Let to Buy Mortgages
Jason Eves and Pete Armfield from Yellow Brick Mortgages join the Mortgage and Protection Podcast to share their expertise on Let To Buy Mortgages.
What is a Let to Buy mortgage?
Let to Buy isn’t widely known about, but it gives you an opportunity to capitalise on your property. It applies when you already own a home, and want to buy a new property to live in. Instead of selling your current home, you let it out to a tenant.
There’s all sorts of pros and cons that come with that. But the biggest benefit is that you now own two properties, which is a great investment for the future.
A further advantage is that with Let to Buy you can potentially raise money on your current home to fund the onward purchase, rather than saving up for a deposit.
How does a Let to Buy mortgage work?
A Let to Buy mortgage is in effect two mortgages: a Buy to Let mortgage on your current home and a residential mortgage on the onward purchase. Most lenders require both transactions to complete simultaneously, and they will be looking at the rental income that you expect to get on your current home to make sure it meets their rental stress test criteria.
There are a couple of things to consider with a Let to Buy mortgage. One is that when you have two homes, the stamp duty land tax will increase. This is because on your onward purchase you will have to pay an additional 3% stamp duty for it being an additional property. However, that additional stamp duty can be re-claimed if you sell the original home within 3 years.
Another factor is that you need a good amount of equity in your home. Lenders will require you to leave 25% equity in your first home on top of the amount you have used as a deposit.
So if you’ve got 40% equity, you can release 15% towards the deposit of the new home, but you can’t go over 75% Loan to Value.
A final point is that there’s usually no minimum income for Let to Buy. Your income will be assessed for the second property but on the Let to Buy, the lender simply wants to be assured that the rent meets and exceeds your mortgage payments – usually at 125% based on a set rate they use in their calculations. So Let to Buy can be more flexible than a traditional residential mortgage
What’s the difference between Let to Buy and Buy to Let?
In essence, Let to Buy is a more specific situation than Buy to Let. You need a Buy to Let mortgage to rent a property out to a tenant. But with Let to Buy you’re currently living in the property, are moving to a new home, and converting your existing mortgage into a Buy to Let mortgage.
Who is a Let to Buy mortgage for?
Let to Buy is for someone who is looking to let their house out to buy a new one. There isn’t any more to it. It’s not for everyone, because you need to have good equity in your current property, and you also need to be willing to take on the additional responsibilities of owning two properties.
It can also be a great option for those who do not want to sell their current home yet, or perhaps have tried selling it, but are not attracting the interest or getting the level of offers desired. By using the Let to Buy option you could secure your new home without having to sell your existing home, so would in effect be a “chain-free” buyer and in an advantageous position to negotiate the price of your new purchase as you should be able to proceed immediately and complete the transaction within a short timescale.
How much deposit do I need for a Let to Buy mortgage?
In general you will need a 25% deposit. There are some niche products that go as low as 20% deposit, but generally you should aim for a 25% deposit to make sure it’s a worthwhile investment – less than that, the rates and payment can become very expensive.
How much can I borrow for a Let to Buy?
This can vary lender to lender, and will be based on your equity and the amount of rent you will potentially receive for your property. They will also look at whether you’re a higher or lower rate taxpayer. If you’re a higher rate taxpayer, they may lend you slightly less.
Some lenders will also take into account your income, which is called ‘top slicing’. Potentially, if the rental income or the rental calculation doesn’t quite fit, but you’re earning a certain amount, they can factor that into the calculation as well to let you borrow the amount you need.
What criteria do I need to meet for a Let to Buy mortgage?
The main criteria you need to meet will include:
- You have a main residence to let out
- You’re buying an onward property to live in
- You’re a UK resident and UK taxpayer
There’s no minimum income requirement – which is unusual in mortgages.
What are the pros and cons of Let to Buy mortgages?
If you can, it’s always a good idea to retain your property and to let it out. You will earn income from it, which you can either use to fund more investment properties or reduce the existing mortgage. That means in the future you will have a property that’s mortgage free (if you remain on a capital and repayment mortgage), in addition to your residential home.
A big advantage is that you have multiple streams of income for an extra level of security. You will also benefit from property price growth which has increased 10% in the last year – although prices can fall as well as rise.
It is also a very suitable option if you are looking to move but struggling to sell your current property, or not receiving the right offers. You can benefit from being “chain free” when offering on the next property, which in turn can help you negotiate a great purchase price.
In terms of the cons, one of the main disadvantages is the additional stamp duty. There’s an additional 3% on top of the usual stamp duty charges when you’re buying a second home – although you may be able to fund this from the equity in your first home. You also have to pay tax on the income you earn from the Let to Buy property.
You also need to think about how you will manage the rental side of things – you can pay an agent to manage that or you can look after it yourself, but sometimes letting out property can be stressful. Fingers crossed, though, you will get the right tenant and it will be easy.
What are the alternatives to Let to Buy?
The main alternative to Let to Buy is to sell your property. You then use all the equity in your current home to put forward to the new residential purchase, rather than just 75%.
If you can retain the property, the earnings potential going forward is probably greater, but using all the equity in your current home means you will potentially be able to afford a higher priced home.
You might also look at holiday lets, depending where the property is. You could potentially make your first property a holiday home. Or, the size of the property could mean it lends itself to becoming an HMO – a house of multiple occupancy – where you potentially let individual rooms. This can work well as student accommodation if the property is in the catchment area for a University.
How can I get help?
if you haven’t considered Let to Buy, it’s well worth thinking about it. Every adviser at Yellow Brick Mortgages has Let to Buy in the back of their mind. It’s always something that raises clients’ eyebrows and when possible, it’s always something that people are glad they did.
If you want to discuss this just give us a call. It’s always worthwhile having a chat, even if you only think it’s a slight possibility. Have the conversation, because it can mean extra income, capital appreciation and a more solid foundation for the future. Just get in touch and we’ll be happy to help.
Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let and Let to Buy Mortgages.