Buy-to-Lets – a Developing Alternative?

Within the residential property market, it is recognised that property prices in London have consistently remained above the national average – a status which places immense financial difficulties on prospective first time buyers within the capital who are looking for a place to call home.

Subsequently an established trend is arising for the city’s residents for them to continue residing within a rented property, while stepping onto the property ladder through purchasing a buy-to-let property in a more affordable area outside of the capital. The payments on the mortgage could then be offset by the rent paid by the tenant.

With property prices slowly recovering and other potential investments having modest returns, this method of getting on the property ladder also looks to form an effective, long-term buy-to-let investment strategy. For first time buyers the potential to get on the ladder as well as make a profit may appear to be an eye-catching proposition.

The considerable growth in the buy-to-let area in recent years would suggest there is a growing market for clients requiring conveyancers and solicitors for their first house purchase, and subsequently becoming landlords. In November 2014, there were 17,700 buy-to-let loans – an increase of 10% over the value of the loans compared to November 2013, whereas purchase loans during the month were down 6.6% from the previous year. Undoubtedly there’s a very real chance transaction levels will experience a slight growth, as buyers who are unable to get on the market pursue this alternative means.

However everything is not as optimistic for this market as may appear on the surface, especially for first time buyers. The risk associated with a buy-to-let has been covered heavily, following the blame that was placed on buy-to-let mortgages in the recent housing market downturn. In this instance, lenders allowed people to invest in property and become landlords, despite little capital to their names. As a consequence, buy-to-let mortgages tend to be less cost effective than residential mortgages. The best deals offered by lenders are earmarked for experienced landlords who are perceived as carrying less of a risk. This could form an issue for first time buyers looking to purchase a buy-to-let, as only 19 of the 61 lenders listed by Moneyfacts are prepared to lend to a first time buyer. All the while, a growing trend emerges of lenders no longer accepting buy-to-let mortgage applications from first time buyers.

Virgin Money was one of the latest to pull out in December 2014, stating the change was to ‘ensure that we continue to lend within our buy-to-let risk appetite’. Furthermore, the recent government backed Help to Buy scheme will also not provide any assistance in this area, as they firmly state that ‘Help to Buy is not available to assist buy-to-let investors’.

In addition, anyone looking pursue a buy-to-let transaction should be made fully aware that the cost of running a buy-to-let does not stop with the mortgage interest. The client will also need to pay for insurance, safety checks for gas and electricity, maintenance costs, income tax, and capital gains tax once the property has been sold – with all that being on top of the legal fees!

Certainly, there are a number of factors potential clients should be made aware of before they take such a huge step into becoming both a home owner and a landlord. One issue which has been queried recently is whether a residential mortgage can be acquired for a buy-to-let.

Since residential mortgages are generally cheaper – with interest rates and product fees being typically lower – it is only natural that clients may be wondering if a residential mortgage can be substituted. First time landlords could be looking at only being able to borrow a maximum of 75% of the property’s value, resulting in them having to pay for a deposit of 25%. On the other hand a residential mortgage may only require a deposit as low as 5%, even for first time buyers. However, taking out a residential mortgage on a buy-to-let property should be categorically discouraged, as this would constitute a breach of the terms and conditions of the loan. Furthermore, the lender could impose penalties such as significant extra charges or revocation of the loan, and immediate redemption of the mortgage. Likewise, letting a house that was being used as a residential property without telling the lender would be a breach and leave the client vulnerable to the legal implications of non-disclosure.

Evidently, although on the surface a buy-to-let mortgage for first time buyers in areas such as London may seem like a viable strategy to take that first step up the property ladder, it is a step littered with legal and financial issues. Consequently, the buy-to-let market should not be seen as an easy money fix for first time buyers, albeit it is an interesting area for any solicitor or conveyancer to keep an eye on to see if it does lead to any transaction growth.

Today's Conveyancer