Buy-to-let landlords are frequently cast as the nemesis of the first time buyer. But what about those Jekyll and Hyde first time landlords who are first time buyers themselves?
Perhaps you are still living at home, working abroad or renting a top end London pad you could never afford to buy. You’re eager to enter the property market, but as a landlord rather than a homeowner.
You’re wondering how your mortgage application might be viewed. Will lenders dismiss you as too green behind the ears? Are you just too big a risk to play rentals with the big boys?
“Not necessarily,” says Dean Higham, business development manager, Ascot Mortgages, “but lenders are not going to make it easy for you. And you’re going to have to find a 25pc deposit as an absolute minimum.”
“Most lenders work on conservative principles and they expect a first time landlord to already be a homeowner. It’s the way of the world as far as they are concerned. First you buy your own home. Then you might start looking at a second rental property.”
There are lenders who are willing to consider offering buy-to-let products to first time buyers. But not many. A quick scan of the limited market brings up Clydesdale (minimum income £30,000), Virgin (minimum income £25,000) and Buckinghamshire. Of the three, Buckinghamshire is the only one that doesn’t specify a minimum income, but borrowers must stump up a whopping 40 percent deposit.
“It’s all about risk,” explains Higham. “With no track record of renting out properties – or even paying a mortgage – you present a considerably higher risk of defaulting.”
And where there’s risk, you can be certain the borrower will pay a premium. Buy to let mortgages command higher fees and higher interest rates than residential mortgages. With a 25% deposit for a residential mortgage, you may expect to pay a rate of interest around 2-3%, and fees could be between £0-£999. A first time buyer for a buy to let with the same deposit would be looking at typical interest rates of 3.39-5.39% and fees anywhere between £999-£3,000.
As a first time buyer first time landlord (FTB FTL), you will be penalised even further. On top of having to pay higher fees and interest rates, you must also be prepared to answer more questions.
Typically, an applicant for a homeowner mortgage would need to present proof of deposit plus a couple of months’ wage slips and bank statements. A FTB FTL may additionally be required to provide a reference from their own landlord, an address history going back further than the standard three years and up to six months’ back copies of bank statements and wage slips.
According to Higham, the good news is that the lender’s decision making process should be relatively straight forward if everything is in place.
“It shouldn’t take a lender any longer to make a decision on a mortgage for a first time buyer landlord as long as they have all the paperwork they require.
“When there are delays, it tends to be because the borrower hasn’t been exactly straight about their history, for example, the mortgage company has uncovered an undisclosed CCJ, default or missed payment.”
And honesty is always the best policy for Higham, who would not recommend FTB FTLs from ever attempting to pull the wool over a lender’s eyes. He finds tales of first time landlords who bought their properties with a residential mortgage and then sneaked in tenants under the radar a worry.
“Lenders regularly check Rightmove, electoral rolls and letting agents’ sites to see if clients are renting out their properties without permission.
“As well as being in breach of your mortgage contract, insurance policies held by both you and your tenants may be invalidated,” he warns.
“The worst case scenario is the lender could terminate your mortgage agreement, demanding full and final payment of the mortgage. This would more than likely force you to sell your property, which is not the best start to your property empire”.
Article Provided by: Ascot Mortgages