Can you get a buy-to-let mortgage if you don’t own a property?
You may be a first time buyer considering a buy to let mortgage before you own a house to live in. But this won’t be as easy as you think.
So can a first time buyer get a buy to let mortgage? As a first time buyer it’s possible to get a buy to let mortgage. But your options will be very limited. Most lenders consider the risk that first time buyers will want to live in the property for themselves. Many that will lend to first time buyers will limit the buy to let lending to a multiple of earnings.
All is not lost and you can still get a buy to let as a first time buyer. But there are other strategies that may be easier to help you get into property investing. Please read on to find out more.
Find a good mortgage broker to help you find a buy to let mortgage as a first time buyer.
Problems faced by first time buyers buying property
The biggest problem for first time buyers is having the funds for a deposit. This is the same whether they buy their first residential property or a buy to let investment.
The second problem first time buyers of buy to let’s have it is the limited number of mortgages available to them.
Also, first time buyers lack experience of being a landlord and are therefore considered a higher risk by mortgage lenders. This is the same for any property owner when they buy their first buy to let property. But if a property owner buys their first buy to let, they do at least have experience of owning property.
Lending criteria for first time buyers for buy to let mortgages
There are specific lending terms for buy to let mortgages for first time buyers. These include the following specific differences:
- The requirement of a larger deposit which is often a minimum of 25%.
- A higher annual rental yield.
- An income affordability calculation.
Let’s take a look at each of these in more detail.
1. The requirement of a larger deposit which is often a minimum of 25%
First time landlords will be restricted on who will lend to them. This restricted list of lenders will normally require a higher deposit than an experienced investor. This will likely be 25% as a minimum.
Buy to let mortgages normally require a deposit between 20% to 40%. The higher the percentage of deposit, the lower the risk to the lender. Which normally means a lower rate of interest on the mortgage.
The larger the deposit requirement, the harder it is to save the amount. This may mean first time buyers are limited to invest in an area with lower value properties. For example, in the North of England.
The lower the property value, the lower the deposit required. For example, if as your very first investment you can find a property at sub-£100,000, this will help. But even a property worth say £75,000 still requires a deposit of £18,750. Plus the legal fees and possible refurbishment costs are needed on top.
2. A higher annual rental yield
Most buy to let lenders require an interest multiple to lend, which is referred to as an interest cover ratio. For example, if the monthly interest on a buy to let mortgage was £500 per month. And the interest multiple is 1.45. The rent needs to be at least £725 per month (i.e. £500 x 1.45) for the lending to be approved.
Currently interest cover ratio is either 125% or 145% for most buy to let lenders. But for those that don’t already own a property, this multiple can be higher for those lenders prepared to lend to first time buyers. This is to lessen the risk to the lender.
If you use a broker to find your buy to let mortgage, they will find the best deal to suit your personal circumstances.
3. An income affordability calculation
Some of the small number of lenders who will lend to first time buyers will also apply an income affordability. Even for an experienced property investor, having earnings of £25,000 or more makes it easier to get buy to let mortgages.
As the pool of buy to let lenders who will lend to first time buyers is smaller, this requirement can be more stringent.
How best to find the right buy to let mortgage as a first time buyer
The best way to facilitate being a property investor is to use a mortgage broker. Mortgage brokers know which lenders will lend on which properties and to what type of investors.
The job of a mortgage broker is to match the following aspects on the property deal:
- The personal circumstances and credit rating of the individual.
- The financial position of the person and their earned income either from a job or a business outside of property investing.
- How much money they have for a deposit.
- The type of property they intend to invest in.
- The potential income the property will generate.
- The work needed to restore or refurbish the property.
- Whether it’s the investors intension to rent or flip the property.
Can a first time buyer get a mortgage for an HMO property?
Whilst is possible for a first time buyer to get a buy to let mortgage for a single let property, it’s extremely unlikely they would get a mortgage to buy an HMO property.
