In an ideal world, you’d sell your home for the asking price and then find and move into your dream home. Unfortunately, the real estate market is far from ideal, and you may find the right place to live long before you find a buyer for your home. When this occurs, one alternative is to rent out your current property and obtain a new “Let to Buy” mortgage to buy your next home. Let’s learn more about let-to-buy mortgages and how they work.
What is a Let-to-buy Mortgage?
A let-to-buy mortgage allows you to let out your property while receiving a loan to buy a new one. This entails converting your present residential mortgage to a let-to-buy mortgage and then obtaining a new residential mortgage for the home you’re relocating to. You can then rent out your old residence to tenants.
You should be able to use your newfound rental income to cover your mortgage, depending on the let-to-buy rates you qualify for. Also, you might even have some money left over to help you pay off your mortgage.
If you have equity in your present home or perhaps own it outright, a remortgage may allow you to free up some cash. This can then serve as a down payment for your future purchase.
How Does the Let-to-buy Scheme work?
You must apply for two new mortgages with a let-to-buy mortgage:
- A let-to-buy mortgage for your current home that will take the place of your current residential mortgage.
- A new residential mortgage for the home to which you wish to relocate.
- This is often done with the same lender who specialises in giving let-to-buy mortgage solutions, but it can also be done with two distinct lenders. The let-to-buy mortgage lender enables you to raise a deposit for your next property by borrowing additional funds without affecting your present mortgage as a commitment.
Once remortgaged as a buy-to-let property, the predicted rental income must cover the repayments, and you must still have enough equity in your property to fulfil your lender’s minimum buy-to-let loan-to-value (LTV) ratio.
For example, if your property is worth £200,000 and you still owe £100,000 on your mortgage, you may wish to borrow some of your equity to put down on your next home.
A let-to-buy lender with a minimum buy-to-let LTV of 75% may allow you to borrow £50,000 from the property as a deposit for your future house and convert your prior home to buy-to-let.
If your next property costs £200,000, you’ll put down a £50,000 down payment and obtain a residential mortgage to cover the remaining £150,000.
The rent from your prior home must be sufficient to cover the let-to-buy mortgage comfortably.
Reasons to consider a Let-to-buy arrangement
You may be considering let-to-buy for a variety of reasons.
The most common reason is that you want to leverage the equity you’ve built up in your home to move to a new one while maintaining the old one as a long-term investment.
Let-to-buy may also be appropriate for homeowners in the following circumstances:
- You’re eager to relocate to a new home and can’t wait to sell your existing one.
- Due to market conditions, you have had difficulty selling your house.
- You wish to buy a house with a partner while keeping ownership of your current home.
- You’re moving away for a few years but intend to return home in the future.
Criteria for Let-to-buy Mortgage Lending
Instead of focusing on how much money you make, a buy-to-let mortgage will assess your eligibility based on how much rental income you can produce from the property you’re renting out.
A few suppliers offer specialist let-to-buy mortgages, and you’ll normally need to match the following criteria:
- Borrowing limit of 75%–80% of current house value: if you want to release equity when remortgaging, you’ll need to account for this in your calculations.
- Proof that your rent will be greater than your mortgage payments: most lenders require rent to cover approximately 145 per cent of monthly payments.
- Proof that you’re buying a new property and switching mortgages: they’ll normally ask for a copy of your mortgage offer for your new home.
- The use of the same solicitor for both transactions is not necessarily essential, but some lenders do.
Typically, the maximum age is 70 or 75.
How much money can I borrow?
On buy-to-let mortgages, the majority of lenders will only lend up to 75% LTV. This means that a deposit of at least 25% is required for your existing property.
You may be able to use this as your deposit, or at least a portion of it if you have enough equity. If you can’t come up with a 25% down payment, some lenders will consider a higher LTV.
Rental revenue must also cover 125 per cent of monthly mortgage payments, according to buy-to-let mortgage lenders. If you’re unsure how much your property will rent for, contact a local letting agent, who may provide you with a free rental value.
If your lender is unsure about what rent is possible, having a rental valuation in writing can help.
It is recommended that you have at least a 10% deposit for the home you are moving into. The more money you can save for a down payment, the better. This is due to the fact that you will have access to more lenders and better prices. Lenders will mostly base their decisions on the amount you can borrow and your credit score when it comes to residential mortgages.
Is it necessary to Hire a Mortgage Broker for a Let-to-buy transaction?
Because let-to-buy involves many moving components, it is strongly advised that you get advice on your choices from a whole-of-market mortgage broker.
A professional broker will be able to manage the process from start to end, ensuring you can complete both mortgages concurrently, in addition to finding you suitable buy-to-let and residential mortgages.
