What is a Let-to-Buy mortgage?
A let-to-buy mortgage involves letting out your current home so you can buy a new one to live in elsewhere. It often involves raising funds from your current home to fund some or all the deposit for your onward purchase. In most cases, it involves having two mortgages, a let-to-buy mortgage on your current home and a standard residential mortgage on your onward purchase.
There are various considerations with let-to-buys, including managing two mortgages, the challenges of being a landlord and the cost implications.
A let-to-buy can enable you to purchase a property without the need to sell your existing one and, therefore, buy without a chain. The biggest benefit is having two properties, which is a great investment for the future.
How does a Let-to-Buy mortgage work?
This typically involves securing a let-to-buy mortgage on your existing home. If you currently have a residential mortgage on the property, the let-to-buy mortgage will need to be large enough to repay the existing residential mortgage. You may be able to borrow over and above the value of your existing mortgage and use the surplus to fund some or all of your deposit. This will be dependent on the amount of equity available in your current home. Let-to-buy lenders will generally not allow you to borrow in excess of 75% of the property value and will carry out affordability stress tests based on the potential rental value of your current home.
You will need to raise sufficient funds to cover the deposit and buying costs for the onward purchase. This can be made up with your own funds, e.g. savings, as well as any equity released from the let-to-buy Mortgage.
For most people, they will also require a residential mortgage on their new home to cover the shortfall.
In most cases, but not all, the residential lender will ignore the let-to-buy mortgage from their affordability calculations because they are deemed self-financing. Mortgage lenders will generally insist on the transactions completing simultaneously.
When you purchase a second home and are not “replacing” your main residence, you will become liable for an additional 3% stamp duty surcharge, this is in addition to the standard thresholds. At the time of writing (15th February 2023), if you sell the original property within 36 months of the purchase you may be eligible to claim the additional 3% back. Regulations and taxes change so always ensure you check with a qualified accountant.
Whilst there are additional taxes to consider when retaining your current property, some of the costs associated with a sale and purchase will be reduced, for example, the need to pay for estate agency fees or solicitor costs for the sale of your property.
What’s the difference between a Let-to-Buy and a Buy-to-Let?
A let-to-buy mortgage is used when you are letting out your current main residence to facilitate purchasing a residential home for you to live in. A buy-to-let mortgage is used where a property is currently let or being purchased with the intention to Let from the outset.
Are Let-to-Buy rates higher than Buy-to-Let rates?
In most cases, they are similar, and lenders offer the same rates on both, however, there are less lenders offering let-to-buy mortgages. Therefore, the lack of choice among lenders compared to buy-to-let can sometimes make them more expensive.
Who is a Let-to-Buy for?
Quiet simply anyone that wants to let out their existing home and buy another one to live in. It’s not for everyone because you’ll need a good amount of equity in your current property and be willing to take on the responsibilities that come with being a landlord and owning two properties.
They can be used either for relatively short-term use or to facilitate a purchase as a “chain-free” buyer. Alternatively, to fund a second property purchase with the potential to generate a passive income and act as a long-term investment.
How much deposit do I need for a Let-to-Buy?
A minimum 25% equity (Maximum 75% LTV) must be retained in the let-to-buy property. However, the amount you can borrow on the let-to-buy will depend on the potential rental income of the property and, therefore, in some cases, you may be unable to borrow up to 75% LTV.
You will also need a deposit for the onward purchase, this will generally be at least 10% of the property value. You will need to be able to afford a mortgage on the difference between the purchase price and the deposit available to you.
How much can I borrow for a Let-to-Buy?
Firstly, we will need to calculate how much you can borrow on the let-to-buy mortgage, this will be based on the lender’s rental estimate for the current property. The lender will carry out stress tests to ensure the rent can cover the monthly mortgage payments in certain scenarios, for example, if interest rates rise to a certain level. If you’re interested in securing a let-to-buy mortgage, it’s worth getting a few rental valuations from a few local letting agents.
Secondly, we need to ascertain how much you can borrow on a residential mortgage and, if applicable, combine figure this with the additional funds released from the Let to mortgage as well as your own funds.
Speak To an Expert
Whether you’ve just had an offer accepted on a property and you’re ready to go, or you’re simply wondering how much you need to save for a deposit, it’s never too soon to reach out.
What criteria do I need to meet for a Let-to-Buy Mortgage?
It goes without saying you will need to currently own your own home, and having a good level of equity in the property is key. In most cases, a residential mortgage will be required for the onward purchase, and you will therefore need an earned income as well. Other than that, all the standard mortgage criteria applies with regards to credit score, property type etc.
What are the alternatives to Let-to-Buy?
You could sell your current property and buy a larger home to live in with more equity freed up.
Alternatively, you could sell your home and buy another one to live in as well as buy-to-let property if, for example, you like the idea of having an investment property but your current home may not make the most suitable buy-to-let.
If you’re simply looking to buy as a “chain-free” buyer but have no intention of keeping the property long-term, short-term bridging finance may be more appropriate.
Examples of Let-to-Buy
- Existing Property value – £300,000
- Existing Property current mortgage – £50,000
- Arrange a new let-to-buy mortgage on the existing property at 75% of the property value – £225,000
- £50,000 used to repay the existing mortgage, with £175,000 remaining to be used for deposit and buying costs.
- £350,000 Onward Purchase
- Stamp duty (At additional rate as of 15/02/2023) – £15,500
- Other buying costs- Solicitors, survey etc – £4,000
- Total required Buying costs- £19,500
- Deposit available = £155,500 (£175,000 minus the £19,500 move costs)
- £194,500 mortgage required (£350k purchase price minus £155,500 deposit)
- Let-to-buy mortgage on current property – £225,000
- Standard residential mortgage on purchase property – £194,500
STAMP DUTY COSTS LIABLE TO CHANGE
How can Strive Mortgages help?
There are many considerations when thinking about taking on two mortgages. Having an experienced broker to walk you through all your options and help you decide if it is the right decision for you can be of real comfort.