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What’s a Let To Buy Mortgage and Am I Eligible?

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    People often get confused between Let-To-Buy and Buy-To-Let mortgages, but their unique differences are vital if you’re hoping to step into or navigate property investing more successfully.

    These two different types of mortgage options each cater to different scenarios while both serving one goal – property investment or simply put letting out your property. This guide offers an insightful breakdown, equipping you with enough knowledge to make informed decisions.

    What is the difference between buy-to-let and let to buy?

    • Let-To-Buy Mortgage: Allows you to borrow money to buy a new home while turning your current one into a rental property. Suitable for those wanting to relocate but retain and rent out their existing residence.
    • Buy-To-Let Mortgage: Buy-to-let mortgages are specifically tailored for purchasing property that will be rented out, making them a viable solution for anyone attempting to break into or expand their investment in the property market – whether this be your first venture or adding another property portfolio.

    Now you know the difference between the two, let’s delve deeper into Let-To-Buy mortgages by exploring their benefits and eligibility criteria to establish whether they align with your property investment goals.

    what is a let to buy mortgage

    What is a Let To Buy Mortgage?

    A Let-to-Buy mortgage allows homeowners to rent out their current home while buying another to live in. It involves two key steps:

    • Renting out your existing property: Converting it into a rental, secured by a Let to Buy mortgage.
    • Buying a new property: Buy getting a standard residential mortgage for your new residence.

    As such, you will manage two mortgages simultaneously: one for your new home and the other for the old property, now being rented out as an investment property. This strategy allows you to move while turning the old place into a buy-to-let property, offering both personal and financial advantages.

    What Are the Benefits of a Let to Buy?

    Let-to-buy mortgages can offer numerous advantages, such as:

    • Flexible Moving Solutions: Retaining ownership of an existing property gives you more options when moving, particularly if you need to relocate quickly or are reluctant to sell at market value.
    • Potential Rental Income: Renting out your previous home may generate enough rental income to cover its mortgage payments and help cover those of your new one.
    • Build Your Property Portfolio: Start small. Acquiring one property may provide the experience needed to grow a larger one without needing to make substantial new investments.
    • Avoid Sales Pressure: you can avoid the pressure to sell quickly, potentially at a lower price than desired, especially in a slow or declining property market.
    • Release Equity: If the value of your current home has increased significantly, let-to-buy can offer an effective means of unlocking its equity to fund the deposit on a new one.
    • Tax Efficiency: Investigate potential tax efficiencies such as offsetting mortgage interest against rental income, although for tailored advice consult a tax advisor.
    • Market Exposure: Assuming that property values continue to appreciate, remaining an owner of your existing home means continuing to benefit from any value increases.

    Who Offers Let-to-Buy Mortgages?

    Considering a let-to-buy mortgage is a key step for homeowners looking to rent out their current property while buying a new one to live in.

    This common mortgage option is particularly beneficial in scenarios such as couples moving in together and renting out one of their second home, or for individuals who have found their dream home but aren’t ready to sell their current one. Here’s a straightforward look at who can benefit the most and how:

    Common Situations for Let-to-Buy Mortgages:

    • Couples Joining Homes: Common among partners choosing to cohabit, with one of the properties becoming the shared home and the other’s property being rented out and generating rental income.
    • Finding Your Dream Home: For those who stumble upon the perfect property or need to relocate for any reason but already have a mortgage on a different home.
    • Holding Onto Your Existing Property: Homeowners who prefer to keep their existing home, whether that’s due to difficulty selling or a desire to maintain it as an investment property. In some cases switching to a let-to-buy mortgage may even allow you to release equity from your current property to fund the deposit on a new one.

    Lenders Offering Let-to-Buy Mortgages:

    Not every UK lender offers let-to-buy mortgages; however, many do, such as:

    It’s important to remember that the availability of let-to-buy mortgages is subject to change. Engaging directly with lenders or seeking advice from a mortgage advisor ensures access to the latest and most pertinent information.

    Let to Buy Mortgage Lending Criteria

    Investigating let-to-buy mortgages provides homeowners with an ideal strategy to transition into their next home while making use of their current property as a rental investment. But this requires thorough knowledge of lending criteria:

    • Loan-to-Value Limits: When applying, lenders often set maximum loan-to-value (LTV) limits of 75% to 80%; this caps your borrowing at no more than 80% of your current home’s value and ensures equity release for new home deposits. Additional cash is essential if you need to access equity through loans and equity releases aren’t sufficient.
    • Age Requirements: Similar to buy-to-let mortgages, let-to-buy applicants typically must be between the ages of 25 and 75 for these mortgages.

