First-time buyers benefit from a variety of advantages when it comes to mortgages, from cheap down payments to low-interest rates. However, it’s essential to understand that first-time buyers won’t legally own the property until the mortgage term ends and the borrower pays off the loan. This begs the question: Can first-time buyers rent their property?
Generally, first-time buyers can’t rent their property. That’s because the lender approved the mortgage for a residential home, not a buy-to-let property. In contrast, landlords’ mortgage terms differ since they get a significant income through their monthly rental income.
If you want to learn more about renting out properties as first-time buyers, read below. We’ll explain all of the mortgage options that are open to you and if you want to work with a specialist mortgage broker to help you find the perfect deal for your circumstances, then use When The Bank Says No today. Our team has a wealth of mortgage advice, especially for a first-time buyer landlord. First-time landlords have a whole heap of potential issues they could run into, whether they want to be a property investor or climb the property ladder.
What Is A First-Time Buyer Mortgage?
Being a first-time buyer can be challenging, especially with all the different rules and conditions you must know. However, you can enjoy certain advantages as a first-time homeowner. These benefits make owning your first property purchase easier and more affordable.
You qualify as a first-time buyer if you’ve never owned property inside or outside the UK, whether this property is an inherited, residential, or investment property. The good news for the business owners amongst you, though, is if you already own a commercial property, such as a shop or an office, you can still qualify as a first-time buyer!
First-time buyer mortgages don’t require a significant down payment, as it usually starts at 10%. However, the bigger the down payment, the easier you’ll become approved for a mortgage.
After finding your future home and passing the credit check and affordability test, you can buy the property and pay off the mortgage. Your monthly mortgage payments depend on if you have a repayment mortgage or interest-only mortgages.
Since the purpose of the loan is to own a residential property, not a buy-to-let property, you won’t be able to move out of the property and rent it out. The reason you can’t do this within your own home is due to the rules of residential mortgages for the first-time buyer.
Can You Rent Your Property As A First-Time Buyer?
You might think you can rent your property as long as you find a tenant. Yet, that’s not the case if you’re a first-time buyer with a mortgage. The reason is that the mortgage lender technically owns the property, not you!
Moreover, first-time buyers usually have a residential mortgage. This means they shouldn’t use the property for financial gain.
You might need to rent out the property if you can’t pay the mortgage or if you won’t be living there for a while. In this case, it’s crucial to alert your lender of the circumstances and get their approval before renting out the property.
Otherwise, you’ll be breaching the mortgage agreement.
That said, you can rent your property once it legally becomes yours, which happens once the residential mortgage term ends and you’ve paid off the entire loan. Alternatively, you can remortgage to a buy-to-let mortgage. In these cases, the decision is ultimately up to mortgage lenders.
Simply put, each mortgage has specific terms and conditions. So, you can’t get a residential mortgage with the intent to rent the property.
What Is A Buy-to-Let Mortgage?
Buy-to-let mortgages are specifically for landlords who want to buy property and rent it out. Naturally, the rules of buy-to-let mortgages differ from residential mortgages.
Most lenders find buy-to-let mortgages high risk, so there are numerous rules for getting approved. For starters, the down payment for the loan should be at least 25%.
Furthermore, the fees and interest rates on buy-to-let mortgages are significantly higher. That’s because lenders treat the property as an investment. Since the landlord will gain a monetary benefit, so should the lender.
Most buy-to-let mortgages are interest-only. This means the landlord pays interest each month but not the total amount borrowed. When the mortgage term ends, the landlord will pay the mortgage in full.
Buy-to-Let Mortgages For First-Time Buyers
If you want to rent your property, your best option is to get a buy-to-let mortgage. While you can get a buy-to-let mortgage as a first-time landlord, it might be difficult.
Many lenders classify first-time buyers looking to buy-to-let as high-risk. Since you haven’t owned a property or managed a buy-to-let property before, the lender can’t be sure that you’ll pay off the mortgage in time.
