A let-to-buy mortgage can be a great option when you wish to buy another property to live in without selling your current one. Let-to-buy mortgages enable you to let out your current home to fund a mortgage that will go towards acquiring your new property.
Read on to learn about let-to-buy mortgages in detail and find out how Think Plutus can help you get the most from your mortgage. Our mortgage advisers are available to chat about it any time, get in touch today.
What is a let-to-buy mortgage?
A let-to-buy mortgage is a loan based around you renting out your current home to provide the additional income to fund a mortgage to purchase a new one. It may sound like a single mortgage, but it actually involves having two mortgages from the same lender. The first mortgage is on your current property and the second is used to buy your new home.
Your current home will need the right kind of mortgage to enable you to rent it out. You will need it to be a buy-to-let mortgage. Your new property, which you intend to make your home, will need a residential mortgage. This is the basic structure of a let-to-buy mortgage.
If you have some equity in your existing home – or perhaps own it outright – it may be possible to release some equity to build a deposit that will assist with the new purchase. Depending on which let-to-buy rates you can get, your new rental income should cover the buy-to-let mortgage. There may even be some funds left over that can go towards the new residential mortgage.
There are various reasons why homeowners don’t want to sell their current home. Some common reasons include the following:
- You intend to move back into your home in future
- You’ve attempted to sell the property buy been unsuccessful
- You want to hold onto your property as an investment
- Property values have dipped since you bought your home
This isn’t an exhaustive list of reasons people want to let a property instead of selling. Whatever your reasons, let-to-buy mortgages can be an elegant solution which provides regular rental income. It may be that you wish to switch your current mortgage to a buy-to-let, and we can help with that too.
How much can I borrow with let-to-buy mortgage?
Most lenders will only provide up to 75% LTV for a buy-to-let mortgage. This means that, for a let-to-buy arrangement, you will need to put forward a minimum deposit of 25% for your existing property. If you have sufficient equity, you may be able to use this as your deposit (or part of it, at least). Some lenders may consider a slightly higher LTV if the 25% deposit is a problem for you.
Buy-to-let mortgages also require you to cover at least 125% of the monthly mortgage repayments with the rental income, based on a stress rate of 5.5%. If you aren’t certain about the rent your property will fetch, a local estate agent should be able to provide a free rental valuation. Getting this in writing can be helpful if your lender has doubts about whether the specified rental amount is achievable.
For your new property, you are advised to put forward a minimum deposit of 10%. A larger deposit is always preferable because it will give you access to more lenders and more competitive rates. With residential mortgages, the assessment lenders carry out will primarily focus on affordability and your credit history.
How to get a let-to-buy mortgage
An application for a let-to-buy mortgage involves a special assessment which your lender will carry out. As both a buy-to-let mortgage and a residential one are needed, you’ll have to meet the necessary criteria for both.
The following will be necessary to qualify for a let-to-buy mortgage:
- You must meet your new home’s affordability requirements
- You’ll probably need a minimum deposit of 10%
- You must have a deposit of 25%+ for the buy-to-let mortgage (equity in your existing property can cover this)
- Your rental income will need to cover at least 125% of the buy-to-let mortgage repayments, based on the lender’s stress rate
- A good credit score helps, but there are some specialist lenders who will consider bad credit applications
Are they the best option?
It isn’t straightforward to advise on whether a buy-to-let mortgage would be your best option. It really depends on your personal circumstances. There are some other options for you to consider, but it would be best to speak to an adviser to talk through your situation.
If you intend to let your property with an eye to a long-term investment, a let-to-buy mortgage could work. That said, if your plan is to rent out your current property for just a short period, it may be better for you to gain ‘consent to let’ from your lender. Consent to let enables homeowners to leave their property and rent it out for a short time period. The downside to this is that it is not a permanent arrangement, and you will struggle to get approval for a second residential mortgage.
A simple option would be to just remain in your current home. It may be possible to release equity by remortgaging in order to raise funds for home improvements.
Ultimately, there are various options that could work for you – the main variable is your reasons for moving. Our advisers at Think Plutus can help you identify the best options by exploring your situation with you.
Don’t forget about stamp duty
If you are entering a let-to-buy arrangement, you will need to understand the stamp duty land tax that you will have to pay. Any purchase of a second property comes with additional stamp duty requirements. The additional stamp duty rate starts at 3% but it can go as high as 15%, depending on the value of the new property.
You can reclaim the additional stamp duty you pay if you sell the second property within three years. The claim will need to be made twelve months from the completion of the sale, so it won’t come to you immediately. If you manage to find a property for less than £40,000, there will be no second home stamp duty to pay.
Let-to-buy mortgage broker
Let-to-buy mortgage arrangements involve getting two mortgages, so the process is significantly more complex than with most other mortgage applications. Even if it were only a single mortgage, the help of a broker can ensure you aren’t paying over the odds by settling on a bad deal. So where two mortgages are involved, you’ll be taking a big risk if you decide to go it alone.
Let-to-buy mortgage advisers can assess your circumstances and offer expert guidance to find the best possible solution. What’s more, they can speak with underwriters if any issues arise. Brokers will only approach lenders whose criteria you meet, such as affordability. Even borrowers with bad credit, or who have recently become self-employed, can be successful in their application, but approaching a high-street lender will mean you are more than likely to be declined.
Think Plutus has a team of specialist advisers with a wealth of experience in helping clients find the best let-to-buy mortgage deals. Enquire today to speak to an adviser and get the ball rolling on making your plans a reality.