What is a Let-to-Buy Mortgage
Let’s face it: moving house is an incredibly stressful process. Few events in life manage to combine many of life’s more difficult skills, with money management, property appraisal and maintenance, and finding a mortgage that works for your budget.
As thrilling as it is to find a new place you can call home, though, sometimes it doesn’t make sense to jump in headfirst. If you’re looking to hold onto your current property while shopping around or even signing a new mortgage, you should look into a let-to-buy mortgage for your existing home.
So what is a let-to-buy mortgage? In essence, it’s a mortgage that lets you rent out your current property while looking towards your onward purchase. It allows you to have two mortgages at once. You can change the mortgage on your existing property to a let-to-buy mortgage and then take out a standard mortgage on your new property.
However, there are a few things you’ll need to keep in mind should you decide to go this route. After all, becoming a landlord while signing a second mortgage is bound to be fraught with pitfalls. Read on to learn what these pitfalls are and how you can avoid them.
Is let-to-buy right for me?
Some homeowners wish to use the equity they’ve built up on their current property to shop around for a new one. However, they’d also like to keep their current as a more long-term investment. There are a few other reasons why a let-to-buy mortgage could be right for you, though.
Perhaps you’re itching to move into a new place and want to sell your current one right away. Maybe the current market conditions have posed a struggle for you while trying to sell. People who’d like to move away for a few years and then return would also benefit from a let-to-buy mortgage.
Last but not least, maybe you’d like to buy a new property with a partner while owning the old one. These are just a few situations that make a let-to-buy mortgage ideal for you.
What’s the lending criteria?
Not every homeowner is immediately eligible for a let-to-buy mortgage, though. Typically, your eligibility will be determined based on how much income you can bring in from renters, and not on your regular income. You’ll also have to meet a list of specific criteria.
For starters, most banks will not let homeowners switch to a let-to-buy mortgage if they are over the ages of 70 or 75. Moreover, you’ll need to show proof of both the mortgage you’re taking out for the new house and that you’ll bring in higher rental income than your mortgage payments.
Keep in mind, too, that you’ll likely only be able to borrow only 75-80% of your current property value. Some lenders even require the same solicitor for both transactions, although this is not needed for every bank.
Is it possible to take out both mortgages with the same lender?
As mentioned above, some banks will require the same solicitor for your transactions. But did you know that some lenders will let you take out both a let-to-buy and a standard mortgage simultaneously? It’s true, and quite frankly, going this route could streamline the mortgage process and save you a headache or two.
However, not every lender offers this option, so it’s best to seek advice from a mortgage broker before signing anything.
Do I need a mortgage broker?
A mortgage broker will be able to handle any concerns you might have about making the switch to a let-to-buy mortgage. Not only will they be able to find both the right let-to-buy mortgage and standard mortgage for you, but they can deal with all the paperwork and fine print that inevitably come with signing a mortgage.
Furthermore, the unique nature of let-to-buy mortgages means that you’ll have no choice but to go through a mortgage broker to get one. If you have the money to spare, we highly recommend consulting a mortgage broker before making any long-lasting decisions.
What happens if I can’t switch?
This problem does happen, but it’s also pretty easy to remedy. Most lenders assess your current financial situation before making the call, but they’re also willing to work with you to get you what you need.
If your current lender doesn’t let you switch, you might need to refinance with another lender. However, homeowners who are still in the introductory fixed-rate phase of their mortgage might find that they’ll accrue a whole lot of expensive early repayment charges. To sidestep this, look for a lender who offers specialist let-to-buy mortgages; this will smooth out a lot of the kinks.
What if I only want to rent out my property for a short period?
If this is the case, you might have better luck with a ‘consent to let’ deal. Instead of converting your current mortgage into a brand new one, your lender will permit you to rent out your existing property temporarily. Most lenders require that you show proof of your temporary leave, though.
If you request a consent to let policy but show that you’re moving into a new property, your lender may try to push for a let-to-buy mortgage instead. For this reason, it’s good to gather as much proof about your temporary leave as possible, as this will make your case more credible and therefore may convince lenders to let you switch to a consent to let policy.
Get your numbers sorted
You’ve not been let off the hook with a let-to-buy mortgage; if anything, you’ll be taking on more work now that you’ll officially be considered a landlord. If you’re entering uncharted territory as a landlord, we have a few recommendations for you.
To start, you’ll have to prove that you’ll generate more income from your renters than you do from your regular income before you even switch to a let-to-buy mortgage. On top of that, you’ll need to manage your tenants and their questions, concerns, and complaints they might have.
For this reason, it’s wise to hire a letting agent who can deal with that side of your new rental property. Not to mention, you’ll need to file income taxes on this rental property via self-assessment.
New tenant fee bans were also implemented in June 2019 that may end up costing landlords a lot of money, in addition to existing government restrictions on much mortgage interest you can claim on your taxes.
As you can see, a let-to-buy mortgage doesn’t automatically mean you’ll be making a profit. Carefully assess your current budget before taking on more than you can afford.
What about buy-to-let stamp duty?
In 2015, the Autumn Statement announced a 3% surcharge of Stamp Duty Land Tax on all additional properties. This surcharge is part-and-parcel of taking out a second mortgage on a new property, so you will have to pay thousands upfront. Make sure you factor this in when calculating your budget. However, if you’re able to sell your old property within three years, you can claim the difference between the standard home mover rates and what you’ve already paid
Are there any drawbacks to let-to-buy mortgages?
One of the most significant disadvantages of these mortgages is that, well, you’ll be paying two mortgages. Following this, you’ll also be in charge of both properties, most notably the property you’re looking to rent out, which will likely present many of the problems that we’ve listed above.
Furthermore, the 3% surcharge on all new, additional properties means you’ll have to tack on thousands to what you’re already paying. You may also want to consider that some lenders’ rates for let-to-buy mortgage rates might not be as attractive as their standard mortgage rate because of the increased risk. This is not recommended for those who do not have an ample budget to back them.
Are there any alternatives?
While a mortgage broker will be able to present you with the alternatives most clearly, there are a few you can try on your own. If you find that you don’t have the money to cover all the extra fees that come with switching to a let-to-buy mortgage, it’s best to stay where you are for right now. However, you can boost your current property’s selling value by making some home improvements.
Seeing how low the current rates are, it might be cheaper to remortgage your home for these improvements rather than taking out a personal loan. Remember, though, that not every renovation will add value to your home. Study up on your local property market to see what’s selling and what isn’t before you bust any walls down.
Let-to-buy mortgages can be an excellent option for homeowners who have the time and money in their budget to take on a side hustle of renting out property. As intimidating as the switch may be, it can all go quite smoothly with the right mortgage broker. Hopefully, you’re now better armed with the knowledge you’ll need to convert your standard mortgage into a let-to-buy mortgage.