Let to Buy Mortgages
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Let to Buy Mortgage - the pros and cons
Thinking about letting out your home and buying a new property? It can be an effective way to move up the property ladder, but there are a few things to think about. Let’s start with the basics…
What is a Let to Buy mortgage?
Let to Buy describes a situation where you rent out your existing home and buy a new one to live in.
In practice, it means having two mortgages at the same time. You turn your existing mortgage into a Buy to Let mortgage, so that you can rent the house to a tenant. Then you take out a standard residential mortgage on the home you’re buying.
If you have a cash deposit you can have two independent mortgages, but if you use the same lender for both products, this is a Let to Buy mortgage.
How does a Let to Buy mortgage work?
The advantage of Let to Buy is that the lender lets you use your equity as a deposit for your next property, and doesn’t take your current mortgage into account as a commitment.
What’s important is that the rental income from your first home makes the mortgage repayments affordable. A mortgage calculator can help you work this out.
When is Let to Buy a good idea?
A common reason to choose Let to Buy is to use equity you’ve built up in your existing property as a deposit to move to a new one, keeping the first home as a long-term investment.
Sometimes people opt for Let to Buy when they’ve found a great new residential property to buy but are finding it difficult to sell their first home.
Why do I need a special mortgage?
Letting a property out under a standard mortgage would be a breach of the terms of your loan, so you will need to either talk to your lender and get permission to let, or get a Buy to Let mortgage or a Let to Buy deal.
Buy to Let is generally more expensive than a residential mortgage and has higher interest rates.
What Let to Buy lending criteria will I need to meet?
Your assessment will be based on the rental income from your first home, rather than solely on your income. Typical criteria are:
- A maximum LTV (Loan to Value) of 80% – the mortgage needs to be for less than 80% of your current home’s value
- Rental income of 145% of monthly mortgage repayments.
- Proof you’re buying a new home at the same time as switching your mortgage
- Same solicitor for both transactions
- Maximum age of 75 at the end of the mortgage
Stamp duty and Let to Buy mortgages
Stamp duty can sometimes put people off Let to Buy, as there’s an extra 3% stamp duty when you’re buying additional properties. So on a £200,000 house, the stamp duty will total £7,500.
If you sell your first home within three years, however, the government will refund the extra 3% you paid – £6,000 in this case.
Advantages of Let to Buy
Let to Buy can solve some mortgage challenges – especially the stress of organising a Buy to Let mortgage for your current home at the same time as arranging a residential mortgage for your next home.
They are also an option if you want to use your equity without selling your home.
Disadvantages of Let to Buy
Owning two properties can seem like a great investment – but you’re twice as exposed if property values fall for any reason.
Also, Let to Buy rates might not be as low as residential mortgage rates, although they may be competitive compared with Buy to Let rates.
You’ll also be paying two mortgages, so if you struggle to get or keep a tenant, you could quickly go into debt.
What if I only want to rent out my property for a short period?
If you’re only looking to let for a short period and then sell your home, ask your lender if they will give you ‘consent to let’. Whether they agree will depend on the lender’s policy.
How can a Mortgage Broker help?
Let to Buy can be quite a complex approach, and there are limited lenders that offer it. With a broker like Mint Mortgages and Protection on your side, you have peace of mind that an expert is considering all the types of mortgages and ways to achieve your property goals.
We’ll compare the options and different mortgage deals to recommend the way forward.
We’re an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of Personal Touch Financial Services Ltd which is authorised and regulated by the Financial Conduct, so get in touch today to explore your options.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
The Financial Conduct Authority does not regulate most Buy to Let Mortgages