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Should I rent out my first home?

Should I rent out my first home?

Jenni Hill
Last Updated 1 November 2023

Spend any amount of time on TikTok and you’ll probably have seen influencers talking about the benefits of buy-to-let properties and becoming a landlord. It’s true that renting out your first home can help increase your income, but is it always a good idea? 

In this article, we take a look at the pros, cons and things to consider when renting out your first home.

In this guide

Why should I rent out my first home?

Some people rent out their first home without necessarily wanting to become a landlord. For example, if a homeowner wants to move house but they’re struggling to sell their first property, they may choose to rent it out instead. Another homeowner might rent their property out while they go travelling, using their tenant’s rent to stay on top of their mortgage payments.

Other people buy their first property with the sole intention of renting it out and generating an income, but there’s a risk your own living costs will eat into your profits. If you live with family or you have cheap rent, you may be able to make it work. But you’ll need to work out whether it’s worth the inconvenience and added responsibilities that come with being a landlord, too.

Another option is to buy your first home, live in it and rent out a room to a lodger. This is often the most straightforward option because you’ll be able to use a residential mortgage, rather than a buy-to-let mortgage. If you charge your tenant(s) less than £7,500 a year, you also won’t have to pay any tax on your rental income, thanks to the government’s Rent a Room scheme. 

Learn more: Is now a good time to buy?

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.

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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

How has buy-to-let changed?

In the last few years, the government has made changes to the way buy-to-let investors are taxed. These include:

Stamp duty surcharge

In 2016, the government added a 3% surcharge in stamp duty for buy-to-let investors and those purchasing a second home. You can learn more about this in our guide to stamp duty.

An end to mortgage interest relief

Between 2017 and 2020, the government gradually phased out mortgage interest relief with a new tax-credit system. 

Mortgage interest relief allowed landlords to claim their mortgage interest as an expense. By deducting the interest they paid on their mortgage from their rental income, they were able to reduce their tax bill. 

Mortgage interest relief was particularly rewarding for higher-rate taxpayers because it effectively gave them 40% tax relief on their mortgage interest. 

Now, landlords receive a tax-credit instead. This is based on 20% of their mortgage interest, no matter what tax bracket they’re in. 

Without mortgage interest relief, some landlords have found themselves bumped up into a higher tax bracket than before, potentially leading to a higher tax bill. 

It’s particularly bad news for landlords with interest-only mortgages. An interest-only mortgage lets you pay off the interest throughout the mortgage term and only repay the capital at the end. 

Mortgage interest relief allowed interest-only landlords to deduct their full mortgage payments from their income. The new system, however, only lets them deduct 20% of it ⁠— even if they’re a higher rate taxpayer. 

Can I live in my buy-to-let property?

You can’t live in your own buy-to-let property. If you’d like to live in the property yourself, you’ll need to have a residential mortgage. Thankfully, residential mortgage rates tend to be cheaper than buy-to-let rates, so you might see your mortgage payments decrease once you’ve made the switch. 

If you’d like to make money from the property you live in, renting out a room to a lodger may be a better option. As we touched on earlier, you won’t need a buy-to-let mortgage to do this and you won’t pay tax on rental income under £7,500 a year.

Can I change my buy-to-let mortgage to a residential mortgage?

If you rent out your first home but later decide to move into it, it’s possible to change your buy-to-let mortgage to a residential mortgage. How you achieve this will depend on your mortgage broker, financial circumstances and affordability. 

Some lenders won’t let you change from a buy-to-let mortgage to a residential mortgage. If this is the case with your lender, you may have to remortgage the property and take out a residential mortgage with a different lender. 

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