First-Time Landlord Mortgage Guide
Buying Your First Buy to Let Property
Becoming a landlord is very different from buying a home to live in.
When you purchase a Buy to Let property, the property is being acquired as an investment. This means both the mortgage and the way a lender assesses the application can differ from a standard residential mortgage.
Expected rental income, property type, deposit, your personal circumstances, credit history and the proposed ownership structure can all influence the mortgage options available.
For someone buying their first rental property, there are also decisions to make before reaching the mortgage application stage.
Should you buy personally or through a limited company? How much deposit will you need? How will a lender assess the rent? Should the mortgage be interest-only or repayment? What happens if the property is empty for a period?
This guide explains some of the main mortgage considerations for first-time landlords.
What Is a Buy to Let Mortgage?
A Buy to Let mortgage is generally used to purchase or refinance residential property that is being rented to tenants rather than occupied by the borrower as their own home.
Because the property is being used as an investment, lenders assess Buy to Let applications differently from standard residential mortgages.
One of the most important differences is the role of rental income.
With a residential mortgage, affordability is primarily based around the applicants' income, expenditure and financial commitments.
With Buy to Let, the rent the property is expected to generate can form an important part of the lender's assessment.
Your personal income and wider circumstances can still matter, depending on the lender.
Can I Become a Landlord If I Have Never Owned a Rental Property Before?
Potentially, yes.
Being a first-time landlord does not automatically prevent you from obtaining a Buy to Let mortgage.
However, lender criteria vary.
Some lenders are comfortable with first-time landlords, while others may have additional requirements or prefer applicants who already have experience of owning rental property.
The type of property can also make a difference.
A straightforward property intended to be rented to a single household may be viewed differently from a more specialist property such as an HMO, multi-unit property or holiday let.
The fact that one lender will not accept a first-time landlord therefore does not necessarily mean that another lender will take the same approach.
Can a First-Time Buyer Get a Buy to Let Mortgage?
This is a slightly different situation.
A first-time landlord may already own their residential home but have never owned a rental property.
A first-time buyer has not previously owned a property.
Some lenders may consider someone who does not currently own their own residential property for Buy to Let finance, while others may have different requirements.
The lender may also consider why the applicant wants to purchase a rental property before buying their own home.
This can make lender selection particularly important for a first-time buyer considering Buy to Let.
How Much Deposit Does a First-Time Landlord Need?
Buy to Let mortgages generally require a larger deposit than many residential mortgages.
The precise deposit required will depend on the lender, mortgage product, property, expected rental income and applicant circumstances.
The relationship between the mortgage and property value is known as the loan-to-value, or LTV.
For example, if you purchased a property for £200,000 with a £150,000 mortgage, the mortgage would represent 75% of the purchase price.
That would be a 75% LTV mortgage, with the remaining £50,000 being provided as the deposit before allowing for other purchase costs.
A larger deposit reduces the LTV and may potentially increase the range of mortgage options available.
However, deposit requirements vary, so it is sensible to understand your potential mortgage position before committing to a property.
Don't Use All Your Savings for the Deposit
The deposit is only one of the costs involved in becoming a landlord.
You may also need money for costs such as:
mortgage fees;
valuation costs;
legal fees;
property surveys;
taxation associated with the purchase;
insurance;
repairs;
safety requirements;
letting costs;
initial improvements; and
other professional fees.
It can also be sensible to maintain an emergency reserve after completion.
A rental property can experience unexpected expenses, and there may be periods when no rent is being received.
Putting every available pound into the deposit without considering the wider costs can leave a new landlord financially exposed.
How Do Buy to Let Lenders Assess Affordability?
Buy to Let affordability can be very different from residential mortgage affordability.
The expected rental income from the property is often a major part of the assessment.
Lenders may use an Interest Coverage Ratio, commonly referred to as ICR, together with a stressed mortgage interest rate.
Rather than simply asking whether the actual monthly rent is higher than the actual mortgage payment, the lender applies its own calculation.
The property may therefore need to generate more rent than the actual monthly mortgage payment.
Different lenders can use different calculations.
This means one lender might offer the mortgage amount required while another lender might not, even though they are considering the same property and the same expected rent.
Does My Personal Income Matter?
It can.
Although rental income is important, lenders can also have requirements relating to personal income.
