What is a Let to Buy mortgage?
A Let to Buy mortgage is a way to rent out your existing home while purchasing a new residential property. It is ideal for those who wish to keep their current home, perhaps due to an emotional attachment, uncertain market conditions, or as a long term investment to climb the property ladder.
Unlike a standard first-time buyer residential mortgage, a Let to Buy arrangement enables the homeowner to rent out their existing property and use the rental income to secure a new mortgage for their second property purchase.
How does a Let to Buy mortgage work?
A Let to Buy mortgage involves two separate mortgages: one on your existing home and another on your new home. If you don't want to sell your house, typically, you remortgage your current home with a Let to Buy mortgage, which often has different lending criteria compared to a standard residential mortgage. Concurrently, you take out a new residential mortgage on your next property.
Usually, if you have enough equity, you should be able to remortgage your current residence and purchase a new house.
Sometimes, you can use the same lender for your first and second property.
Navigating this process means dealing with various factors such as mortgage fees, mortgage repayments, rental yields, conveyancing fees and the terms set by mortgage providers.
Is a Let to Buy mortgage the right choice for you?
A Let to Buy mortgage will be a good idea for you if you aren't ready to sell your current property. It provides unique opportunities for your residential mortgage needs.
Let to Buy might suit those who are experiencing changes in personal circumstances like a job relocation or family growth.
It also appeals to those considering entering the rental market as landlords, making use of their current residential property to benefit from rental income and rise in property prices.
Let to Buy can ease pressure when you are in the property chain without having to sell your home, but keep in mind that you should have a reliable plan to manage the financial responsibilities of juggling two mortgages.
Note that it is not a suitable type of mortgage for a first time buyer.
Lending criteria for Let to Buy mortgages
Your credit history, income and existing debts, significantly influence approval for Let to Buy mortgage. Typically, a strong credit score and a stable income reassure lenders of your reliability. Try to improve your credit score.
High equity in your existing house increases the likelihood of mortgage approval, offering more favourable terms. You will require a large deposit (or equity), which is approximately around 20-25%.
The condition of your current property must be good. For lenders to do the valuation of your house, they typically require a property in good condition, as this impacts its rental and resale potential.
The current market value of your property is important. Most lenders set specific Loan to Value (LTV) limits. Let to Buy will enable you to release equity from your property by borrowing at a higher LTV. So how much can you borrow? Let's say that If your home is worth £200,000 and your mortgage is currently £130,000 you can borrow £150,000. You can use the extra £20,000 as a deposit for your new home. If your property's value has increased since purchase, you're more likely to secure a favourable mortgage deal.
The rent you expect to earn from your existing home is what most mortgage lenders consider when assessing your application.
Lenders want to be sure that you will be buying a new house. Provide evidence of your onward purchase. You may often be able to use the same lender.
Your current property should not be listed for sale or be sold subject to contract.
How to calculate the potential rent
You can calculate your potential rent by estimating the amount that covers at least 125% - 145% of your mortgage repayments. Researching similar rentals in your area gives a realistic idea of what you can charge. Remember, your rent must also account for periods when the property might be vacant, as well as maintenance costs.
Impact of house prices on Let to Buy mortgage decisions
House prices affect both your current and future property investments. When property prices rise, it might mean more equity in your existing home, offering a larger budget for your next house. However, they also imply higher costs for the new property.
It's a balancing act; you'll need to gauge the market carefully to maximise your investment.
Conversely, when house prices fall, it might reduce your selling price but could also make your next purchase more affordable.
Keeping an eye on market trends and future predictions can guide your decision-making process.
Let to Buy mortgages: pros and cons
Advantages of a Let to Buy mortgage
Retaining your current home and relocating to a new home maybe an attractive option for your current circumstances.
The opportunity to generate rental income from your current residential mortgage and becoming a landlord may appeal to you. This income can potentially cover your current mortgage payments.
When the housing market isn't ideal for selling, Let to Buy allows you to wait for a more favourable selling climate. Meanwhile, you can still move to a new place.
It offers a taste of managing a property without the commitment of a full Buy to Let mortgage. This step can be an excellent introduction to property investment.
Challenges and risks of a Let to Buy mortgage
Managing two mortgages can be financially demanding. It's essential to ensure you can afford the two mortgages of both your current residence as well as the new one, factoring in periods when your old home might be vacant between tenants.
