Let to Buy Mortgage

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Let to Buy Mortgage

Diarmuid Phoenix explains Let to Buy mortgages and when this can be a suitable option.

What is a Let to Buy mortgage and how do they work?

A Let to Buy mortgage is where you already own your own home, you want to move but you want to retain the ownership of that first property. You could move house and then let that existing home out, buying a new home for yourself.

You have to either get a Buy to Let mortgage on your existing property, or apply for Consent to Let. It’s essentially letting out your property and buying a new residence.

What’s the difference between Let to Buy and Buy to Let?

The main difference is that with Let to Buy, the new property is your main residence and not let out to the public. With Buy to Let mortgages, you’re simply buying a property to let it out immediately. You’re not permitted to live in the property.

Often people aren’t even seeking a Buy to Let mortgage product at first. It may be that you are tied in with your existing lender on a residential mortgage and you obtain Consent to Let from that lender to let the property out.

The main difference is that with Buy to Let you’re buying a property for the sole purpose of letting it out, whereas with Let to Buy, you’re letting your existing property out and buying a new one to live in.

Who is a Let to Buy mortgage for?

Anyone really, as long as you meet both lenders’ criteria. You essentially need the desire to keep your existing property and let it out.

What criteria do I need to meet for a Let to Buy mortgage?

Firstly, there would need to be enough equity in your existing property. You generally need 25% at least – which is the requirement for a Buy to Let, especially in Northern Ireland. Some lenders in England might let you away with a bit less.

A lender will also need to be satisfied that when your current residential deal ends it can easily be switched to a Buy to Let product. The expected rental income from the property you’re leaving would need to fit the lending criteria for the size of mortgage being sought.

You might want to borrow a little bit extra against your existing property, for example. There needs to be sufficient rental income to make that affordable – and that may not align with how much they’re willing to lend you.

When you originally bought the property, the borrowing would have been calculated on your income rather than the rental, because it wasn’t a Buy to Let property at the time. You were buying it as a residential property – it’s calculated in a different way.

The lender may also take both mortgage payments into consideration when assessing your overall affordability for the new property, even though there’s rental income coming in to cover the first mortgage. We have to make sure there’s enough affordability there for the lender.

How much deposit do I need for a Let to Buy mortgage? How much can I borrow?

How much you can borrow will depend on affordability and that additional payment for the Buy to Let mortgage will be subtracted from your affordability in calculating your new mortgage.

With the new mortgage, obviously you’re buying as residential so that is based on your income and your outgoings – including the existing mortgage. How much you can borrow will be entirely dependent on that.

Deposit-wise, you’ll need 25% equity in your existing property, and the rental income will indicate how much you can borrow against your existing property.

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What are the pros and cons of Let to Buy?

The pros are you get to keep your original property, which can give you a nice supplement to your income both now and in the future. Some people may want to move back into that property at some point in the future.

A negative could be the length of time it takes to complete, as you’re essentially applying for two mortgages at the same time. Many lenders want it done as a simultaneous transaction, which can be tricky and can take a bit more effort.

You may also have reduced affordability for the new mortgage as a result of having the other one in the background.

Can I get a Let to Buy mortgage as a First Time Buyer?

Technically, no, because for Let to Buy you already own a property. Even if you were to inherit a property rather than buy the initial one, you still wouldn’t be deemed a First Time Buyer – you own the property that you’ve inherited.

How does remortgaging a Let to Buy work?

Once your existing property is out of its former residential deal, you’ll need to remortgage it with a Buy to Let product. This will require you to have at least 25% equity in the property.

Some lenders will insist on the original Let to Buy deal being done at the same time as the new purchase. If you’re still in your residential mortgage deal at that point and there’s a bit of time to go, you may have to pay an early redemption penalty to exit that deal and get the Buy to Let mortgage the lender is insisting on.

It’s not straightforward. There are obviously lots of different moving parts and elements to it. It definitely can be done, but you will need the services of a broker, I would imagine.

What are the alternatives to Let to Buy?

The obvious alternative is to simply sell your existing property and use all the equity that’s left in it to put towards your new home purchase.

This might not be ideal for somebody who wants to keep their original property, but it may save on stamp duty tax as you’re selling your main residence and replacing it with another. If you keep your existing property, there’s additional stamp duty to pay on the new property.

How can a mortgage broker help here?

Not every mortgage broker will have lots of experience in these scenarios. Have a look online for reviews on broker websites that show they’re capable of looking at this and they’ve got experience in it.

The right broker can navigate you through the process. It can be taxing and stressful for anyone – an experienced broker can take a lot of that pain away.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST Buy to Let MORTGAGES.

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