Blog post written by Mortgage and Protection Broker, Adam Wells of Lloyd Wells Mortgages (pictured right).
For most people, buying their first home can be a bit of a struggle, with a good income, a healthy deposit, and a bit of luck needed. Without the help of Parents, the ability to purchase a property is unattainable for some people. What happens if you have a good income and a good deposit, but you simply can’t afford to purchase a property where you currently live, but you definitely could afford to purchase a rental property elsewhere?
The Evening Standard recently reported that the average house price in London has risen from £482,576 to £509,935. If we round that to a slightly nicer £510,000, you would need at least a 5% deposit of £25,500 and an income of roughly £110,000 per annum to purchase this property.
If we compare this with Manchester, Rightmove states “The majority of sales in Manchester during the last year were semi-detached properties, selling for an average price of £261,852. Terraced properties sold for an average of £203,696, with flats fetching £195,563.”
Using the above figures underlines that buying in London is unattainable for most, but you might be able to buy property elsewhere at a more affordable price.
To answer the main question, can I purchase a buy-to-let as a first-time buyer? Yes, and it’s relatively easy too!
The main barrier is the ability to put down a deposit of 25%. For the Manchester flat of £195,000, that would be £48,750. Some buy to let lenders do have products available at 80% Loan to Value, but as a first-time deposit, you will need the 25% deposit.
Once you have saved up the deposit, which can come from your immediate family as a gift, the next hurdle is affordability.
Usually, a buy-to-let application is assessed on the rental income. As a bit of a rule of thumb, £600 per month rent would allow you to borrow £100,000, £900 per month would allow £150,000 and £1,200 per month would allow £200,000, etc.
For first-time buyers, the application will be assessed in a similar way to a residential mortgage.
Using the £195,000 flat in Manchester as an example, the mortgage required would be £146,250. We can use a term of 25 years in this example making a monthly rental income of £900.
The letting agent will take around 12%, which is £108.
The lenders will want to know about your income and expenditure.
If we use a gross annual income of £30,000, assuming you are completely debt-free, your own rental payments are £1,500 per month, then you would be able to borrow the £146,250 that you need.
Should I Have the Mortgage on a Repayment or Interest Only Basis?
This is completely up to you, and we suggest that you seek some financial advice around this. If you would like us to refer you to someone who can provide financial advice, just let us know.
With a repayment mortgage, you are repaying the capital and interest. If your mortgage is over 25 years, you can guarantee that the mortgage will be repaid at the end of the 25 years. As this is an investment property, there will be capital gains tax to be paid when you declare the rental income on your annual tax return.
Using the same figures we have used above, a 5 year fixed rate will come in around 2.18% with a £995 fee. You will likely receive a free basic survey on the purchase too. Over 25 years, £146,250 comes in at £632.78 per month.
If you decide to proceed on an interest-only basis, the mortgage will remain at £146,250 and you won’t repay any capital. The benefit to this is that the monthly payments will be lower, but in 25 years you will be expected to sell the property to repay the debt. Using the same figure of 2.18%, the monthly payment will be £265.69 per month.
Which Product Should I Pick?
Mortgage providers usually offer fixed rates and variable rates. Fixed rates stay the same for the fixed-rate period of 2, 3, 5 years, etc. This offers the ability to budget and protect yourself from interest rate fluctuations.
Variable rates are historically cheaper but can become more expensive if rates start to rise. The Bank of England base rate is currently at a record low of 0.1% and due to this, the variable rates aren’t particularly attractive and as a first-time buyer, the banks are more comfortable with you taking a fixed rate. They are generally more generous if you take a 5-year fixed rate over the shorter 2 or 3 year fixed rates. That being said, we would go through your situation in detail and recommend the best product to suit your needs. This can depend on your attitude to risk, what your plans are for the property and how long you intend to keep the property.
Next Steps
We are happy to talk through all the options with you, find the right lender, and manage the process for you all the way through.If you are thinking about buying then do give us a call on 01174 520 330. Our initial conversations usually last around 15 minutes. Alternatively, you can email enquiry@lloydwellsmortgages.co.uk and let us know how we can help you.
We will discuss:
- How much you can borrow
- What that will cost
- What fees can you expect
- How Lloyd Wells Mortgages work
- What insurances you will need
- What documentation you will need to provide
- Next steps
Your home may be repossessed if you do not keep up repayments on your mortgage.