Buy to Let First-Time Landlord

Are there any tax implications that first-time landlords need to be aware of?

We aren’t qualified tax advisors, and we’d always advise any clients to talk to an accountant to make sure they get proper advice.

But a key consideration is the type of structure through which you are buying the property. Whether you buy in your own name or through a limited company can have a big impact on how you are taxed.

If you’re a higher rate taxpayer and you buy in your own name, you will be paying tax on the rental income at the higher rate. Whereas in a limited company, there’s a bit more flexibility, depending on how you structure it.

What factors determine the interest rate for a Buy to Let mortgage?

Generally, Buy to Let rates are higher than for residential. For a first-time landlord, that’s one of the first hurdles. Mortgage fees are also higher.

In terms of what changes the rate, just like residential mortgages there are set products from lenders for different scenarios, which will have different rates. Also, the lower your deposit, the higher the rate, and the more complex a property is, the higher the rate.

If you have a complicated personal situation you may also face higher rates – the lender’s not increasing the rate because of these factors, but we would have to go to more specialist, less competitive lenders with trickier situations.

We make sure that we’re presenting the most straightforward case, in the right way, to the right lenders. That’s how we will find the most suitable deals.

Also, it’s not necessarily just a higher rate these days – it can be higher charges and fees.

We now see lenders offering rates that are lower than for residential mortgages, but they put huge fees on them to make up for it.

That links in with the stress test calculations. When the rates started going up during Covid, Buy to Let properties became unaffordable because of the stress test calculations. So lenders put the rates down and added a higher fee.

What’s the difference between a fixed-rate and a variable-rate Buy to Let mortgage for a first-time landlord?

It’s no different from residential mortgages. A fixed rate for Buy to Let means that your rate stays exactly the same for the time you tie in for. If you’ve gone for a two-year fixed rate, your monthly payment will remain exactly the same for two years.

A variable rate could be a discounted rate, which is set at a certain level below the lender’s standard variable rate; or a tracker rate, which is a certain amount above the Bank of England base rate. They’re the most common.

The standard variable rate and base rate will change, and your rate follows suit – moving up or down. So, when you’re budgeting for your investment property, you have to consider your margins. If the rate goes up, the margin you have left to cover your bills will be finer. It’s a key part of your decision-making.

What is the typical loan term for a Buy to Let mortgage for first-time landlords?

There isn’t one – and this is a good point to bring up the difference between interest-only and repayment mortgages.

On a residential property, it’s more tricky to arrange an interest-only mortgage, where you’re only paying the interest each month and the balance stays the same. It’s much more common to have a repayment mortgage, where the balance goes down over time.

On a Buy to Let, because you can sell the asset to pay the mortgage off, it’s easier to get an interest-only deal. You don’t really have to justify it – it’s just whatever works best for you. Most Buy to Lets are as interest-only, as on the repayment route, you’ve got higher payments. Depending on the rent coming in, that can impact affordability.

The point is that when you borrow on interest-only, the term doesn’t change your monthly payments. You could have a three-year term or a 30-year term – your monthly payments will be the same. A longer term just gives you much more time until you need to pay that money back, by selling the property.

Most people probably choose 25 or 30 years. The maximum is often 25 years on Buy to Let, but because there’s no impact on the monthly payment, you could take a 25-year term and then, 10 years later, take another 25-year term with a different lender.

You can also borrow up to higher ages with Buy to Let than on residential – age isn’t as much of a factor.

What type of property is the best investment for a first-time landlord?

It’s subjective – it depends on the individual, their location and their risk appetite. Some people might choose a flat in central Bath or central London that might hold its value nicely. You could get good capital appreciation there with a safe investment.

But other people might try to make more money, more quickly – perhaps with a House of Multiple Occupants (HMO) where you’ve got multiple tenants within one property. There are different ways of investing, but you’d usually start off with something lower risk first.

A lot of lenders wouldn’t give an HMO mortgage to a first-time landlord, as it’s much more to manage. There are special laws and regulations around HMOs that are quite in-depth compared to a single-unit Assured Shorthold Tenancy (AST) property.

Most first-time landlords start with a single family unit – something that doesn’t need lots of work and lets you get your head around all the regulations, laws and the costs involved.

You have to think about maintenance costs. Imagine having to buy a new boiler, especially on a lower value property. If you’re spending £10,000 on a boiler and it’s a £100,000 property, that’s quite a high percentage of the property value wiped out in one expense.

This is why it needs to be a business decision, not an emotional one. You have to think about these things and what you’re looking for long-term.

How can a mortgage broker help here?

There’s more to Buy to Let than getting the lending right – your wider strategy is key and it can be a complex beast. Buy to Let is about thinking strategically as a business.

A good broker will have connections to accountants, property sources and expertise that will help you on this journey. You could think your case is pretty straightforward, and suddenly all sorts of things come out of the woodwork that make standard lending harder to attain.

A really good broker will recognise those complications at an early stage. We can point you in the right direction to avoid pitfalls and unnecessary challenges.

There’s so much more to compare. With residential, it’s easy to look at rates and fees, but with Buy to Let you need a lot more support to get that right. You might start looking on the high street, but many of those banks don’t actually do Buy to Let mortgages. They might have different arms for Buy to Let because it’s so much more specialist.

How you set your Buy to Let business up in the beginning has a massive impact down the line – so getting it right is really important. If you took a property in a personal name, for example, and then after a few years you decide it should be in a limited company, that’s a huge cost. It’s a pain in the neck and very expensive to do. It’s better to get it right in the first place.

While a broker probably can’t advise you specifically on that, we can talk around it and introduce you to the right experts to guide you correctly at every step.

Key Takeaways:

• A first-time landlord seeking a Buy to Let mortgage must typically already own their own residential home for at least six months.
• Lenders generally require a minimum deposit of 25% for a Buy to Let mortgage for first-time landlords.
• Affordability is calculated based on the property’s potential rental income and includes a stress test that is often more conservative for first-time landlords.
• A Buy to Let property purchase should be treated strictly as a business decision, focusing on financial viability and rental demand rather than emotional attachment.
• It is crucial to determine the correct structure (e.g., individual name vs. limited company) for the purchase from the start, as this has major tax implications and is very expensive to change later.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

NOT ALL BUY TO LET MORTGAGES ARE REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

For specialist tax advice, please refer to an accountant or tax specialist.