Instead, you need to own your residential property before buying a property for rent.
For this reason, it’s tricky to find a lender who will approve your loan if you’re a first-time landlord. If you’re approved for a mortgage, the terms might be a lot stricter.
You’ll also need to save up for the hefty down payment, which can be anywhere between 25% to 40%. Once you save up, you should have an annual salary of above £25,000. This is excluding the earnings you’ll get from your buy-to-let property.
As a first-time buyer, you’ll need to fulfil the following criteria to get approved for a buy-to-let mortgage:
- Pass the affordability test
- Have excellent credit history
- Obtain evidence of current income and finances to support paying the monthly interest, usually through bank statements.
- Be older than 18, but younger than 75
- The property’s rental potential must be 125% of the monthly mortgage repayments
How To Rent Your Property As A First-Time Buyer
If you already own a property as a first-time buyer, you can still rent it out. Here are all the different ways you can rent your house:
Pay Off Your Mortgage
This is the best option if you’ve had your mortgage for a while and are now in a better financial position. The mortgage rate might not reflect your current income or financial situation, or you might have saved a lump sum.
In this case, you can pay off some or all of the mortgage. Then, the property will be legally yours, and you can do what you please with it, including renting it out!
Even though paying off your mortgage will depend on the agreement, most lenders will charge you a fee for overpaying. The reason is that lenders make money from the monthly interest. So, if the suitable lender has you pay off your loan early, their profit will substantially decrease.
Typically, lenders will allow you to overpay the mortgage by up to 10% annually without any penalties. Otherwise, you can pay off the loan in the following ways:
- Overpaying: If your income increases, you can increase the monthly payment accordingly. In turn, this will reduce the mortgage term.
- Lump sum: You can pay off the mortgage in full if you have a lump sum of money. That said, the lender will likely charge you a fee depending on how early along the mortgage term you’re paying it off.
- Shortening the term: Instead of increasing the monthly payment, you might decrease the mortgage term. Then, the lender will assess the extra amount you’ll need to pay each month.
Obtain Consent To Let
Paying off the mortgage is easier said than done. Luckily, you can still rent your property even if it’s under a mortgage. All you need to do is obtain the lender’s consent to let.
You must understand that mortgages are regulated by the Financial Conduct Authority (FCA) as long as the loan is residential and not to a commercial borrower. So, you shouldn’t financially benefit from the mortgage.
If you want to rent the property, the lender must agree and adjust the terms and conditions of the mortgage accordingly. Still, this is ultimately the lender’s decision, so they have the right to refuse to rent out the property outright.
If the lender agrees, they reserve the right to choose the tenant, the paid rent, and the lease terms.
The lender might not give you consent to let. So, under certain circumstances, you might have to consider remortgaging the property in the following cases:
- You don’t have a convincing reason to rent out the property
- The rent is too low
- You’re not paid up on your mortgage repayments,
How To Get Consent To Let
You might think it’s hard to get consent to let, yet it’s easy once you know what to expect. After all, the lender will probably change the mortgage terms, so they’ll benefit as well.
Lenders also understand that it’s impractical for a person to live in the same property during the entire mortgage term. So, if you’re moving out for a short while because of work or any other emergency, you’ll probably get consent to let.
To make sure your lender gives you consent to let, you should do the following:
- Have an up-to-date mortgage account with no arrears
- Have a short-term tenancy agreement that’s less than 12 months long
- Have specific plans to move back to your property
- Not rent out the property as an investment or for financial gain
You can switch your residential mortgage to a buy-to-let mortgage by remortgaging.
Remortgaging your property is a lot less expensive than getting a new mortgage on another property. You won’t have to pay the enormous 25% down payment.
Yet, this involves having substantial equity to serve as the down payment for rental properties.
To explain, your previous mortgage payments will act as the down payment for the buy-to-let mortgage. If the property cost £300,000 and you’ve already paid £100,000, then you’ve paid up ⅓ of the loan.
