What is let to buy and how does it work
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.
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 are let to buy mortgages?
On the other hand, a let-to-buy mortgage product allows you to buy a new house to live in while you repurpose your current home as a rental property. In other words, you let your existing property to tenants and, at the same time, purchase a new home. Essentially, a let to buy (LTB) means that you will have to arrange for mortgage payments for not one but two mortgage products 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 buy-to-let and let-to-buy mortgages as these seem to apply to completely different situations? The answer is simple. Typically, when you opt for a let to buy option, you will convert the mortgage on your existing property to a buy to let product 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 a resi 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 LTB 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?
A broker will compare deals
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 lender
You may not be able to apply for your residential mortgage with the same lender, so a knowledgeable mortgage broker will help keep up with both simultaneous application processes. Additionally, some 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 existing 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 to buy-to-let mortgage conversions are on an interest-only basis. Unlike residential ones, which include mortgage repayments, interest-only mortgages can be more difficult to obtain.
What is 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 LTV. 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 to remortgage it as a buy to let. You will also need to apply for your residential mortgage on the new home. Therefore, 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 a LTB. Similarly, applicants who have previously filed for bankruptcy or face county court judgements 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 values, first of the property but also the rental value. You can work with a real 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.
MORTGAGES: WE'LL DO IT ALL FOR YOU
Why mortgage advisors warn against let to buy mortgages
Financial advisors warn homeowners about the pressures and risks of a let-to-buy mortgage offer. You need to be aware of the money disadvantages of this strategy.
Not one but two mortgaged properties
First of all, you become responsible not only for one but two properties. This means stretching your household budget to cover maintenance costs for two houses. Additionally, becoming a landlord can increase your responsibilities significantly.
Secondly, dual mortgages mean being prepared for periods with no additional income to cover your repayments. For instance, when your tenants leave, you will likely face a period of no earnings 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 of 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 sell your existing property & move?
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 of your new home. It is a second mortgage with monthly repayment, but it can be more affordable than a let to buy.
Lenders can give their consent to let so you can transform your residential property as a rental. This also converts your mortgage into a buy to let one. You can use this lender consent to move out and rent somewhere else, which enables you to save for your property purchase.
Alternatively, it can be more profitable to sell your current property and rent out until you are ready to buy. The process will save you the stamp of duty surcharge cost.
Hopefully, this guide has explained LTB mortgages 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 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 thousands of lenders.