Finally, many buy-to-let mortgages are only available through brokers rather than directly from lenders, so a broker may have access to deals that you won’t be able to find on the high street.
Let to Buy Mortgage Benefits vs. Disadvantages
Before applying for a let-to-buy mortgage, make sure you’ve evaluated all of the advantages and cons:
The Benefits of Let-to-Buy Mortgage
- Due to lender conditions for both types of loans, it can be difficult to arrange a buy-to-let mortgage for the house you’re currently living in while also arranging a residential mortgage for your next home – let-to-buy simplifies this procedure.
- It alleviates the pressure to sell quickly and at a loss.
- You’ll end up with two properties, increasing your profits if property prices rise in the future.
- When compared to buy-to-let rates, interest rates and fees may be competitive.
Disadvantages of a let-to-buy agreement
- Owning two houses is a double-edged sword in that if property prices decline, you will suffer greater losses.
- Let-to-buy rates are typically higher than residential mortgage rates.
- Because let-to-buy programmes are offered by a few number of lenders, you will have fewer options.
- You’ll also be paying two mortgages, which could strain your budget if you don’t sell your prior property promptly.
- Purchasing a second property will almost certainly result in a large stamp duty charge, although the additional 3% will be repaid if you sell one of them within three years.
Alternatives to Let-to-buy Mortgage
When the status of the property market makes it difficult to sell, there are a few options to get you moving:
#1. Buy-to-let Mortgage
You move out, possibly into rented housing, before taking out a buy-to-let mortgage on your previous residence.
The disadvantages are that it can be complicated and expensive, and you may not fulfil the buy-to-let standards of lenders.
#2. Consent to let
Some lenders will grant you consent to let on your residential mortgage, allowing you to move and rent out your house for a limited time.
However, it may be more difficult to obtain a second residential mortgage to buy another house for yourself while you have consent to let.
#3. Renting
If you must relocate for a job or other reasons, examine whether you would be better off selling your home and renting for a spell.
Although you may not receive the full value you hoped for when selling your house, you will be in the beneficial position of being a chain-free buyer on your next home, which may allow you to drive a better bargain.
What distinguishes let-to-buy from buy-to-let?
Let-to-buy and buy-to-let may sound similar, but they are not the same thing.
Buy-to-let involves acquiring a property, particularly to rent out, while let-to-buy involves purchasing a new property to live in while renting out your current home.
Making the switch to a buy-to-let mortgage
Your current mortgage lender may allow you to transfer to a buy-to-let contract, but this will require a reassessment of your finances based on its buy-to-let standards.
If you are unable to move to a buy-to-let deal with your existing provider, you may be able to remortgage to another lender; but, if you are still in the introductory fixed term of your mortgage, you may be subject to costly early repayment charges.
Taking these intricacies into account, some lenders provide specialised let-to-buy mortgages, which alleviate some of the tension.
Let-to-buy and consent to let
If you only intend to let your property for a limited time, such as while you try to sell it, you may not need to move to a buy-to-let mortgage because some lenders will grant you ‘permission to let.’
However, you can’t rely on this: it all depends on your reasons for asking and your lender’s policies.
If you’re going to be away for a year for work before returning to your property, your provider may be ready to provide you with temporary consent to let.
If you’re buying a new property to live in, the lender may be less cooperative and insist on switching to a buy-to-let mortgage.
Let-To-Buy Mortgage Repayment Plan
You’ll repay your Let to Buy mortgage in the same way you’d repay any other mortgage, with monthly payments for the life of the mortgage. When the term expires, you’ll usually be immediately converted to your lender’s standard variable rate, which may be higher than the rate you were previously paying.
Most creditors will allow you to make overpayments, normally of around 10% of your total per year, to pay off your mortgage faster, but keep in mind that if you exceed the limit, you may be liable for Early Repayment Charges, which can be costly.
Let-To-Buy Mortgage FAQs
Do I pay stamp duty on a let to buy?
Yes, you will have to pay greater stamp duty on the second home. This is 3% higher than the usual rate. If you sell your older house within 36 months, you should be able to reclaim this immediately from HMRC.
Can you live in let to buy property?
While your residential mortgage lender may grant you permission to let the flat for a limited time, it is not viable to live in a property with a buy to let mortgage, so you will need to refinance.
Can I buy a buy-to-let as a first time buyer?
Yes, but you may have a more difficult time obtaining a loan than if you have previously owned property. This is because first-time buyers have access to fewer buy-to-let mortgages—roughly one-fifth, according to some estimates. Furthermore, you will most likely be required to put down a larger deposit.