    Let-to-buy mortgage criteria is very similar to Buy To Let Mortgage Criteria and is integral for making the best use of your property’s value, transitioning into the rental market, and finding your new home. Below you will find more details and answers to questions related to these criteria – giving you all of the knowledge required for this journey.

    How much deposit do you need for a let to buy?

    You would fund a deposit by borrowing at a higher loan-to-value. So, you need to consider equity release as part of your mortgage application carefully. It can be useful to provide a recent valuation of your existing home to determine the current property purchase price on the market. Most mortgage advisors recommend large equity, around 20% to 25%.

    How long does it take to get a let-to-buy mortgage?

    Every case differs depending on each person’s financial situation. The most crucial part of the let-to-buy process is the double mortgage application. You will have to apply for a let-to-buy mortgage or remortgage it as a buy-to-let. You will also need to apply for your residential mortgage on the new home. Therefore, most lenders will assess your ability to cover both mortgage repayments. So to make the process as quick as possible, it would always make sense to get a broker to orchestrate your let to buy.

    Can I afford a let-to-buy mortgage?

    There is no miracle formula, however, your income together with the rental income should ensure you can afford to pay for both mortgages. If lenders suspect that you don’t have enough money, your chances of approval will be negative.

    Mortgage providers base let-to-buy and buy-to-let mortgages on the property value and the rental income value. The lender will expect your income from rent to be around 125% to 145% of the interest payable. You will be put through a strict affordability assessment, so the numbers need to work.

    To make the best possible decisions when making these tough choices, it is wise to consult an expert mortgage advisor, who can offer tailored advice on the ideal mortgage deal and lender options for you. Furthermore, reaching out to a reputable letting agent may help accurately evaluate the potential income from rent.

    Do you need a good credit score for a let to buy?

    Applicants need a good income and a good credit rating. There are no mortgage deals for a bad credit score when applying for let-to-buy mortgages. Similarly, applicants who have previously filed for bankruptcy or face county court judgments and arrears will face huge obstacles if they choose to pursue any let-to-buy mortgages.

    Can I Let Out My Property with a Residential Mortgage?

    Letting out your residential mortgaged property is subject to residential mortgage criteria. You will usually require permission from your mortgage lender as most agreements contain clauses prohibiting renting it without consent. Here’s what to keep in mind:

    • Lender’s Permission: Before you move forward, it’s crucial to reach out to your lender. Some may grant “consent to let,” allowing you to rent out your property for a specified period, possibly with certain conditions or a slight increase in your interest rate.
    • Switching to a Buy-to-Let Mortgage: If you plan to rent out your property for a long time, your lender will require you to switch to a buy-to-let mortgage specifically designed for rental properties. This will also take into account any potential income from rent when assessing affordability.
    • Insurance and Legal Requirements: Additionally, landlords must update their insurance to include coverage specific to landlords. It will also need to comply with all of the legal requirements related to being a landlord such as safety checks and tenant rights.

    If you’re unsure then consult with a mortgage advisor who can offer customised advice tailored to your existing mortgage terms and future property plans.

    The Risks of Let to Buy Mortgages

    There can be some pressures and risks associated with having a let-to-buy mortgage. Below we cover the main risks to be aware of before considering this type of mortgage.

    Not one but two mortgaged properties

    First of all, you become responsible not only for one but two properties and two mortgages. This means you may be stretching your household budget to cover maintenance costs for two houses. Although the rent will normally cover and work needed. Additionally, becoming a landlord can increase your responsibilities significantly.

    Financial risk

    Secondly, having two mortgages means being prepared for possible periods with no additional income to cover your repayments. For instance, when your tenants leave, you will likely face a period of no rent income being made on your let until you can find new tenants. Besides, letting fees can be costly, especially since the tenant fees ban was introduced in June 2019. As a landlord, it can be tricky to make sure letting to buy remains a profitable solution.

    Stamp Duty

    Finally, you will need to pay a stamp duty surcharge of 3% as a buyer of a second home. Whereas if you have a residential purchase you will pay the normal level of stamp duty

    It can mean several thousands of pounds to pay up-front for the stamp duty. You can claim the difference if you manage to sell your initial property within 3 years.

    Stamp duty can be the greatest cost that people will be facing when looking to buy a property, especially if it is a second property. Find out more about exactly how much stamp duty you can expect to pay here – How much is stamp duty?

    Are there mortgage deals for let-to-buy properties?

