drawing up tenancy agreements.
Of course, the list can easily be endless. Each property may have specific requirements. For ease, it is often advised to use a lettings specialist. It may come with a fee but will ensure full compliance with all the above and more.
Should a first-time buyer rent out their property?
If you have been able to secure the relevant mortgage and can afford the fees (and stress!) associated with being a landlord, renting out your property can be of benefit. Not only will you generate yourself an additional income, but you’ll also develop skills in property management that may help you generate a portfolio, and you could end up with an asset that has significantly appreciated.
Of course, there are a few disadvantages too. The risk is high, as are the costs. Factor in that there are times when the property could remain empty, and that problem tenants are a very real possibility, and you may regret opening up your property to others.
If you are looking for your first home, Cairds has a stunning variety of houses for sale in Epsom and the surrounding areas. And, should you be looking at your buy-to-let options, our team can assist with a wide range of landlord services that ensure your property to rent in Epsom and beyond is never left empty.