Let To Buy Mortgages

If you are looking to let your current home and buy a new home, our guide will cover everything you need to know to get started.

We can also help if you are looking to let without an onward purchase in mind.

Call us today to see how we can help with a let-to-buy mortgage.

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    What is let-to-buy?

    Let to buy is the process of renting your current home with the intention of moving into a new home.

    Typically, when moving, you’ll sell your current home and use the equity you have accrued to fund the deposit on a new home.

    In some instances, a homeowner might want to retain the current home, but would like to release some of the equity to help with the deposit for the new purchase, which is where a let-to-buy mortgage can help.

    As you are looking to rent your current home, you’ll need to switch your existing mortgage to a let-to-buy mortgage and take out a new residential mortgage on your new home.

    Let-To-Buy Mortgages

    Author: Darren Ferguson – Mortgage Specialist & Owner

    First Published: 15th November 2023

    Read Time

    Read Time – Approximately 5 Minutes

    Our let-to-buy guide should be helpful, but it’s always best to speak with an adviser to discuss your own personal circumstances and to get the best advice. Call us on 01604 212879 should you have any questions.

    Why would I need a let-to-buy mortgage?

    There are a number of reasons why you might want to consider a let-to-buy mortgage, which could include the following:

    • Become a landlord – perhaps you want to move into buy-to-let investment and see your current home as a good rental investment opportunity.
    • Moving in with a new partner – you are both homeowners and wish to live together but don’t want to sell your current home.
    • Work relocation – you have a new job elsewhere but intend to return.
    • Difficulty selling – the property has been on the market for a while, and you don’t want to lose the new property. In this scenario, regulated bridging finance may also be an option.
    • Dropped in value – perhaps the property value has fallen and you would like to retain it in the hope of a future uplift.

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

      Let-to-buy mortgages and buy-to-let mortgages are both closely related. Ultimately, they are used to finance a property that will be let to a tenant, and as a rental property, they will generally need to meet the same criteria.

      The difference is just in the scenario. With a let-to-buy, you are refinancing a property you currently live in, whereas with a buy-to-let mortgage, you would purchase a new property to let out that you have no prior history with.

      Both a let-to-buy and a buy-to-let are effectively just a mortgage for rental purposes.

      Call us on 01604 212879 for a no obligation let-to-buy mortgage review

      What are the key points I need to know about let-to-buy mortgages?

      There are several key points you need to understand before considering if a let-to-buy mortgage is right for you:

      You’ll need an onward purchase

      The definition of let-to-buy is that you will rent your current home and buy a new home as your primary residence.

      Typically, lenders will require this to be a ‘simultaneous transaction’, meaning the day you complete on the let-to-buy mortgage will also be the day you complete on the new residential mortgage and move to the new property.

      If there is no onward purchase, for example, the intention is to let your current home and move into rented accommodation or perhaps back in with family, this will not be acceptable to many lenders. Under this scenario, it’s common that a lender will want the property to be let for 3 to 6 months before a mortgage can be applied for.

      The exception to the above might be where you are moving in with a partner who is a homeowner, have tied work accommodation, or have an existing buy-to-let property you intend to move into.

      picture of house

      You’ll pay additional stamp duty land tax (SDLT)

      If you are retaining your current home and buying a new home, you’ll be buying a 2nd property and will, therefore, be subject to the 2nd property surcharge that came into effect in 2016.

      The amount you pay will be subject to the purchase price of the new property. For 2nd properties, there is an additional 3% surcharge.

      Stamp duty rates are tiered, so for example, under current rates, if you purchase a property for £500,000, you would pay 3% on the amount up to £250,000 (£7500) and then 8% on the next £250,000 (£20,000) meaning a total of £27,500 in stamp duty.

      If you decide to sell within 3 years, the additional 3% will be refunded.

      Total Rates For 2nd Property

      • up to £250,000 3% 3%
      • £250,001 to £925,000 8% 8%
      • £925,001 to £1.5 million 13% 13%
      • Over £1.5 million 15% 15%

      You’ll need at least 25% equity

      Just like a buy-to-let mortgage would typically need a minimum of 25% deposit, to qualify for a let-to-buy mortgage, the property to be let will generally need at least 25% equity in it. Equity is the difference between the property value and how much is owed on any mortgage borrowing; for example, if the property is valued at £400,000 with a £200,000 mortgage, then the loan to value is 50%, with 50% equity in it.