However, the lender probably won’t approve of remortgaging after a short while as you won’t have enough equity.
Nevertheless, your lender might refuse to remortgage into a rental property. In this case, you might have to remortgage with other lenders.
You should also consider that the terms and conditions of your mortgage will differ completely. First, you’ll have a larger interest rate. Then, the lender will charge you an admin fee and stamp duty. How much stamp duty land tax an owner will pay depends on the property value.
Additionally, this isn’t a short-term solution. Instead, the property will become a buy-to-let property, you won’t be able to move back, and the mortgage repayments will be much more expensive.
You can assess whether you’ll be able to afford a buy-to-let mortgage using a buy-to-let mortgage calculator. The deposit will be the equity released from your property.
Partially Rent The Property
If you want to earn some extra income without moving out of your house, you can partially rent or get a lodger for rental income! This is just like getting a roommate.
You won’t be breaching any terms and conditions of your mortgage, and you won’t need to remortgage or obtain consent to let. After all, you’ll be living in the house.
Still, this depends on the terms and conditions of your mortgage agreement. Some lenders only approve of short-term occupancy through specific platforms, such as Airbnb.
Simply put, you’ll need to have constant access to the property and have valid building insurance. If you’re unsure whether your mortgage terms include partial rent, it’s best to inform your lender beforehand.
First-Time Buyers Renting Property FAQs
1. What happens if I rent out my property as a first-time buyer without the lender’s consent?
If you don’t have your lender’s consent and you rent out your property, you’ll be breaching the residential mortgage agreement. Your lender might even assume you’re committing mortgage fraud.
You’ll face serious consequences, from your lender calling in the loan and demanding you pay the mortgage in full to increase the mortgage rate.
You might even get fined or have a black mark on your credit record. In this case, it’ll become exceedingly hard to get approved for another mortgage.
2. Is getting a buy-to-let mortgage as a first-time buyer easy?
If you meet the criteria for a buy-to-let mortgage, the lender will easily approve you. These eligibility criteria include saving up for the larger deposit, which is between 25% and 60% of the property value, having a high annual income, accommodating expected rental income, and having an excellent credit score.
You might also need letters of recommendation from your previous landlords as well as proof of steady income.
3. Do I need to stay with my mortgage provider when remortgaging?
You can either remortgage with your current lender or switch to another mortgage provider.
Staying with your current lender can be easier in terms of paperwork. Yet, other lenders can give you better deals and help you save more money.
4. Does remortgaging to buy-to-let require the same criteria as getting a new mortgage?
Many people assume that remortgage from a residential mortgage is easier than getting a buy-to-let mortgage, especially considering they won’t have to pay the deposit.
However, the terms of remortgaging are almost identical, as you’ll be paying the deposit in released equity. Some lenders might even increase the interest rates if you’re remortgaging than if you were getting a new mortgage.
5. Do I need to inform the lender if I’m getting a lodger?
Typically, you don’t need to inform your lender if you’re getting a lodger or a roommate, as long as you’re still living on the property. It’s still sensible to give them a heads-up and inform your insurance company.
That said, HM Revenue and Customs must be aware of the lodger as a part of the Rent a Room Scheme.
Understanding the answer to this question is highly important if you’re thinking of climbing the property ownership ladder. Whether or not you’re a first-time buyer, you can’t rent your property without consent from your lender if you have a residential mortgage. The reason is that you don’t legally own the property yet.
Instead, you can get a mortgage for buy-to-let properties, though this might be hard for first-time buyers. If you’re planning to move back to your property, your lender might give you consent to let.
Luckily, if you’re taking in a lodger but will still be living in your house, you won’t even need to inform your lender!
If you really have your heart set on renting out your property as a first-time buyer, then you can speak with one of our mortgage experts who might help you find a buy-to-let mortgage suitable for first-time buyers.