First-Time Buyers: Could you grow your deposit with a buy-to-let?

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Getting on the property ladder as a first-time buyer is hard, so should you consider investing in a buy-to-let instead?

With house prices breaking records over the last six months, and some predicting a house price fall, many people will be wondering if it’s the right time to buy a property for the first time.

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This question is especially pertinent if you can’t afford to buy a place in your preferred location. Residents of highly populated and desirable places – like certain parts of London – will often come up against this problem. Maybe you’ve made up your mind to buy, have a decent deposit saved up, but local prices are a barrier to taking the plunge.

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I’m ready to buy but can’t afford to do so in my area – what are my options?

Well, one option would be to put off purchasing a place until you have a deposit big enough to get the home you want to live in. But here’s the downside: if your chosen area is very popular, it’s hard to say with any real certainty that a larger deposit would go much further by the time you’ve saved for it.

So let’s explore one alternative: buying a property in a super-affordable location and then letting that property out, and using the resulting income to pay the mortgage on the property (and perhaps some of your living costs too) whilst you continue to rent in the area you really want to live in. That way, you’ll continue to build your deposit by gradually owning more and more of a property, and eventually you can sell it off and put the lump sum down on a house for you, in the right place.

How does buy-to-let work?

to rent out a property you own – unless of course you can buy the place outright. Unlike a residential mortgage, which relies on your deposit and income, a lender of a buy-to-let mortgage uses the property’s projected rental income to calculate how much they’ll let you borrow.

But can a first-time buyer get a buy-to-let mortgage?

In short, yes. But as with any mortgage the lender has to be convinced that you’re a safe bet. First-time buyers are an unknown quantity compared to someone with a mortgage on their own home, but a good credit score, secure income (£25k+) and hefty deposit (25% or more) certainly help – as does an expert mortgage advisor. So while it’s trickier for first time buyers, it’s far from impossible.

Our mortgage advisors are available to give you free advice, so it’s worth booking a call with them to discuss your options.

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Is buy-to-let a secure investment?

Being a landlord isn’t quite as easy as a few years ago. The rising interest rates this year have made mortgages more expensive, while maintenance costs are also on the rise and insurance has stagnated (let’s count our blessings here – at least that hasn’t gone up too!). Combined with the possibility of falling property prices, becoming a landlord isn’t something to take on lightly.

All of this means less of a return than the landlords of yesteryear, but the return is still likely to be better than having that money in a savings account. Before signing on the dotted line, do bear in mind that we can’t rule out a property price crash, although experts find this unlikely any time soon.

What kind of returns could I see on my property, and what expenses too?

The mortgage interest isn’t your only expense, of course. Several unavoidable elements take a bite out of every pound of rental income:

Repairs (5%)
Management fees (11%)
Insurances (3%)
Tax based on your net rental income
And don’t forget you need to factor in the cost of your legal compliance certification too

In short, we’re talking around 7p profit from every pound of rent. And when you sell, you’ll also need to pay capital gains tax (CGT) on any gain you have made.

And what would my obligations be as a landlord?

As a landlord, you’re in a position of responsibility, especially when it comes to compliance:

Ensuring regular checks on all gas appliances, and securing the necessary gas safety certificates.
Arranging for electrical systems and appliances (EICR) to be inspected routinely to make sure they are safe.
Updating your Electrical Performance Certificate (EPC) regularly.
Providing smoke alarms and carbon monoxide detectors.
Organising water checks for heaters and hot water tanks
Making sure all furniture meets safety requirements
Using a government-approved scheme to protect your tenant’s deposit

Should I use an agent or go it alone?

With agency fees taking a sizable chunk of your rental income, it’s tempting for landlords to manage their properties themselves.

While this suits some hands-on landlords with the time and energy to get stuck in, the chances are that if you’re reading this, you’re considering investing in somewhere a fair distance from where you live, in which case you might want to consider engaging an agent.

However, if you do so, don’t forget that even if you use an agent you are still liable. So make sure that your agent is doing all they should – protecting the deposit, handing over the appropriate certification at the right time – as the buck will stop with you, no matter what.

How much will an agent cost me?

Like much else when it comes to property, the cost is affected by location, property type, and the level of service. Normally, agents charge a percentage of the rent, usually about 10-20%. And most agents are often open to a little haggling. Don’t forget online agents, whose overheads – and therefore fees – will be lower.

Becoming a landlord comes with responsibilities and expenses, and it could be tricky to get a buy-to-let mortgage as a first-time buyer. But if you find the right place – and if you have the time, energy and desire to become a landlord – you could see a great return on your investment, meaning you could be buying your own home sooner than you thought.

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