      The maximum loan-to-value lenders can consider is typically 75%, although 1 or 2 can potentially go as high as 80%, subject to rental income.

      percentage ring
      2 hands and money

      The rental income will need to be sufficient to cover the mortgage

      As you’ll be renting the property, the amount you can borrow will be based on the anticipated rental income rather than your earned income.

      Mortgage lenders apply ‘stress’ tests to rental income to calculate how much you can borrow, and the stress that they use will depend on what tax bracket you fall into and what product type you select.

      Typically, if you are a basic rate taxpayer, the rental income must cover 125% of the stressed mortgage payment and 145% if you are a higher rate taxpayer. You can find out more about rental stress tests in our helpful guide.

      Its important to get the right advice when looking at let-to-buy options. Call us on 01604 212879 and speak to an expert.

      How does a let-to-buy mortgage work?

      Most people who wish to explore let-to-buy will have a mortgage on their existing property.

      To qualify for let-to-buy, the mortgage on your current home must be replaced with a rental mortgage, basically the same as a buy-to-let mortgage.

      So, what do you do with your current mortgage?

      This depends on a couple of factors, but you have two choices:

      • Port your existing mortgage –  porting is the process of transferring your mortgage from one property to another. You would need to check if your current lender will allow you to do so, but it should be confirmed in the original mortgage offer if porting is permitted. This generally works best when you might have early repayment charges on your current mortgage that you don’t want to pay. If you need to borrow any further funds for the new purchase, you could speak to your existing lender to see if they would lend more to help.
      • Repay the existing mortgage and take out a new mortgage – If you don’t have any early repayment charges or minimal charges to pay, it may be worth reviewing what options are available with your existing lender or a different lender for a new mortgage. Perhaps you need to borrow more, and your current lender won’t lend the amount required, which means you’ll need to look at a new lender with a better affordability model.

      Example Let-To-Buy Scenario

      Our applicants own their own home, with a current valuation of £300,000 and a mortgage outstanding of £125,000.

      They wish to purchase a new home for a price of £400,000 and have £50,000 in savings to put toward the deposit and associated costs. They want to raise funds from the current property to use as a deposit for the new property.

      Their current mortgage has an early repayment charge of 5%, working out to £6250, which they don’t wish to incur, so they would like to port (transfer) this mortgage over to the new property.

      Property to be let

      house with rent sign

      Value of £300,000
      Mortgage of £125,000
      Early Repayment Charge – £6250

      New Let-To-Buy Mortgage

      Maximum  loan to value available is typically 75%. (subject to rental income)

      £300,000 * 75% = £225,000.

      The existing mortgage balance is £125,000 so this means an additional £100,000 can be raised against this property to put toward the cost of the new property.

      The mortgage of £225,000 will be used to clear the current mortgage so it can be ported to the new property.

       

      New Home

      house with new sign

      Purchase Price – £400,000
      Stamp Duty – £19,500

      Residential Mortgage Costs

      • Purchase price is £400,000.
      • Deposit and Savings available – £150,000
      • Stamp Duty – £19,500
      • Legal and Moving Fees (estimate) – £5000
      • £150,000 – £19,500 – £5000 = £125,500 after associated costs

      £400,000 – £125,500 means the applicants need to borrow £274,500 in total.

      £125,000 is being ported from the current property, so they would therefore need to gain agreement from the lender to borrow an additional £149,500, bringing the total mortgage borrowing up to £274,500.

      Call us on 01604 212879 for a no obligation let-to-buy mortgage review

      Can I do both mortgages with the same lender?

      Yes, this is possible if the lender offers both residential and let-to-buy mortgages. It may be that your current lender does not offer mortgages for rental properties so in that instance you would need to consider two different lenders. 

      Are there any alternatives to let-to-buy?

      This depends on what you are looking to achieve. Most people look at let-to-buy because they want to retain the property and raise funds to help with the deposit for the property. 

      If there is no requirement to raise funds, and you just want to retain the property then you could speak to the existing lender about ‘consent to let’. 

      Under consent to let, the lender will allow you to let the property and normally retain the current rate you are paying. When the deal ends you would then need to speak to your lender about a new deal. Some lenders if a property is under consent to let may not offer a new deal, meaning you would revert onto the lenders variable rate. If so, you might need to then get some advice with regard to switching the mortgage to a buy-to-let mortgage. 

      Summary

      There are a lot of variable with a let-to-buy mortgage including affordability for the property to be let and affordability for the new property to be purchased. Its always best to a qualified adviser as they’ll be able to confirm the numbers and options available to you. 

      Call us on 01604 212879 for a no obligation buy to let mortgage review

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