The tax implications warrant careful consideration. It's important to understand what stamp duty land tax you will be paying under a Let to Buy mortgage deal. With Let to Buy mortgage, you'll likely face additional stamp duty on the purchase of your new home. You will have to pay stamp duty on your new residential mortgage which can be a significant upfront cost and must be accounted for, in your financial planning. See the page about residential property rates for stamp duty on Gov.UK.
Being responsible for two properties: When you have two mortgages, it means you have to consider maintenance, insurance, and possibly property management fees for two properties instead of one.
Higher mortgage rate is yet another factor to consider. Transitioning from a residential mortgage to a Let to Buy mortgage on your existing property often results in higher mortgage rates. Residential mortgage rates are typically lower than those for rental properties due to the different risk assessments made by lenders.
Accurate rent estimation is another potential risk for your residential mortgage. Estimating how much rent you can charge is one thing, but actual market conditions, tenant consistency, and property maintenance can all impact your real income. Therefore, you must be prepared for fluctuations in rental rates.
Let to Buy vs. consent to let for existing property
A Let to Buy mortgage differs from consent to let in that the latter might be more suitable for you if you want to let your house for a shorter time period.
This could be the case if you anticipate a temporary need to rent out your property or wish to avoid Early Repayment Charges (ERC) or a potentially higher interest rate associated with switching to a different type of mortgage.
This would be suitable for you if you plan to move away for work for a shorter time period like a year, before coming back to your house. Your mortgage provider may be willing to provide a temporary consent to let.
In case you are buying a new home for yourself to move to, then your lender might be less accommodating and might insist for you to transition to a Buy to Let mortgage instead.
Let to Buy vs. Buy to Let mortgages
Let to Buy and Buy to Let, though sounding similar, cater to different needs. Both mortgage products are for those looking to rent out a property, but they work slightly differently. Here are some key differences between these mortgage deals.
Purpose of your residential mortgage:
Let to Buy mortgages
Let to Buy mortgages allow purchasing a new property while renting out the existing one.
Let to Buy mortgages can help you to hold onto your current home, possibly due to market conditions or personal attachment, while moving to a new one.
They can help retain your current home transitioning it into a rented accommodation while acquiring a new residence.
Buy to Let mortgages
Buy to Let means purchasing a property specifically to rent it out.
A Buy to Let property is only concerned with the purchase of a new property, with no direct effect on your current residential status.
Buy to Let mortgage means investing in a rental property as your primary goal, without any intention of living there.
Lending criteria and requirements
Let to Buy mortgages
Lenders often want to see that your current home has potential as a rental property when considering you for Let to Buy mortgages. They might also require evidence that the income you earn from rent will cover the mortgage payments.
Buy to Let mortgages
For a Buy to Let mortgage, lenders typically look at the potential income of the property being purchased and may have higher deposit requirements.
Financial implications
Let to Buy mortgages
When converting your current mortgage to a Let to Buy, you might find the interest rates and fees are higher compared to residential mortgages.
Switching to a Let to Buy doesn't involve paying stamp duty on your existing property, but you'll likely pay the higher rate of stamp duty for your new purchase, as it's considered a second home.
Buy to Let mortgages
These usually come with higher interest rates and fees than residential mortgages, reflecting the perceived higher risk.
A higher rate of second home stamp duty typically applies.
Age factor
Let to Buy mortgages
Lenders might set a maximum age limit for repayment, similar to residential mortgages. It is usually 70-75 years.
Buy to Let mortgages
The majority of lenders set the age limit to 79-85 years at the time of application.
Income
Let to Buy mortgages
Personal income is very important in securing a Let to Buy deal.
Buy to Let mortgages
Lenders might focus more on the rental income the property will generate rather than your salary.
In conclusion
Each mortgage type has its unique set of requirements, benefits, and challenges. Understanding these differences is key to making an informed decision on which mortgage suits your circumstances. It is a good idea to consult mortgage advisors and know the new mortgage rules.
FAQs
How much deposit is required for a Let to Buy mortgage?
Expect to need a 25% deposit of your current property's value for a let to buy mortgage, though this can vary. A lower deposit might be possible but usually increases interest rates. Speak to a mortgage broker can clarify the specifics for your situation.
Can I still buy a new property if prices fall?
Yes, you can. A fall in property prices might reduce the equity available from your current property, affecting your new property's deposit. Consult a mortgage broker to understand how market changes impact your purchasing power.
What happens if I can't rent out my current property?
If you can’t rent out your property, and you still want to make a Let to Buy work for you, you should have a good backup plan. Lenders usually require proof that potential rental income will more than cover mortgage costs whenever offering you a mortgage deal. Investigate local rental demand and consider speaking to a letting agent for advice.