There may be a time when you want to buy a property to be your new home without selling your existing one. This is when a let-to-buy mortgage can help you. It allows you to let out your current home so that you can get a mortgage to buy a new one. It can be a complex process and we’ll explain here how it works as well as some considerations you need to think about and alternative options before deciding if it’s right for you.
What is a let-to-buy mortgage?
This arrangement actually consists of two mortgages. To be able to rent out your current home, you need to convert your existing mortgage into a buy-to-let mortgage. This is because renting out your home with a residential mortgage puts you in breach of the mortgage terms. A buy-to-let mortgage, on the other hand, is specifically designed to allow you to rent out your property. To buy your new home, you need a standard residential mortgage.
If you have equity in your current home, you may be able to release it to use as a deposit to purchase your new home. The rental income you achieve should cover the repayments you have to make for your buy-to-let mortgage.
Why opt for a let-to-buy mortgage?
There are lots of reasons why this type of arrangement can be helpful:
- You may have found a new home to move into but have been unable to sell your current one.
- The value of your property may have decreased since you bought it and you stand to make a loss if you sell it. If you rent it out, the value may eventually go up again.
- You may be relocating somewhere else for a few years but intend to move back into your property afterwards. For example, you may have been offered a new job in Edinburgh but will return to live in your home in London when the contract for the job ends.
- You may have decided to buy a property with your partner but want to keep your existing one as an investment.
How does a let-to-buy mortgage work?
As you’re taking on two new mortgages, the application process can be quite complicated as you need to meet different criteria for both types.
For the buy-to-let side of the equation, you need to have a minimum deposit of 25%. You may be able to use some of the equity in your property to cover this. You also need to show that you can achieve a rental income that covers at least 125% of the repayments for this mortgage. Some lenders will expect you to cover a higher amount of 145%. You’ll need to provide proof to your lender that you’re buying a new home at the same time, such as a copy of your mortgage offer.
For your new residential mortgage, you need a deposit of at least 10%. Again, you may be able to use some of the equity in your current property to cover this. You also have to meet your lender’s affordability checks for this mortgage.
It’s helpful if you have a good credit score, particularly as you need to meet the requirements for two mortgage applications. However, some specialist lenders will consider let-to-buy applications even if you have a bad credit score. Speak to your mortgage broker first to get advice on how to improve your credit rating.
Another stipulation set by many lenders is that your maximum age at the time of your application must be 70 or 75.
How much can you borrow?
For the buy-to-let aspect of your let-to-buy arrangement, you will most likely be able to borrow up to 75% of your property’s value. This means you’ll have to pay 25% as a deposit for your buy-to-let mortgage. If you have enough equity in your property, you can release some of it to cover this as long as enough equity remains in your property to cover your lender’s loan-to-value (LTV) ratio for your buy-to-let mortgage.
For example, your current home in Bexleyheath may have a value of £200,000 and you owe £100,000 for the existing mortgage. This gives you £100,000 equity in your property. If your lender has agreed to a 75% LTV for your buy-to-let mortgage, you can use £50,000 of that equity to cover your 25% deposit. You can release the remaining £50,000 to use as a deposit for your new property in Bexley.
The amount you can borrow for a new residential mortgage depends on the standard affordability checks carried out by your lender, which take your income and credit rating into account. The more deposit you can pay, the more deals with better rates will become available to you.
Stamp duty requirements
When you buy a second property, you have to pay an additional stamp duty charge of 3%. This can cost you thousands so it’s important to be aware of this and budget for it. If you sell your original home within 3 years, you can claim this extra stamp duty amount back from HMRC.
There are advantages and disadvantages to think about with a let-to-buy mortgage.
- When you want to move into your new home quickly, it removes the pressure of having to sell your existing one.
- If your property has decreased in value, it prevents you from making a loss and allows for an increase in the future.
- With two properties, you benefit from the increased values of both in the future if the market is favourable.
- You are liable for two mortgages.
- Should the property prices fall in the future, you will lose on the values of both properties.
- Let-to-buy rates are generally higher than standard residential mortgage rates because they are considered to be a higher risk.
- You have to pay an additional 3% stamp duty charge.
- You have to take on the responsibilities of becoming a landlord. This includes finding tenants, dealing with maintenance issues and paying tax on your rental income.
- There are extra fees to pay for both properties, such as the mortgage arrangement fees and your solicitor’s costs.
There are alternative options to consider before deciding if a let-to-buy arrangement is the right fit for your circumstances.
Consent to let
If you only want to rent out your property for a short period rather than as a long-term investment, your lender may agree to give you a ‘consent to let’ on your existing residential mortgage. As this is only a short-term arrangement, though, you may find it difficult to get approved for a second residential mortgage on your new home.
Stay where you are
If you’re unable to sell your current home and are in no rush to move, consider staying where you are to rectify the issue. Should the reason be that your property has decreased in value, wait until the market turns and the value goes back up before putting your property up for sale. If the property needs work to make it more attractive to buyers, consider remortgaging to use some of your equity to carry out the improvements.
Rather than buying a new home to move into while keeping your existing property, consider moving into rented accommodation instead. That way, you only have to contend with switching your current residential mortgage to a buy-to-let one so that you can rent out your property as an investment.
Seek help from your mortgage broker
Let-to-buy mortgages belong to a niche market and many lenders will only deal with brokers. As well as being able to find the best buy-to-let and residential mortgage deals to suit your circumstances, your broker can help you throughout the let-to-buy process. With two mortgages to deal with simultaneously, it can be complicated but your broker will be able to handle everything from start to finish so that your let-to-buy arrangement is a smooth and stress-free experience.