Buy-to-let mortgages: Can first time buyers get the best rates
Can first time buyers get a buy to let mortgage?
I am hoping you are able to help me with a buy-to-let mortgage, I have a reasonable amount of deposit saved up (approx £130k) and I am looking for a buy-to-let mortgage to purchase a house of approx £450,000 (rental income of approx £1400 per calendar month). I am struggling to get a buy-to-let mortgage for more than £250,000. Buy-to-let mortgage providers keep telling me that due to me being a first time buyer and a landlord it is going to be extremely difficult to obtain a mortgage.
I would really appreciate any advice you could offer. What percentage deposit do you need for a buy-to-let mortgage? Even if I met that minimum loan to value (LTV) will I still be able to access the best buy-to-let mortgage rates?
Unfortunately new regulations have made it much harder for buy-to-let landlords to obtain a mortgage. It has also made buy-to-let investing less attractive because costs have risen (stamp duty has gone up) as has the income tax due in most cases. When you say you are a first time buyer do you mean you have no personal residential property, or no existing buy-to-let properties?
If it's the former (as it appears to be) then a lot of mortgage lenders will not offer you a mortgage, but some will. Even if you are able to secure a buy-to-let mortgage then bear in mind that if you later buy a residence for yourself the 3% 2nd property stamp duty levy applies to your new home (see below).
If you have a residential property already and you want to buy your first buy-to-let property then more mortgage lenders will offer a buy-to-let mortgage, even as a first time landlord. However, you'll be subjected to the aforementioned 3% 2nd property stamp duty levy. So for example if you buy a second property for £450,000. The usual stamp duty would be £10,500, but with the 3% levy this becomes £24,000
I'll assume that you have allowed for legal costs, stamp duty etc. so you can put down the whole £130,000 deposit. This leaves you needing a £320,000 buy-to-let mortgage. The reason you can't get this much is due to affordability rules, and nothing to do with being a first time buyer.
Lenders must prove you can cover "void" periods yourself, i.e periods when you have no tenant. In order to cover any void periods the rental income, after tax, must cover the mortgage, with a significant amount to spare. To work this out the lender will carry out a a buy-to-let mortgage calculation. It's typical for the lender to calculate the mortgage at 5.5% (not the actual rate you may be paying), and then multiply this by 145%. If the rental exceeds this value then you are good to go.
In your case the figures look like this:
£320k x 5.5% = £17,600
x 145% = £25,520
So the monthly rental must be at least £2,126.67 (£25,520/12) in this instance
Even at 4% the rental needs to be £1,546.67
Some lenders calculate slightly differently but as you can see you are very short of the mark.
Buy-to-let mortgage calculation how much can I borrow?
Using the above assumptions you can calculate how much you can borrow as a buy-to-let mortgage. if you work backwards from your obtainable monthly rental income (you state £1,400). Then you could probably borrow ((£1,400 x 12) / 1.45 / 0.055) = £175,548
Minimum buy-to-let deposit calculation
This also answers the question of how much deposit you need to get a buy-to-let mortgage. Using the assumed £1,400 monthly rental income again then you'd need a deposit of at least
£3200,000 - ((£1,400 x 12) / 1.45 / 0.055) = £320,000 - £175,548 = £210,658
What percentage deposit do you need for a buy-to-let mortgage?
After working through the above numbers then you need to divide your required mortgage by the value of the property to get the Loan to Value (LTV). This equates to £210,658 / £450,000 = 46% LTV which will also determine the interest rates on buy-to-let mortgages that you'd be offered.
Obviously you need to check your assumed rental yield as it has a material impact on your a) chances of getting a buy-to-let mortgage and b) making a profit.
What to do now?
Obviously the above response is for information purposes only and not mortgage advice. The mortgage market and lender criteria are changing all the time. Therefore I strongly suggest that you speak to an independent mortgage adviser. If you don't know a mortgage adviser whose opinion you trust, then you can get a free unbiased mortgage review in 60 seconds from a vetted FCA regulated mortgage professional. Simply select the adviser type as 'Mortgage adviser'. You will then receive a free non-obligation mortgage review. It's a good service which I've spent time vetting. Good luck.