This is because the investor lacks the necessary experience for managing an HMO investment. Therefore, they need to buy at least one single let property before embarking on buying an HMO.
It’s one thing buying a single let property for the first time without any property experience. But it’s a much bigger step to buy an HMO with the extra regulation and responsibility involved.
Why a first time buyer might purchase a buy to let before they own residential property
The number one reason why first time buyers opt to buy a investment property as their first property rather than a home to live in is affordability.
If a first time buyer lives in an area with high priced properties too expensive to buy to live in, they can buy investment properties elsewhere that are more affordable that require a lower deposit amount.
First time buyers of investment property don’t get the stamp duty relief
The relief available to first time buyers for purchasing their own home does not apply to purchasing a buy to let. First time buyer Stamp Duty relief requires the person to live in the property.
If a first time buyer buys a home to live in as their first property, they will get relief for Stamp Duty.
But don’t start thinking you can live in the buy to let, because you can’t. Buy to let mortgages have set terms and conditions that don’t allow the owner to live in their own buy to let.
It’s worth mentioning that you will end up paying the additional 3% Stamp Duty when you eventually buy your own house, as at this stage you will already have other property.
Investing in buy to let may be better using a limited company
Investing in buy to let property changed when the UK Government changed the rules on mortgage interest relief for buy to let interest. Mortgage interest is no longer an allowable deduction against rental income. But instead you get a basic rate tax deduction for mortgage interest on the rental income net of expenses.
This is why it’s a better to invest using a limited company instead, as interest is an allowable deduction in a limited company.
Other strategies for first time buyers looking to invest in property
There are other strategies to use as a first time buyer of property. These include:
- Buying the property with a co-investor who already owns property either as a homeowner or better still as an investor.
- Get a guarantor to guarantee the loan as this will give more comfort to the lender.
- Invest using option contracts to buy property is a way to invest with little money down as a deposit.
- Buy your own house and rent a room.
- Use Rent-to-Rent as an investment strategy.
Of the above options, let’s take a closer look at the last three strategies in more detail.
Invest using option contracts to buy property is a way to invest with little money down as a deposit
Lease option deals are not easy to find and are a bit more complicated to structure. But if you find them, they are a great way to get on the property ladder and can be purchased for as little as £1 down.
But the most important advantage of using property lease options aside from a no money down investment strategy, is it doesn’t require you to get a mortgage. You can even get a lease option property deal if you have a bad credit report, as a mortgage is not required at the outset.
However, further down the track a mortgage may be required if you ultimately buy the property by exercising your option, but not if you assigned the lease option deal.
Buy your own house and rent a room
If you are finding it difficult to find a rental property or secure a buy to let mortgage. Or if you’d prefer to buy your own home first. You can always get extra income to help save up your deposit on your first buy to let by renting a room in your first home.
But before you do so, make sure to check your mortgage terms and it’s possible you’ll need a consent to let. But if this is your intension at the outset, let your broker know so they put you into the right mortgage to allow you to do this.
By approaching your investment strategy in this way will mean you are opened up to a wider range of buy to let mortgages, as you are no longer a first time buyer.
Use Rent-to-Rent as an investment plan
Rent to rent is another investment strategy that newbie property investors like, as this strategy doesn’t require a deposit and no mortgage is needed. Rent-to-rent requires you to find a property that the owner is prepared to rent to you for one price and you then sub-let it at an increased rent.
This strategy works best if you rent a house from an owner and let it out as an HMO. This gives you the uplift in rental income so you make a profit on the difference between what you are renting it from from the owner for.
Another strategy that works well for rent-to-rent is to rent property and then let it to Airbnb or as holiday let.
Final thoughts for first time buyers getting buy to let mortgages
If you find your first mortgage is not quite as good as you’d hoped, remember the second property will be easier.
After a few months have passed you can always remortgage the first property. This is because at this stage you have a little more experience as a landlord with other properties in your ownership.
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