Should I rent out my first home?

Key takeaways

• Renting out your first home can generate steady income and help you build equity, but it comes with landlord responsibilities
• Buy-to-let mortgages typically require a 25% deposit, compared to 5-10% for residential mortgages
• Recent tax changes mean landlords now receive a 20% tax credit on mortgage interest instead of full relief
• Renting a room to a lodger lets you earn up to £7,500 tax-free per year under the Rent a Room scheme
• You can't live in a property with a buy-to-let mortgage - you'll need to switch to a residential mortgage first

Why should I rent out my first home?

Renting out your first home can be a practical way to earn a steady income while keeping hold of an asset that may appreciate in value over time.

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 have cheap rent, you may be able to make it work. However, you will need to work out whether it's worth the inconvenience and added responsibilities that come with being a landlord, too. Before you list your property, make sure you're up to speed with the latest landlord legislation, have set a realistic rent and put a clear tenant-screening process in place. Taking these steps early can help you avoid costly disputes and keep your new income stream running smoothly.

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 my first house or live in it?

Whether renting out is better than living in the home yourself will come down to your budget, lifestyle and long-term plans. So, is it better to rent out your first house or buy one to live in? Here's how each option compares:

Renting out your first home

• 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 home 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.

Struggling to save a deposit? We can help.

Is buy-to-let still a good investment?

Buy-to-let can still be worthwhile if the rent comfortably covers your costs and you're prepared for the extra responsibilities that come with being a landlord. Buy-to-let properties have traditionally been popular investments, but recent changes to taxation and regulations mean it's important to understand both the opportunities and challenges before making your decision. Here's what you need to know about the advantages and considerations of buy-to-let properties:

Buy-to-let pros

• You'll earn rental income - the average UK rental yield currently stands at 5.6%
• 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

Buy-to-let cons

• 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 convert 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.