Some lenders may have minimum income requirements, while others may take a different approach.
Your income may also become relevant where rental income alone does not satisfy the lender's standard calculation and the lender offers another affordability approach.
The source of your income can matter as well.
Lenders can have different criteria for employed applicants, self-employed applicants, company directors, contractors and people with multiple sources of income.
How Is the Expected Rent Established?
You may have an idea of the rent based on similar properties in the area or information provided by a letting agent.
However, the mortgage lender will normally want its own assessment.
As part of the mortgage valuation, the valuer may provide an opinion of the property's expected market rent.
The lender can then use this figure for its rental affordability calculation.
This means you should not automatically assume that the rent shown in an estate agent's advertisement or estimated by an online property website will be the figure accepted by the mortgage lender.
Should I Speak to a Letting Agent Before Buying?
For a first-time landlord, speaking to an experienced local letting agent can be useful.
They may be able to provide information about:
realistic rental values;
tenant demand;
popular property types;
expected void periods;
local rental conditions;
property management costs; and
practical landlord responsibilities.
Mortgage advice and letting advice serve different purposes.
Understanding both the financing and the likely rental market can give you a more complete picture before committing to an investment.
Rental Yield vs Monthly Profit
New landlords sometimes focus heavily on the expected monthly rent.
However, rent alone does not tell you whether a property is a good investment.
Rental yield is commonly used as one way of comparing rental income with the property's value or purchase price.
But even yield does not represent actual profit.
A landlord may have expenses including:
mortgage interest;
insurance;
repairs and maintenance;
letting or management fees;
service charges;
ground rent where applicable;
compliance costs;
periods without a tenant;
accounting costs; and
taxation.
The amount left after all relevant expenses can be very different from the headline monthly rent.
What Happens If the Property Is Empty?
A period when a rental property has no tenant is commonly referred to as a void period.
During a void period, the rent may stop but many of the property's costs continue.
The mortgage still needs to be paid.
There may also be insurance, utilities, council tax, service charges, maintenance or other expenses depending on the circumstances.
First-time landlords should therefore consider whether they have sufficient financial reserves to manage a period without rental income.
A Buy to Let investment should not be planned on the assumption that the property will always be occupied and rent will always arrive on time.
Should I Buy Personally or Through a Limited Company?
This is one of the biggest questions many new landlords face.
A property can potentially be purchased in your personal name or, subject to the circumstances and lender requirements, through a limited company.
The two structures can have different implications for:
mortgage availability;
mortgage pricing;
taxation;
accounting;
administration;
ownership;
extracting income;
future investment; and
selling the property.
There is no universal answer that makes one structure better for every landlord.
A mortgage adviser can explain how the proposed structure affects mortgage availability.
An accountant or appropriately qualified tax adviser should advise you on the tax implications.
It is particularly important not to establish a company solely because someone has said it is always more tax-efficient.
Individual circumstances matter.
What Is an SPV Limited Company?
If you investigate Limited Company Buy to Let, you are likely to encounter the term SPV, or Special Purpose Vehicle.
In property investment, this usually refers to a limited company established specifically for property-related activities rather than a company carrying out an unrelated trading business.
Some Buy to Let lenders prefer or require particular company structures.
If you are considering purchasing through a company, it can therefore be sensible to understand the mortgage requirements and obtain appropriate tax advice before finalising the structure.
Interest-Only or Repayment?
Many Buy to Let investors consider interest-only mortgages, but repayment mortgages may also be available depending on lender and product criteria.
Interest-Only
With an interest-only mortgage, the monthly mortgage payment generally covers the interest charged rather than reducing the original capital borrowed.
The mortgage balance therefore remains to be repaid at the end of the mortgage term.
This can result in lower contractual monthly mortgage payments than an equivalent repayment mortgage, but it also means you need an appropriate strategy for eventually repaying the capital.
Repayment
With a capital-and-interest repayment mortgage, each monthly payment includes both interest and repayment of part of the original mortgage balance.
Provided the required payments are maintained, the balance should reduce over the mortgage term.
The appropriate structure depends on your circumstances, cash flow and investment strategy.
What Is a Buy to Let Repayment Strategy?
Where a mortgage is arranged on an interest-only basis, the lender may want to understand how the outstanding capital is expected to be repaid at the end of the mortgage term.
