While buy-to-let mortgages are often confused with let-to-buy mortgages, they are not the same thing. Below we explain the difference between the two and the benefits of let to buy mortgages.
A buy-to-let mortgage is when you purchase a new property to rent out solely as a landlord. If you are looking to get a buy-to-let mortgage, you can learn more here > (Buy-To-Let Mortgages)
What is let to buy?
A let to buy mortgage allows you to rent out your current property so that you can buy a new house to live in. In other words, you let your existing property to tenants and, at the same time, purchase a new home.
A let-to-buy mortgage (LTB) means that you will have to arrange for mortgage payments for not one but two mortgages simultaneously: The residential mortgage on the new home and the mortgage on the existing property that’s now converted into a rental.
So why do we often confuse a buy-to-let mortgage and let-to-buy mortgages as these seem to apply to completely different situations? Let’s try and simplify things! Typically, when you opt for a let-to-buy option, you will convert the mortgage on your existing property from a residential mortgage to a let-to-buy mortgage that allows you to let your former home out.
Who considers a let-to-buy mortgage?
The first important thing to consider is that a let-to-buy isn’t suitable for everyone. It is a popular choice for couples where two partners move in together when each one already has their own home. If the couple agrees to move into one of the partners’ houses, the other one can use a let-to-buy mortgage to cover the remaining residential mortgage payments.
Additionally, it is also a favourite option for homeowners who are already paying an existing residential mortgage but come across their dream property or want to purchase a new home for any other reason. The process enables homeowners to keep their existing home and use it as a rental property. It can be an effective approach if you are struggling to sell your current home or wish to keep it. In these situations, switching from a residential mortgage to a let-to-buy mortgage deal can help release some equity from the existing property for your deposit.
Applicants looking to obtain any let-to-buy mortgages should be between 25 and 75 of age.
Is a let-to-buy a good idea?
The bottom line is that you would only usually consider let to buy mortgages in specific situations:
- You have difficulties selling your home in the current property market conditions.
- You want a shared property with your partner while also keeping your own home.
- You want to move to your new home quickly and selling the current property takes too long.
- You’re moving away for an extended period of time but still want your home in the future.
Are there mortgage deals for let-to-buy properties?
There are two ways of finding the best let-to-buy mortgage deals.
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 mortgage 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.
Using your current mortgage lender
You may not be able to apply for your mortgage with your current 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.
What are the lending criteria for a let to buy?
When you apply for a let-to-buy, the lending criteria typically sets the maximum loan-to-value or LTV to 75% to 80%. In other words, this means you can’t borrow more than 80% of the value of your current home. Ideally, if you want to release equity to pay for the deposit of your new home, you need to have extra cash available.
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.
Lenders also expect to see your expected money rental income, which needs to represent around 145% of the mortgage interest.
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.
Essential steps for a let-to-buy mortgage
Find a fee-free broker to help you through the key steps of the let-to-buy process.
The first step focuses on the property value and also the rental value. You can work with an estate agent to establish the new property value. It’s also a good idea to reach out to a professional and accredited letting agent and determine how much rent you can charge. The lender will expect your rental income 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.
Use a let-to-buy mortgage broker
The application process can be delicate. Even if you apply for both mortgages with the same lender, the applications will be assessed separately. However, you should aim to apply simultaneously for both to ensure you can get them approved around the same day. Indeed, you will need to get your buy-to-let remortgage approved if you want to complete the new residential mortgage. So, it’s essential to prepare for both at the same time so lenders can process your applications effectively.
Why mortgage advisors warn against let to buy mortgages
There can be some pressures and risks associated with having a let-to-buy 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 works needed. Additionally, becoming a landlord can increase your responsibilities significantly.
Secondly, having two mortgages mean 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 rental income being made on your let until you can find new tenants. Besides, letting fees can be costly, especially since the tenant fees ban introduction in June 2019. As a landlord, it can be tricky to make sure letting to buy remains a profitable solution.
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 – https://www.gov.uk/stamp-duty-land-tax
What are the alternatives to selling your existing property?
You can choose to release equity from your property without a remortgage through a second-charge mortgage. 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 property to buy-to-let
Mortgage lenders 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 mortgage 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.
Let to buy Summary
Hopefully, this guide has explained how a let-to-buy mortgage works and how to navigate them. We also hope you have found the answer to your financial queries, such as finding alternatives to a buy-to-let mortgage or making the most of your property investments. However, our YesCanDo Money advisers can help explain things further. Our service is FREE and we can get you a decision in-principle quote offer from over 90 mortgage lenders.