Navigating through TikTok, it’s hard to miss the buzz from influencers championing the merits of diving into the buy-to-let market and embarking on a landlord journey. Undoubtedly, transforming your primary residence into a rental can boost your financial inflows, but is it the golden ticket for everyone?

In this piece, we dissect the advantages, challenges, and key factors you should ponder before turning the key and renting out your inaugural abode.

Should I Convert My First Home into a Rental? 

Venturing into the rental market with your primary residence isn’t always about harboring landlord ambitions. There are myriad reasons why one might tread this path.

Picture this: A homeowner keen on relocating struggles to find a buyer for their current home, prompting them to consider renting it out. Similarly, an adventurous homeowner might decide to globe-trot, relying on the steady income from their tenant to keep up with mortgage dues.

Then there’s another set of homeowners who purposefully purchase their initial property as an investment, envisioning it as a consistent revenue stream. However, it’s crucial to be mindful of one’s own living expenditures, which might dip into these potential earnings.

If you’ve struck gold with a minimal rent situation or live with relatives, this strategy could be fruitful. Yet, don’t overlook the logistical intricacies and the heightened accountability that landlord status demands.

A simpler route for many is acquiring a primary residence, residing therein, and leasing out a spare room to an occupant. This method typically simplifies the mortgage scenario, leaning more towards a residential mortgage than its buy-to-let counterpart. Furthermore, with the government’s Rent a Room initiative, if your lodger’s annual rent stays below £7,500, you’re in for a tax-free experience.

Is It Better to Rent out Or Buy My First House?

So, is it better to rent out your first house or buy one to live in? Let’s look at the benefits at a glance:

Renting out your first house

• You can use your tenants’ rent to pay the mortgage off
• You can earn an income from tenants’ income, too
• You may see the value of the property rise over time
• You’ll own the property outright once the mortgage is paid off (if you choose a repayment mortgage) 

Buying your first house to live in

• You can usually buy a house to live in with a smaller deposit than if you bought a house to rent out
• You’ll be able to make your home your own while also building equity in it
• Once you’ve paid the mortgage in full, you’ll own the home outright
• You won’t need to find somewhere else to live or pay rent to another landlord

If you only have a small deposit saved up, you might struggle to buy a house to rent out. Lenders will often limit buy-to-let mortgages to a loan to value (LTV) of around 75%.

This means you may need a deposit of at least 25%. When buying a house to live in, deposits of 10% are more common. In some cases, you might even be able to buy a house with a 5% deposit, for example with the Deposit Unlock scheme.

If you use a guarantor scheme like a Savings as Security mortgage, you could buy with 0% deposit through a loved one’s savings being held by the lender as security instead.

Is Buy-To-Let a Good Investment?

Buy-to-let properties have long been considered a good investment, but is this still the case? Let’s explore the pros and cons of buy-to-let properties:

Pros of buy-to-let

• You’ll earn rental income – the average UK rental yield currently stands at 4.75%
• You’ll benefit from capital growth if your property’s value increases over time
• You can outsource property management to a letting agent
• You can take out insurance to protect you from the loss of rental income, damage and legal costs

Cons of buy-to-let

• Managing a rental property is a big responsibility, particularly if you want to be a hands-on landlord to save money on letting agent fees
• You’ll need to factor in the cost of stamp duty, letting agent fees, insurance, repairs and maintenance into your budget – these could eat into your profits
• If property prices fall, the amount of equity you have will fall too
• If you have an interest-only mortgage and you sell the property for less than you bought it for, you’ll need to make up for any shortfall
• Your tax bill will be higher than before and you’ll need to factor this into your profits
• You could lose money when the property is unoccupied, particularly if you don’t have any insurance

The Evolving Landscape of Buy-to-Let

The realm of buy-to-let has witnessed significant shifts over recent years, primarily driven by governmental reforms aimed at taxation structures for investors in this segment. Here’s a snapshot of these changes:

The Rise in Stamp Duty

In 2016, a pivotal change came into play: the government imposed a 3% surcharge on stamp duty, targeting buy-to-let investors and individuals buying an additional property. Dive deeper into this development through our comprehensive stamp duty guide.

The Curtailment of Mortgage Interest Relief

The period from 2017 to 2020 marked the phasing out of the cherished mortgage interest relief, replaced by an innovative tax-credit mechanism.

Traditionally, mortgage interest relief was a boon for landlords, permitting them to categorize their mortgage interest as a deductible expense. By subtracting the mortgage interest from their rental earnings, they could substantially cut down their taxable income.

This scheme was a significant windfall, especially for landlords in the higher tax brackets. They essentially benefitted from a 40% tax deduction on their mortgage interest payments.

With the overhaul, a universal tax-credit system took its place. Now, irrespective of one’s tax category, landlords receive a tax-credit anchored to 20% of their mortgage interest.

This alteration has presented challenges for many landlords. A noteworthy section found themselves inadvertently placed in a loftier tax slab, translating to steeper tax obligations.

Impact on Interest-Only Mortgages

Interest-only mortgages, which mandate borrowers to service only the interest component during the mortgage tenure and repay the principal at the conclusion, are hit hard by this change.

Previously, the mortgage interest relief endowed such landlords with the ability to offset their entire mortgage payments against their income. The revamped framework restricts this to a mere 20%, even for those in higher tax brackets.

Can I Make My Buy-to-Let My Home?

The short answer? No. A buy-to-let property isn’t designed for the owner’s residence. If you’re contemplating moving into this investment property, you’ll need to procure a residential mortgage. The silver lining?

Residential mortgages generally have more favorable rates compared to buy-to-let options. Thus, upon transitioning, you might observe a pleasant dip in your monthly mortgage outflows.

Should you wish to generate income from the residence you inhabit, welcoming a lodger and renting out a spare room might be your best bet. As highlighted earlier, such an arrangement doesn’t necessitate a buy-to-let mortgage. Moreover, a significant incentive is the tax exemption on annual rental earnings below £7,500.

Switching Your Mortgage: Is It Feasible?

If circumstances change and you decide to make your previously rented property your primary residence, you might ponder over switching your mortgage type. But can you pivot from a buy-to-let mortgage to a residential one?

The feasibility of this move hinges on a medley of factors: the policies of your current mortgage provider, your personal financial landscape, and the affordability metrics.

While some lenders might facilitate this transition, others could be more rigid, not allowing such modifications. Should you face such restrictions, your next course of action could be to explore remortgaging opportunities.

This would entail settling your current buy-to-let mortgage and securing a new residential mortgage, potentially with a different lender.

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