For some Buy to Let investors, selling the investment property may form part of that strategy, subject to lender acceptance.
It is important to understand from the beginning that interest-only does not mean the original debt disappears.
The capital remains outstanding until it is repaid.
What Type of Property Should a First-Time Landlord Consider?
From a mortgage perspective, straightforward properties can sometimes provide access to a broader range of lenders than unusual or specialist properties.
Lenders can have specific criteria relating to:
property construction;
flats;
high-rise buildings;
ex-local authority properties;
properties above commercial premises;
HMOs;
multi-unit properties;
holiday lets;
short leases;
unusual construction; and
properties requiring significant work.
That does not necessarily make these properties unsuitable investments.
It means that the property itself forms an important part of mortgage eligibility.
A property can appear attractive as an investment but still be unsuitable security for certain mortgage lenders.
What Is an HMO?
HMO generally means House in Multiple Occupation.
These properties can involve different tenancy arrangements and may be subject to additional licensing, management and regulatory requirements.
HMO mortgage lending can also be more specialist than standard Buy to Let.
Lenders may consider factors such as the number of bedrooms, number of tenants, property layout, licensing requirements and landlord experience.
A first-time landlord considering an HMO should therefore establish both the regulatory requirements and potential mortgage position before proceeding.
What About Flats and Leasehold Properties?
Many rental properties are flats, but leasehold ownership introduces additional considerations.
These can include:
remaining lease length;
service charges;
ground rent;
restrictions within the lease;
building management;
major works;
building insurance arrangements; and
lender requirements.
The lease may also contain restrictions concerning letting or particular types of tenancy.
Your solicitor should investigate the lease as part of the legal process.
Can I Let the Property to Anyone?
Not necessarily.
Mortgage lenders can have restrictions concerning acceptable tenancy arrangements and tenant types.
A standard Buy to Let mortgage may be designed around conventional residential letting arrangements.
More specialist circumstances may require different lender criteria.
It is important that the way you intend to use the property is disclosed accurately when arranging the mortgage.
Changing the use or tenancy arrangement later could also affect the mortgage terms.
Do I Need Landlord Insurance?
A normal residential home insurance policy may not be appropriate for a property being rented to tenants.
Landlords may need insurance designed specifically for rental property.
The appropriate cover will depend on the property and circumstances.
Mortgage lenders may also impose requirements concerning buildings insurance.
Insurance should therefore form part of the planning process rather than being left until after completion.
What Other Responsibilities Does a Landlord Have?
A Buy to Let mortgage is only one part of becoming a landlord.
Landlords can have significant legal and regulatory responsibilities relating to areas such as:
property safety;
tenancy arrangements;
deposits;
energy performance;
repairs and maintenance;
gas and electrical safety;
licensing;
right-to-rent requirements where applicable; and
other housing regulations.
These requirements can change.
Mortgage advice does not replace specialist legal, tax, letting or property-management advice.
Before letting a property, make sure you understand the current responsibilities that apply to the property and tenancy.
What Documents Might I Need for a Buy to Let Mortgage?
Requirements vary between lenders, but a first-time landlord may be asked to provide information such as:
proof of identity;
proof of address;
bank statements;
evidence of income;
evidence of deposit;
details of existing mortgages;
details of existing properties;
information about the property being purchased;
expected rental income; and
information concerning the proposed ownership structure.
Self-employed applicants or company directors may need additional financial documentation.
Limited Company Buy to Let applications can also require information relating to the company, directors and shareholders.
Does My Credit History Matter?
Yes.
Even though the mortgage relates to an investment property, lenders may still assess your personal credit history.
Missed payments, defaults, County Court Judgments, high unsecured borrowing or other credit issues can influence lender choice.
Different lenders can take different approaches to adverse credit.
It is sensible to understand your credit position before making a mortgage application, particularly if you know there have been problems in the past.
Should I Get an Agreement in Principle?
Depending on the lender and circumstances, an Agreement or Decision in Principle may be useful before proceeding to a full mortgage application.
It can provide an initial indication of whether the lender may consider the application, subject to full underwriting, property assessment and other checks.
An Agreement in Principle is not a mortgage offer and does not guarantee that the mortgage will ultimately be approved.
