There has been a swathe of tax and regulatory changes impacting on the buy-to-let sector in recent years which may have affected the perception of residential rental property and its viability as an investment option. Consequently, the sector has seen a reduction in the number of amateur landlords and it is now primarily the domain of professional property investors. However, there are still people entering the market and looking to make their first buy-to-let purchases – a group referred to as ‘first time landlords’.
Most lenders on our panel will accept applications from first time landlords providing they are currently an owner occupier, so there are plenty of product options in the marketplace. There is often a requirement that applicants have owned their residential home for a minimum length of time which may vary from 6 to 12 months, although some lenders do not state a minimum period providing the applicant’s name is on the title deeds.
It is not quite as straightforward for first time buyers - those with no existing UK property at all. We currently have around fifteen lenders on panel who will consider applicants without a history of property ownership such as Barclays, Landbay, Precise and Vida Homeloans. Some lenders will apply an affordability calculation alongside their normal rental stress tests and criteria, which depending on income multiples may limit the amount applicants can borrow.
There are also options for first time buyers to be the second applicant on a buy-to-let mortgage and it is a familiar scenario when parents help their children onto the property ladder in this way. Lenders who consider this include Interbay, Leeds Building Society and Paragon.
In recent years, we have seen a significant increase in the number of limited company applications, especially since the phasing out of mortgage interest tax relief for buy-to-let properties. We have also seen first time landlords setting up an SPV for their initial property purchases, which is definitely an option worth considering as it may provide financial benefits depending on individual circumstances. It is always recommended to seek professional tax advice before deciding about this option.
It is simple and inexpensive to set up an SPV, but it is important to register the company with an appropriate SIC code relating to the letting and management of property. Most lenders will accept brand new SPVs with no accounts history, but they will require personal guarantees from the directors/shareholders. There are also lenders that accept companies that trade in non-property related businesses, although the product options for this scenario are fewer.
A significant advantage of using a corporate entity when applying for a buy-to-let mortgage is that they are not affected by the recent tax relief changes or the 2017 PRA regulations relating to rent stress tests. Lenders normally apply a less stringent rental calculation for limited companies, typically at around 125 per cent at 5.5 per cent which may increase maximum borrowing levels for new landlords.
Those investing in buy-to-let property should give proper consideration to property type, tenant demand, location and rental income. These variables can have a significant effect on the overall profitability of an investment and prospective landlords will surely benefit from thorough research. For example, we get frequent enquiries about HMOs and multi-unit properties which often give a better than average rental yield due to multiple rents being charged.
Unfortunately for first time landlords most of the specialist lenders who finance HMOs and multi-unit properties require a minimum amount of previous experience as a landlord. For example, Vida Homeloans requires 12 months’ experience and Paragon Mortgages requires 3 years. However, there are a few options such as Masthaven, Kent Reliance and Together who will consider this scenario for first time landlords.
To conclude, there are plenty of investment opportunities for first time landlords and a wide range of buy-to-let mortgage products to choose from. By considering the different factors that may affect the level of finance available and overall returns on a property, new landlords can make more informed choices during their first buy-to-let investment experience.