A guide to buy-to-let mortgages for first time buyers

The process of investing in a buy-to-let residential property is a little different to the process of buying your own home. In this guide on first-time buyer buy-to-let mortgage investment, I'll look at who can get a BTL mortgage, eligibility requirements and even tips on finding the best lenders and secure financing to get yourself moving up the property ladder.

Can a first-time buyer get a buy-to-let property mortgage?

Yes, a first-time buyer can get a BTL mortgage for a residential property. However, the BTL mortgage process for rental properties differs from getting a standard home loan. BTL mortgages are at higher risk than home loans for mortgage lenders, so the lending criteria are stricter, and the rates are usually higher. Mortgage lenders also deem first time landlords a higher risk as you don't have any experience running a rental property. Additionally, they have concerns that while you may purchase the property initially to rent it out, it may become your permanent residence, which violates the mortgage agreement terms.

As a result, it restricts the number of mortgages open to first-time buyers to get a buy-to-let property mortgage, but there are plenty of lenders out there who will accept new landlords. How much you are borrowing and your ability to meet eligibility criteria are also factors in creating a successful application. An experienced mortgage broker will help you access the right lenders who will accept inexperienced landlords, strengthen your case as much as possible, and source mortgage deals with competitive mortgage rates that are only available to brokers.

What will I need for a buy-to-let mortgage?

Each mortgage lender will have its own specific criteria for first-time buy-to-let mortgage applicants. However, they will generally require the following to evaluate your case for buying an investment property:

Deposit

The deposit for a BTL mortgage is higher than for a standard residential mortgage. Typically, this should be 20% of the property’s value at the very least and some lenders may require more, especially for first-time buyers. Again, it is best to speak to a mortgage broker. They can use their professional relationship with lenders to source an accessible and competitive deal.

Personal income

The more you earn, the higher the amount that you’ll be able to borrow. Most lenders will use between 4 and 4.5x your annual personal income, but some may look at 5x your annual income. For example, if you earn £30k per year you should be able to borrow around £130k. Of course, this also depends on how much debt you are currently servicing, so lenders will look at your personal income after these debts are paid off.

Employment

If you have a secure income that earns additional bonuses, you are in the strongest position to borrow funds for a BTL property. However, some lenders also fund applicants with a less secure income, including self-employed applicants, if they can see your income is stable.

The number of applicants

It will usually strengthen your case if you jointly apply for a BTL mortgage, especially if the other applicant has a good income and credit record. This will lower the risk profile for the loan, helping you borrow more at more favourable terms.

Age

Some lenders apply an age ceiling to their eligibility criteria that ensure that the loan is safely paid off while you are still likely to be working and therefore earning a salary. Again, this isn’t the same for every lender, and some allow loans that would come to term when the borrower is older than 80.


Loan-to-Value (LTV) ratio

This is a formula that each lender uses to determine their investment risk. It relies on the value of the residential property and how much you want to borrow. A high LTV will allow you to borrow more on more favourable terms, while it will be a bit more challenging to find funding if your LTV is low.

You will need to support your case for a BTL residential mortgage to mortgage companies with the following types of documentation:

  • A landlord reference if you rent
  • An address history of around three years
  • Six months of wage slips for proof of income
  • Six months of bank statements
  • Proof of any assets you may own
  • Proof of your ability to pay the deposit

The same applies to every applicant on your form, so be sure to bring all supporting documentation for each person on the loan application for the mortgage company to evaluate.

How will my affordability be assessed?

The eligibility requirements and the affordability of the BTL residential mortgage are viewed holistically and depend on many different factors, including the rental market, so they shouldn’t be viewed in isolation or as definitive exclusionary factors. For example, you may not have a very high income, but the fact that you are fully employed and have a good deposit may overcome that.

In fact, the main element of concern to lenders is the potential rental yield from the buy-to-let property, as this is the income that BTL investors use to pay off their loans. For example, if the amount you want to borrow will incur a monthly cost of £500, but your rental yield from your investment property is around £800 per month, then your LTV will be very favourable, and you will likely get a very competitive and advantageous loan.

For this reason, it’s important to take your case to an experienced whole-of-market mortgage broker. They will know what different lenders are looking for, who is open to first-time BTL investors, who has the most competitive rates, and more.

Key considerations for first-time BTL mortgages

Mortgage type 

There are several types of BTL mortgages that may assist you in buying your property, including a guarantor mortgage where another party guarantees that they will pay any outstanding payments that you miss. Your guarantor will feature on the property's title deed and be legally held accountable if payments are missed, but they will not own a share in your property. Another option is a joint borrower, sole proprietor mortgage. This allows you to buy the BTL house in your name, although you and another party will own the property and be responsible for the mortgage payments together.

