A buy-to-let mortgage is a different prospect than a residential mortgage – but there are all sorts of scenarios when you might decide to rent out your existing home.
- Wanting to move somewhere new, but needing to delay a sale until the property market is in a better position.
- Refinancing an inherited property, without wanting to sell.
- Moving in with a partner, and deciding to rent one of your homes and live together in the other.
The key difference is that buy-to-let mortgages are based on a property you let out to tenants, with the rental income covering the payments, plus a profit element.
With the help of an independent broker, switching your mortgage can be fairly straightforward, but there are multiple considerations and factors we suggest you be aware of before you make any long-term financial decisions!
In this guide, Think Plutus outlines the essential information we think every homeowner should understand, from evaluating your current mortgage agreement to forecasting rental income and dealing with the associated fees.
Swapping a Mortgage to a Buy-to-Let Product
You can usually change from a regular residential mortgage to a buy-to-let product, with a few caveats that might mean this is not always the best plan.
You may need consent from your lender to go ahead (which we will explain shortly), but if you are in a fixed-term agreement, it could mean you face high charges to repay the current loan early.
Most fixed-term mortgages run for up to five years, so although we would need to have a chat to get a better idea of your requirements, it is often better to wait until the term ends to avoid a big dent in your savings.
Changing to a Buy-to-Let Mortgage and Buying a New Home
In this situation, the homeowner wants to buy a new property, perhaps somewhere with an extra bedroom, or a larger garden.
They do not want to sell their old home (or might think that it will achieve a better sale price in a couple of years) but cannot afford to pay both mortgages simultaneously.
Renting out the current property is a viable option, and you could pursue consent to let from your lender, or switch to a let-to-buy mortgage.
Moving Into Rented Accommodation and Letting Out Your Home as a Buy-to-Let
Another potential could be that the homeowner plans to move out, and wants to rent somewhere to live either long-term or temporarily.
This prospect can be tricky, since some mortgage lenders are not overly keen on changing from a residential to a buy-to-let mortgage.
That is because the risks associated with a buy-to-let are considered higher, since a tenant who decides not to pay their rent could mean the borrower falls into default.
Mortgage lenders offering buy-to-let products are also a little wary of potential fraud. In rare cases, a borrower might request a switch to a buy-to-let product while intending to live in the property and earning income from tenants.
You cannot use a buy-to-let mortgage if you plan on renting out a room or part of a property while living there yourself.
Provided you have demonstrated the legitimacy of your application, the lender will make most of the decisions based on the expected rental income.
Interest rates tend to be higher on buy-to-let products, but you will usually pay on an interest-only basis, so the monthly expense is lower. The lender will want to see an expected rental income of at least 125% to 165% of the monthly mortgage cost.
There are two primary options – staying with your current lender, or remortgaging your existing residential mortgage elsewhere, whether changing to a let-to-buy agreement, or requesting consent to let.
Let-to-buy means that you buy a new property to live in, and take out a mortgage to cover the purchase costs. You rent out the previous property, by changing your current mortgage to a buy-to-let product.
There are a few risks to be conscious of, such as the potential for gaps between tenancies that could affect your ability to maintain both sets of mortgage repayments.
If you have previous experience as a landlord, another income (from employment, for example) or higher security you will usually secure a more competitive offer since the lender’s perceived risk will be lower.
Consent to Let Agreements
The other common solution is to request permission from your lender to keep your existing mortgage agreement as-is, with their consent to let the property to tenants.
Not all lenders will agree to this, but it can be a favourable move if you are on an excellent interest rate, or do not want to incur early settlement charges through a remortgage.
Consent to let means that the rental property is still financed through a residential mortgage, which could mitigate your opportunities to apply for a second mortgage on your new home.
Most lenders cap the number of residential mortgages any one borrower can have simultaneously, although some will allow you to have two concurrent products – and others up to four.
Second Charge Mortgages
A third route could be to refinance the current home, and use some of the cash raised to cover the deposit on your new property, provided you have sufficient equity.
Although you would still need either to switch to a buy-to-let agreement, or apply for consent to let, a second charge mortgage acts as a secured loan allowing you to use your equity to raise capital.
Professional Advice on Switching to a Buy-to-Let Mortgage
One of the main priorities when switching mortgages is to ensure that you are getting the best possible interest rate.
If your current product offers an excellent rate, we might suggest looking to retain the agreement rather than changing to another product that is significantly more expensive.
Much depends on your lender, the values involved, expected rental income, and the equity you own.
There is no one-size-fits-all answer, because the most advantageous action plan must be consistent with your plans and financial circumstances.
Please contact Think Plutus if you would like to discuss any of the information contained within this guide.
As a whole-of-market, independent broker we endeavour to find the right solutions for you, with advice and support to help you make informed decisions at each step of the process.
FAQs – Switching to a Buy-to-Let Mortgage
Still have questions about changing from a residential to a buy-to-let mortgage? We have run through some commonly asked questions below.
How Does Remortgaging Work on a Buy-to-Let Property?
The earliest you can remortgage a buy-to-let agreement will depend on your lender. Some lenders will not allow a remortgage for the first six months, although that initial ownership period is sometimes longer.
Lenders can also apply restrictions on consent to let, based on how long you have owned the rental property.
Cost Comparisons Between Buy-to-Let and Residential Mortgages
You will often find that the costs and fees linked to a buy-to-let mortgage are higher than a residential product, but this varies between lenders, and what offer they are prepared to make based on your personal circumstances.
Deposit requirements are higher, with the minimum typically 25%, and Stamp Duty is also a consideration if buying a second or additional property.
Mortgage rates are higher on buy-to-let properties, particularly if you are borrowing a higher LTV, because the lender is exposed to greater risk and needs to build-in a contingency if you default on the loan.
However, the vast majority of buy-to-let mortgages are interest-only, so even if the interest rates and arrangement fees are higher, your monthly payment cost will generally be much lower.