Understandably the client is anxious to join in the housing prosperity, but there is no rush to get on the housing ladder. Property should continue to represent a good long-term investment no matter when you buy.
Purchasing a buy-to-let property anywhere is a risky business. Assuming the £15,000 is used as a deposit and to cover costs, the maximum available for a property purchase would be approximately £75,000. The mortgage payments on a buy-to-let loan against a property of this value would be in the region of £300pm (interest only). The client could easily expect another £100 pm in miscellaneous expenditure. Against this outlay, rental income may only be £500pm (perhaps a little more for multiple student lets). Hence, what the client is really relying on is a rapid capital increase to make this financially worthwhile. This seems fine if the property remains let and rises rapidly in value. However, it is fairly unlikely that both of these will be achieved consistently over the coming years.
The result may well be that the client ends up with an empty property costing £400pm, and spends all their deposit on the buy-to-let, leaving them with nothing to use as a deposit on their own residence. If the client wants to move to Birmingham to work in the near future and perhaps move into the property, this proposition may be more attractive.
I would always suggest that people who jump aboard the buy-to-let bandwagon have enough disposable income to cover an empty property and also research the potential market exhaustively.
If they decide not to buy in Birmingham, then looking at being a first-time-buyer (FTB) in London on a salary of £22,000 is a daunting prospect. Realistically they will be unable to get on the housing ladder in London on their own and hence may have to look at buying with friends or family to make a joint step onto the bottom rung.
The plight of the first-time buyer is well documented. To counter the problem an increasing number of FTBs have turned to their relatives to help them get on the ladder through gifted deposits. But not all first-timers are in such a privileged position and have therefore sought more creative solutions in order to get their foot on the property ladder – such as as buy to let.
For this client going down the buy-to let-route could well be a viable option. However, like any property purchase, location is key. Having lived in Birmingham the client should have some local knowledge that would aid any decision, yet it will still be wise to use a professional letting agent (particularly as many lenders insist on it) to receive advice on property purchase and selecting appropriate tenants – obviously for a fee which must be taken into account. For example, while student letting is increasing, it is not always viable and not every lender allows buy to let to this group anyway.
With the deposit available the client can purchase a buy-to-let property up to £100,000. They must ensure that the rent that can be achieved is at least 130% of the mortgage interest and they also need to bear in mind that not all buy-to-let lenders lend to first-time buyers.
So in this scenario, using buy to let as a way onto the property ladder could in theory work. The thinking is that the buy-to-let property will see capital growth that can be released to fund a larger deposit for their own property in the future. This can be achieved through a further advance, remortgage or selling the property; for the latter there will be capital gains issues which reduces their profit. Either way, a product with no overhanging redemption charges would be most appropriate to maintain flexibility.
But if their needs and circumstances dictate that this route is inappropriate then it is back to the drawing board and look for their own place in London, which will be tough. So buying with friends could be one solution to this problem.
With London prices they are going to be pretty short on opportunities to buy at £105,000 which is topping out on income multiples and LTVs for first-time buyers. At £22,000 income we can assume they are not going to qualify for a ‘professional mortgage’ (eg accountant or solicitor) where income stretch and LTVs increase. If their appetite is for a buy to let then there are options for first-time buyers, but let us first return to the issue of a residential mortgage.
Lenders will be reluctant to give a residential mortgage against a property in Birmingham when the applicant works in London. Even as a first-time buyer they will not accept that an employee will commute that distance, indicating that they would not have the property as their sole residency and therefore would not have their mortgage application accepted.
Perhaps we should get a better understanding of their reasons for buying so we could base the advice on their objectives. Do they want a residency or do they want an investment vehicle? If the first then the best option perhaps is to buy in a cheap suburb to get their foot on the property ladder. If the latter then some schools of thought are that property returns are greater in the midlands in the medium term and therefore the better place to buy in any case.
The next hurdle is to find a first-time buyer, buy-to-let product. Trigold will bring up tens of products, many where an applicant must be over 21, so we have to consider their age, but few that will allow multiple tenancy dwelling. Paragon and other specialist buy-to-let lenders are the most likely to accommodate a student let, however, it does complicate lender selection.
The best opportunity is to look for a property which suits a single tenancy let and use the deposit to secure a long term fixed rate, such as with The Derbyshire. This will fix costs and with the applicant on a relatively low salary provide ability to plan financially.