Type of mortgage payments

With a BTL mortgage, you can choose between a capital repayment mortgage, which works like a standard residential mortgage, and an interest-only mortgage. They each have their own pros and cons. The capital repayment option allows you to buy off the property over the term of the loan, but your monthly mortgage payments are higher as a result. The interest-only loan keeps your monthly mortgage payments low over the term of the loan, but you have to settle the outstanding capital amount in full at the end of the loan. The most popular option is the BTL interest-only loan.

Rental yield

This is the amount you will earn each month in rental income from your investment property, and it will help determine your eligibility for a BTL mortgage. The rental income for a property must be fairly and objectively evaluated by real estate professionals so that you get a clear idea of what you can charge for rent. In addition, this amount needs to be higher than the monthly loan repayment that you would incur. For standard buy-to-let applications, the rental income will have to be around 125% of the loan repayment amount, but as a first-time buyer, you could expect to meet as much as 145% of the loan repayment amount through your rental income.

Stamp Duty

Stamp Duty, also called Stamp Duty Land Tax (SDLT) is a government tax on the purchasing of property that applies in England and Northern Ireland. Scotland and Wales apply a similar tax in the form of Land and Buildings Transaction Tax and Land Transaction Tax, respectively. These are banded taxes that depend on how expensive the investment property is. You can find out how much Stamp Duty you will pay by using this Stamp Duty Calculator.

How much can I borrow?

Keep in mind that your ability to borrow is influenced by the amount of your deposit, the value of the property you want to buy, your potential rental yield, and the personal financial position of all applicants. The easiest way to find out how much you can borrow is to speak directly to a mortgage consultant that has access to plenty of deals from different lenders. This will give you the most accurate idea of how much you can borrow so that you can either start looking for a property or start the BTL mortgage application process.

You can also use a residential BTL mortgage calculator to get a general idea of how much you can borrow, although this will be more like a general guideline than a very accurate and reliable result.

What if I have bad credit?

Bad credit can feel like an endless burden if you are looking for funding or credit, and buying a property requires considerable funding. Reviewing your credit record is standard procedure for all mortgage companies when considering an investment loan. However, there is no reason to give up if you have bad credit.

Each lender is different, and there are mortgage companies that specifically specialise in bad credit mortgage lending. After all, bad credit can happen to anyone, especially in the current economic climate, and there is no reason why this should be used to hold you back when you are getting your investments and life back on track.

These mortgage companies will review your mortgage application against their risk profile, looking primarily at the severity and circumstances of your rating. They will look at what events caused the drop in credit rating, how these were resolved when they occurred, and how stable your credit rating has been since these events. 

Often, they will not dismiss an application if the event was minor, was resolved a long time ago, or if you defaulted on loans when there were only a few months of payments remaining on the contract. Having someone guarantee your BTL mortgage or jointly sign with you will also help strengthen your case and get you more competitive mortgage rates.

If you are worried about how your credit rating may impact your mortgage application or don’t know which mortgage companies will work for you, it is best to work with a whole-of-market mortgage advisor who can advise you on your case and support your application through their extensive contacts with lenders.

Which lenders offer mortgages?

BTL mortgages are available from a wide range of lenders, including banks, building societies, and property investment funds. In the UK alone, around 42 different lenders offer products for buy-to-let landlords, with about 35 offering mortgage funding to first-time buyers.

With so many companies to apply to, it makes sense to use a mortgage advisor who can send your application out across their entire network to get the most options for your loan. For this reason, it’s better to work with an independent broker who has whole-of-market access than one from your bank, as mortgage advisors who are attached to a lender can only offer the few mortgage products that the lender provides.

Can I get a first-time buyer buy-to-let mortgage through a limited company?

Yes, BTL mortgages are available through a limited company, even for first-time buyers. However, this isn’t always the best option. This is because lenders will require a lot more information to assess eligibility and the same guarantees in terms of deposit, financial security, etc, will still have to be met. If you are unsure if a limited company is right for you, please speak to a qualified tax adviser.

Let experienced whole-of-market mortgage advisors make your investment goals a reality through first time buy to let mortgages

With over 20 years of experience as one of the UK’s leading independent mortgage advisory firms, the team at Mortgages for Business is ready to help you realise your investment dreams. We understand that the UK property market is a tough but rewarding space, and we’ve worked with thousands of landlords to help them get on the property ladder and find the right mortgage deals for their financial situation. 

As an independent brokerage, we have whole-of-market access to the best mortgage deals, ensuring that you can evaluate the widest range of mortgage funding deals to find the most competitive and advantageous offers. Contact us today and see how we help first-time buyers seamlessly navigate this rewarding investment space.

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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