Let-to-buy mortgages allow you to purchase another residential property you wish to live in without selling your current home.
The basics of let-to-buy are letting your existing property and using the rental income to help finance the repayment costs while you purchase a new place to live.
There are many scenarios when a let-to-buy mortgage may be beneficial, but the most common example is when you would like to buy somewhere new but do not yet have a buyer for your current property.
Next, we will look at how let-to-buy works, all the pros and cons, and considerations if you are assessing whether this type of mortgage is right for you.
What Does Let-to-Buy Mean?
We are all familiar with buy-to-let, so when we turn that on its head, it can be tricky to understand!
The ideal property transaction is that you sell one residence at or above the asking price and use the proceeds to purchase somewhere new – but the time delays between these steps can be significant.
If you have found your dream home but are waiting for viable offers, you could decide to let out your current residence to a tenant and use a let-to-buy mortgage product to invest in a new property.
What Is a Let-to-Buy Mortgage?
Provided you have sufficient equity, you can remortgage to release capital to generate a deposit for a new home and use the rental earnings from your previous residence to cover the repayments.
Let-to-buy mortgages are particularly popular for couples that wish to live together but have stalled because one home or the other is taking longer to sell than expected.
Applying for a let-to-buy mortgage can help you proceed with your plans without waiting until a property has successfully sold.
The challenge of let-to-buy is that you undertake two mortgage debts, one on the old property (now a rental) and a residential mortgage on your new home.
This type of mortgage product can be beneficial if you have sufficient equity.
For example, if you own a property worth £300,000 and owe £175,000 on the mortgage, you might be able to borrow up to £225,000 on a remortgage (repaying the existing balance).
Once you have repaid the current mortgage, you have £50,000 in cash to use as a deposit on your new home.
How Do Let-to-Buy Mortgages Work?
Both mortgages are held with the same lender, and your remortgage agreement will need to permit consent to let your existing home as a buy-to-let property.
That means you have two concurrent mortgages:
- One buy-to-let remortgage on your old home.
- One new residential mortgage on your new home.
The key is to have enough equity to ensure that your remortgage will release the funds you need to act as a deposit on the new property acquisition.
Reasons to Consider a Let-to-Buy Mortgage
Some of the typical reasons to consider a let-to-buy mortgage include:
- Having a property you own on a mortgage and intending to move back into the home at some point in the future.
- Owning a home that you cannot sell (potentially due to the current property market).
- Wanting to keep ownership of a property as a viable investment.
- Delaying a property sale due to depreciated values and possibly waiting to sell because the current market value is below your original purchase price.
This list is not exhaustive, and there are countless scenarios in which let-to-buy may be beneficial – but the idea is that you can switch from using your income to repay a mortgage to letting the property to generate the required funds.
You may also wish to consider switching a mortgage from buy-to-let to let-to-buy, in which case Think Plutus can provide further advice.
Borrowing Limits on a Let-to-Buy Mortgage
Most UK lenders will offer up to 75% Loan-to-Value (LTV) as a standard threshold for a buy-to-let mortgage, so you will need a deposit/equity of at least 25% to move forward.
This same threshold applies to let-to-buy, where you take out a remortgage to cover the repayment costs on a property you intend to let out to tenants.
Remortgaging a previous home may allow you to raise plenty of capital for the deposit, depending on the amount of equity you own.
Some lenders will consider a marginally higher LTV cap, depending on the circumstances and available security.
Mortgage lenders will also look at the projected rental income and how easily those earnings will cover the monthly repayments.
Usually, you will need to demonstrate that your rental income will cover at least 125% of the mortgage interest payment when calculated at a ‘stress test’ interest rate of 5.5%.
It is advisable to offer at least a 10% minimum deposit on your new residential property purchase. This level of deposit is essential to secure more advantageous interest rates across a wider pool of potential lenders.
Assessing Let-to-Buy Rental Income
One of the core eligibility requirements on a let-to-buy mortgage relates to your projected rental income.
A lender needs to assess your earnings to determine whether they are confident you will be able to meet the repayment requirements (typically interest-only) on the buy-to-let proportion of your remortgage agreement.
Therefore, you will either need to assess rental prices on similar properties or, more likely, have a local lettings agent review the property and give you an income forecast.
