First-time buyers have been disproportionately hit by the Covid crisis, but first-time buyer landords are a niche part of the market that has remained resilient amid the pandemic, according to brokers.
Instead of buying a home to get a foot on the property ladder, these borrowers are choosing a buy-to-let investment as their first purchase.
Along with the wider buy-to-let market, this segment has seen an increase in activity since the summer, stimulated by the stamp duty holiday, according to Ying Tan, founder and chief executive at broker Dynamo.
He said: “Given buy to let is still more attractive than alternative investments this is no surprise.”
There are a number of reasons why owning a buy to let may be more suitable than owning a home.
Often it is buyers who are living in London or the South East where it’s tougher for salaries to meet higher purchase costs.
Instead these borrowers can buy a property in other parts of the country where prices are lower, and yields are favourable such as northern cities like Leeds, Manchester or York.
Stuart Phillips, director of Aalto Mortgages Ltd, has long had a steady stream of first-time buyer landlord cases.
He said: “The typical client is usually a professional living at home in the South East, who has been gifted money by family, but doesn’t want all the other overheads that come with owning a home, but also don’t really want to just sit on the money in the meantime.”
Affordability is based on the rent potential – or interest cover ratio (ICR) – however lenders also assess buyer affordability – and they are not usually able to borrow more than they would qualify for on a residential purchase.
There are also good deals currently available in buy to let, according to Jane Simpson, managing director at TBMC.
She said: “Rates are really attractive on buy to let – now is a good time to grab the deals.”
This is in contrast to higher rates of higher loan to values (LTV) within the residential market.
Simpson added that with savings rates so low, someone who isn’t ready to buy a home may still want to put money into property.
“People want to invest money in something tangible. Property has longevity, people think if they invest in bricks and mortar, they have got something to show for it.”
Aaron Strutt, product and communications director at Trinity Financial, said the broker firm has also seen more interest from people looking to buy to let as way to get on the property ladder.
He told Mortgage Solutions: “They want to have some form of investment in the property market and take advantage of the stamp duty holiday.”
More hurdles to jump through
However, being a landlord is not necessarily an easier route to property ownership.
Buy-to-let borrowers generally need a larger deposit of at least 20 per cent – ideally 30 per cent – while 90 per cent LTV lending is starting to open back up in the residential market.
Strutt said lenders will want to know why a borrower is buying a property to let it out rather than live in it.
And if the property is close to where the borrower is already living, lenders may refuse.
He added: “There has to be plausible reason – lenders are worried that people are going to live in them, rather than letting it out… Brokers have to be comfortable the client is going to let it out.”
Simpson agreed that these cases can mean “extra hoops to jump through” and the number of lenders offering these deals is also relatively small.
Hiten Ganatra, managing director of Visionary Finance said alongside clients in the South East, many of these cases are also expat borrowers.
He explained: “For ex-pats the UK property market is extremely mature, clean and clear to transact in.”
But again, expat clients are looking outside of London and the surrounding areas.
He said: “Yields up north are better than down south.”
He added that clients don’t need to have any links to the area, as long as they meet the borrowing requirements.