    There are not specific let-to-buy mortgage deals but rather buy-to-let mortgage products and mortgage lenders that allow let-to-buy applicants.

    There are two ways of finding the best let-to-buy mortgage deals for your situation.

    1) A mortgage broker will compare deals for you

    You will find the largest range of let-to-buy deals by using a mortgage broker as it is almost impossible to compare the interest rate and criteria from all the mortgage lenders. Indeed, many let-to-buy mortgage rates and deals are only available through brokers rather than lenders.

    A good broker will be able to provide valuable mortgage advice and insight to help you manage the full process from start to finish. Let’s not forget that with a let to buy, you effectively apply for two mortgages. So you want an expert broker who can guide you through the steps and ensure you can complete both mortgages at the same time.

    2) Using your current mortgage lender

    You may not be able to apply for your mortgage with your existing mortgage lender, so a knowledgeable mortgage broker will help keep up with both simultaneous application processes. Additionally, most lenders may not advertise their let-to-buy services on their website, which is where professional mortgage advisors will make a big difference.

    Nationwide’s property buy-to-let branch is called The Mortgage Works, for example. With the help of a broker, you can switch your current mortgage into a buy-to-let and add a new residential mortgage with Nationwide, keeping your deals with the same lender.

    It is also worth noting that the majority of let-to-buy and buy-to-let mortgages are on an interest-only basis. Unlike residential ones, which include mortgage repayments, interest-only mortgages can be more difficult to obtain.

    Let-to-buy Mortgage Rates

    As part of a let-to-buy arrangement, you will need to manage two distinct mortgages with their own interest rates. When entering into such an arrangement it’s essential to remember that what is commonly referred to as a “let to buy” mortgage doesn’t exist as such; lenders who specialise in let-to-buy arrangements offer “buy to let” products that cater for this arrangement – although typically their interest rates tend to be higher than residential ones – however the interest rate applied by a let-to-buy arrangement should not surpass those faced if secure each mortgage separately.

    To gain access to certain lenders specialised in this niche, it may be beneficial to work with a mortgage broker as these lenders often don’t deal directly with the public.

    As with any mortgage, your rates when arranging let-to-buy will depend upon multiple factors such as your financial situation, the type of mortgage deal you select (fixed rate, tracker rate or discount rate) as well as which lender.

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    Alternatives to Selling Your Existing Property

    When considering a move or acquiring a new property, selling your current home isn’t the only option. Here are some alternatives that could potentially align better with your financial goals and circumstances:

    Release equity

    You can choose to release equity from your property without a remortgage through a second-charge mortgage (secured loan). Essentially, the home loan is secured against the property value so that you can fund the deposit on your new home. It is a second mortgage with monthly repayment, and your income would have to cover your current property as well as your new property.

    Transfer your residential mortgage to buy-to-let mortgage

    Mortgage providers can give their consent to let to enable you to transfer your residential property as a rental. This is often known as ‘consent to let’. Our experience is most lenders will only give you permission for a limited amount of time usually 1-2 years and then after this will insist that your residential mortgage is changed to a buy-to-let mortgage.

    Alternatively, it can be more profitable to sell your current property and rent a property until you are ready to buy. The process will save you the stamp of duty surcharge cost.

    It’s worth noting that you will need enough equity in your home. However, we have a lot of experience with both residential mortgages as well as buy-to-let mortgages therefore one of our mortgage advisors will calculate whether there is enough equity and how this could work for you.

    Frequently Asked Questions

    While many lenders require a minimum personal income of around £25,000, some may not have a minimum income requirement at all. Additionally, rental income should exceed mortgage repayments by 125%-145%.

    Yes, you can switch back to a residential mortgage from a let-to-buy, but this usually requires meeting specific criteria set by your lender, such as moving back into the property as your primary residence.

    Yes, like buy-to-let mortgages, let-to-buy mortgages typically have higher interest rates when compared to residential mortgages due to perceived higher risks by lenders.

    Yes, purchasing a second property through let-to-buy may incur a higher stamp duty rate, including the additional 3% surcharge.

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    Tom Blackler (CeMAP)
    Tom Blackler (CeMAP)

    Tom CeMAP is a committed Mortgage & Protection Adviser at YesCanDo Money. With his extensive industry knowledge and client-centric approach, he excels in assisting clients, be they first-time buyers, seasoned home movers, or buy-to-let enthusiasts. Tom's dedication to securing the best mortgage deals and ensuring clients' financial well-being truly distinguishes him in the field.

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