Struggling first-time buyers: could buy-to-let be the answer?
Barclays has broadened its offering to first-time buyers, now accepting buy-to-let applications from this beleaguered group.
While there are already 23 providers offering buy-to-let mortgages for first-time buyers, according to data site Moneyfacts, the offering from Barclays has changed the landscape, says mortgage broker John Charcol. This is because the deals are available to pure first-time buyers who do not own a property, whether one or two applicants. This is a new development in a market which to date has only accepted buy-to-let applications from first-time buyers purchasing jointly with an existing property owner.
Barclays states that the move offers an alternative way of helping first-time buyers onto the property ladder. For example, a young professional currently working and renting in an area with higher-than-average house prices, such as London, might be looking to buy a property to rent out as an investment in a more affordable part of the UK, without having to move themselves.
If this resonates with you, here’s what you need to know about becoming a first-time landlord.
Why buy a buy-to-let property?
Average UK house prices have continued to grow in recent years, reaching an average value of £226,821 last month, according to the latest Halifax House Price Index. A combination of rising values and high demand for rental property means that buying to let remains an attractive investment for many people.
But historically, for first-time buyers, the seemingly inevitable upward trajectory of property values is unwelcome, continually pricing them further out of the market in many areas. While many may already rent in an area where they could never afford to buy, the new buy-to-let proposition allows them to get a foothold on the property ladder, even if it’s elsewhere in the country.
Charlotte Nelson, finance expert at Moneyfacts, says: “Many first-time buyers who are considering a buy-to-let property may not be able to afford a property where they currently live and work but still want to have a stake in the property market.
“These borrowers may want the benefits of being on the property ladder as an investment but are perhaps not willing to settle down and don’t want to be tied to their main home.”
Nicholas Morrey, mortgage and protection consultant at John Charcol, says while property prices in the North are much more affordable than London and the South East, rental yields are much better. In other words, the combination of low purchase prices but reasonably high rents, makes for a good return on investment.
He says: “Paying for a typical mortgage up north will be a lot cheaper than elsewhere. Whereas in London you might buy a two-bed flat for a minimum of £300,000, in Sheffield, for example, you could pick up a similar property for £70,000. While the Sheffield property may not appreciate much in value in the short term, you may be able to rent it out for £750 a month or £9,000 a year, while your mortgage payments will only be around £4,000 to £5,000 a year.”
Morrey points out that in such a situation, the first-time buyer landlord would be sensible to use the surplus to pay off some of the mortgage capital, reducing their debt and increasing the equity they hold in the property. Building up equity in this way can be a shrewd way of accumulating capital – possibly for the home the borrower might want to buy for themselves a few years down the line.
The stamp duty position
In last month’s Budget, the government announced stamp duty would be abolished for first-time buyers on properties worth up to £300,000 from 22 November 2017 onwards. It also applies to the first £300,000 for properties worth up to £500,000 purchased by first-time buyers.
However, stamp duty relief guidance released by HM Revenue & Customs defines a first-time buyer as a “purchaser who intends to occupy the property as their only or main residence”. As a result, whether you’re a single first-time buyer or there are two of you (both first-time buyers) applying for a buy-to-let mortgage, you’re essentially shaking off the first-time buyer tag as by definition, a buy-to-let won’t be your main residence that you will occupy.
HMRC confirms that the standard stamp duty rates will apply in this scenario – for example it’s 2% on properties costing between £125,001 and £250,000 – and no other tax reliefs are available. See YourMoney.com’s 60 second read on what is stamp duty? to find out more on the rates you’ll need to pay.
While many of the lenders that offer buy-to-let mortgage products for first-time buyers require at least one of the applicants to already own a property, the stamp duty situation here is dearer.
HMRC confirmed that in this scenario, the property purchase will be subject to the stamp duty surcharge – an extra 3% on each property price band (unless the property owner owns a non-residential or mixed use property which doesn’t include a dwelling).
As an example, a joint buy-to-let application (from a first-time buyer and someone who already owns a property) for a property costing £250,000 would attract a 5% stamp duty bill.
It’s also worth considering the tax implications further down the line. If someone currently rents a property but they own a buy-to-let and are looking to buy their first home to live in, they won’t get the stamp duty relief and they’ll have to pay the 3% stamp duty surcharge, HMRC confirms.
Under the ‘replacement main residence rule’, people who buy a second property without selling the first must pay higher stamp duty upfront. But if they sell the former within three years, they are eligible for a refund. But again, HMRC confirms this isn’t the case when it comes to a first-time buyer buying a buy-to-let then selling it to buy a property to live in.
“There could be no refund if the property sold was a buy-to-let property in which the individual had never lived”, it explains.
What about using the government’s first-time buyer bonuses?
There are two major first-time buyer schemes which have been launched by the government in recent years offering a 25% bonus on top of savings.
They are the Help to Buy ISA, launched in December 2015 and the Lifetime ISA launched in April this year. See YourMoney.com’s Help to Buy and Lifetime ISA guide for more information on the two schemes.
HMRC confirms a first-time buyer looking to buy a buy-to-let won’t receive the Help to Buy ISA bonus for the property as you have to live in the property in order to gain it. The rules state the home can’t be rented out. As the Lifetime ISA launched in April 2017 and must be held for a minimum of 12 months, the first eligible savers will be from 6 April 2018. But again, HMRC confirms a first-time buyer purchasing a buy-to-let property won’t gain the government bonus as the property in question must be where you intend to live.
First-time buyer case study
Miranda* is a 27-year-old professional who works in London and lives in Hertfordshire. She has an annual income of £39,000 and had been saving up to buy a buy-to-let property. She was gifted an early inheritance – a two-bedroom house in Hertfordshire worth £290,000, which was already being rented out. It was mortgage-free, but first-time buyer Miranda decided to get a buy-to-let mortgage on the property to release some capital. She didn’t require a deposit and there was no stamp duty to pay either.
She opted for a repayment mortgage which costs £846 a month, but achieves £900 a month in rent. While she’s just about breaking even, she says: “Buying a property is so unaffordable these days and I was given the opportunity to own the house. I thought it was better to have something in my name and this is more about a long-term investment.”
She has a 25-year mortgage term and hopes to pay this down in order to buy in London as she currently lives with her parents. “My family already had experience of renting property and the experience has been absolutely fine, though it was difficult getting a mortgage as my case was quite unusual.
“I would say to anyone considering this route is to do your research and be aware of the fees you will need to pay. I think this will become more popular with people looking to buy in the north for the higher yields.”
*not her real name
Morrey concludes: “I think there will be more first-time buyers who will see buying to let as a good way to get on the property ladder.
“If you feel you’ll never be able to own in London, you might even buy in an area where you may be likely to retire to? It may mean renting for 30-40 years but then you could retire to somewhere beautiful like Cumbria, for instance. I think the first-time buyer buy-to-let route will become more popular as people become more desperate to buy some property somewhere.”