Best practice is to obtain quotes from three agents or more to show that you have a reasonably good idea about what you will be able to charge in rent.
How to Apply for a Let-to-Buy Mortgage
Like any mortgage application, a let-to-buy lender will run your details through various assessments and policy qualification rules before they can make a formal offer to lend.
The eligibility standards differ from other mortgages because you are applying for both a buy-to-let mortgage and a residential mortgage within the same transaction.
Let-to-buy lenders will ask for the following before they can finalise a lending offer:
- Proof of affordability on the new residential mortgage.
- A deposit of at least 10% on your intended new home.
- Down payment of 25% or above for the buy-to-let (which may be covered by equity released by your remortgage).
- Rental income of least 125% of the buy-to-let interest mortgage payment, subject to tax band and stress rates
- A good credit score.
Let-to-buy mortgages are not necessarily straightforward but may be the most viable financing option depending on your circumstances.
Let-to-buy can be very attractive if you plan to let out a property as a long-term investment income project. However, a short-term rental may not be as favourable, and you might be better off requesting consent to let from your current lender.
This latter option is a temporary provision whereby you have permission to let the property on a residential mortgage product, but where, for example, you want to rent it out while organising a move to a new home.
Another option is to remain in situ until you can sell your property, although you might still need to consider remortgaging if you need to raise capital for other costs, such as funding home improvement works.
Ultimately, the right choice of mortgage or remortgage depends on your requirements.
If you need independent advice assessing the various options, please contact Think Plutus at your convenience.
As an independent, whole-of-market private broker, our role is to steer you through the mortgage sector and ensure you direct your application to the right lender, for the right product, at the right time.
Frequently Asked Questions – Let-to-Buy Mortgages
Since let-to-buy lending is such a complex area, we have run through some frequently asked questions below.
How Does Stamp Duty Work on a Let-to-Buy Mortgage?
Buying a second home means that you will be exposed to Stamp Duty rates, beginning at 3%.
Levies can be as much as 15% depending on how much your second property purchase is worth.
Stamp Duty is reclaimable if you sell your existing home within three years, although you need to claim within one year of the sale.
You can find further information about Stamp Duty on second homes through the government pages on Residential Property Rates.
What Is a Let-to-Buy Mortgage Broker?
Think Plutus is not your ordinary broker.
Rather, we are an entirely independent private brokerage, acting on your behalf to ensure you make informed decisions and pick the best possible mortgage product for your requirements.
As a whole-of-market broker, we can structure your remortgage and buy-to-let agreements, direct your application to the most suitable lender, and ensure your documents are correctly compiled to maximise your chances of approval.
Applying directly for a remortgage from residential to buy-to-let and a second residential mortgage on the strength of a buy-to-let property is far from simple, so we strongly suggest you seek advice before proceeding.
How is Let-to-Buy Different From Buy-to-Let?
Buy-to-let mortgages are relatively simple in that you apply for funds to purchase a property you plan to let out to tenants.
You can also use a buy-to-let mortgage product to remortgage a home where you currently live but which you plan to turn into a rental asset.
Let-to-buy is different because it involves remortgaging a residence onto a buy-to-let agreement and using the forecast proceeds from that home to finance the mortgage repayments.
What Are the Eligibility Rules for Let-to-Buy Mortgages?
Every lender has different lending rules and policies, but as a rough idea:
- Let-to-buy mortgages extend to a maximum of 75% LTV, provided you have enough equity to act as security.
- Lenders will usually accept applicants up to age 70.
- A mortgage provider will ask for evidence of the onward purchase before considering the application.
- The existing home cannot be sold, subject to contract or be listed for sale before the mortgage agreement is confirmed.
These lending terms are indicative only, so it is advisable to contact Think Plutus at any stage if you require further advice.
How Beneficial is a Let-to-Buy Mortgage Agreement?
Let-to-buy mortgages can make a property chain significantly easier to navigate and ensure you are not left hanging while you wait to sell your existing home before buying the next.
There are, however, negatives to be conscious of:
- Taking on two mortgages means an increased financial obligation.
- Stamp Duty surcharges on second homes can be steep if you do not sell the original property within the timeframe.
- Interest rates on a let-to-buy mortgage can be less competitive than a standard residential mortgage due to the increase in perceived risk.
Please get in touch if you would like further information about the pros and cons of a let-to-buy mortgage.