For Buy to Let, the property and expected rental income can be particularly important, so a lender's final decision cannot necessarily be established from the applicants' circumstances alone.
Should I Buy a Property Before Arranging the Mortgage?
It is generally useful to understand your potential mortgage position before committing to a purchase.
This can help establish:
potential borrowing;
deposit requirements;
likely rental requirements;
lender restrictions;
ownership structure considerations;
property criteria; and
likely costs.
It can also help identify potential problems before you become financially committed to a transaction.
Don't Choose a Property Based Only on the Mortgage
Being able to obtain a mortgage does not automatically mean a property represents a suitable investment.
The mortgage adviser assesses the financing.
You should separately consider the investment itself, including:
local tenant demand;
achievable rent;
condition of the property;
ongoing maintenance;
likely void periods;
management requirements;
purchase costs;
ongoing costs;
potential taxation;
legal requirements; and
your longer-term objectives.
Property values can fall as well as rise, and rental income is not guaranteed.
Think About Your Exit Strategy
Before buying your first rental property, consider what you ultimately intend to do with it.
You might plan to hold it for many years, build a larger portfolio, repay the mortgage gradually or eventually sell the property.
Your strategy can influence decisions about mortgage term, repayment method, ownership structure and how much capital you commit at the beginning.
Plans can change, but having a clear objective is better than entering a long-term property investment without considering how you might eventually exit it.
The First-Time Landlord Mortgage Process
Although every transaction is different, a typical process may look like this.
1. Understand Your Financial Position
Establish your available deposit, income, existing commitments, credit position and financial reserves.
2. Consider the Ownership Structure
Decide whether you are considering personal ownership or a limited company and obtain appropriate professional tax advice where necessary.
3. Establish Potential Mortgage Options
A mortgage adviser can assess lender criteria, potential borrowing and likely rental requirements.
4. Search for a Suitable Property
Consider both the investment potential and whether the property is likely to meet mortgage lender requirements.
5. Make an Offer
If you find an appropriate property, you can negotiate the purchase through the estate agent.
6. Mortgage Application
Once the property and transaction are known, the appropriate mortgage application can be submitted.
7. Valuation
The lender will normally arrange a valuation and may assess the expected rental value.
8. Underwriting
The lender considers the applicants, property, rental assessment, deposit and supporting documentation.
9. Mortgage Offer
If the application is satisfactory, the lender may issue a formal mortgage offer.
10. Legal Work and Completion
Your solicitor completes the legal work required for the purchase before funds are released and ownership transfers.
First-Time Landlord Checklist
Before purchasing your first Buy to Let property, consider:
how much deposit you have available;
whether you have funds for additional purchase costs;
whether you will retain an emergency reserve;
your credit position;
your personal income;
whether you will buy personally or through a company;
expected monthly rent;
local tenant demand;
potential void periods;
property condition;
ongoing maintenance;
landlord insurance;
property management;
mortgage repayment method;
your longer-term investment strategy; and
the legal and tax implications of becoming a landlord.
Taking time to understand these areas before purchasing can help you make a more informed decision.
Speak to Cambs Ely Mortgages About Your First Buy to Let
If you're considering becoming a landlord, we can help you understand the mortgage side of the process before you commit to a property.
We can discuss your deposit, circumstances, expected rental income, proposed ownership structure and the type of property you're considering, before researching appropriate mortgage options.
Cambs Ely Mortgages provides Buy to Let and property finance advice to new and experienced landlords in Ely, Cambridge, Cambridgeshire and across England, with remote appointments available.
Discuss Your Buy to Let Plans
Building Blocks for a Brighter Future.
#BuildingBlocksForABrighterFuture
Important Information
The information contained in this guide is intended for general educational purposes and does not constitute personalised mortgage, investment, financial, legal, accounting or tax advice.
Buy to Let mortgage availability, interest rates, rental affordability requirements, loan-to-value limits and lender criteria depend on individual circumstances, the property, ownership structure and the relevant lender.
Property investment involves risk. Rental income and property values are not guaranteed, and you remain responsible for mortgage payments during periods when a property is not generating rental income.
Tax treatment depends on individual circumstances and may change. You should obtain appropriate professional tax and legal advice where required.
Your property may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate some forms of Buy to Let mortgage.