Switching to Let to Buy
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Switching to Let to Buy
What is Let to Buy and how does it differ from traditional Buy to Let?
In essence, Let to Buy is where you change the property that you currently live in to a Buy to Let mortgage.
For example, you might live in a two-bed terraced house. You might want to upsize. You could change the mortgage on the property from a residential mortgage to a Buy to Let mortgage. That gives you the freedom to take out a new residential mortgage on a new property.
A traditional Buy to Let would not work in that way. Traditional Buy to Let is a case of finding a property with the intention of renting it out from day one. You’d have a Buy to Let mortgage straight away rather than changing the terms.
What are the main reasons people consider switching to let to buy?
We’ve done exceptionally well in house price growth over the last 15 years, and recently we’ve had a stint of raised interest rates too. But what a lot of people are finding now is that their houses are worth quite a bit more than they expected.
With Let to Buy they can free up some of that money to go towards buying a new house, without having to sell the property. It means you don’t have to worry about putting your house on the market, plus you can keep it for a second form of income.
In the current market, with inflation high, a second income is definitely something to consider. [podcast recorded in September 2023]
Can you explain the process of switching from a residential mortgage to a Let to Buy mortgage?
It’s similar to applying for a normal remortgage, but instead of applying for another residential mortgage, you apply for a Let to Buy mortgage. That allows you to rent out the property that you’re currently living in and buy a new home.
I mentioned earlier about taking some money out of the property as a deposit. That doesn’t always need to be the case. You can do a straight pound-for-pound remortgage, simply changing it from a residential basis to a Buy to Let basis. Perhaps you’ve got the money elsewhere to put down as a deposit on the next property.
The general process is the same as remortgaging from one residential lender to another with a couple of other things thrown in.
What are the eligibility criteria for switching to Let to Buy?
They are actually very similar to standard Buy to Let criteria. You’d normally need a 25% deposit to purchase a Buy to Let and generally speaking, for a Let to Buy remortgage you would need 25% equity left in the house.
Some lenders will allow you to have less, perhaps 20%, but 25% is the sweet spot. If you’ve got a smaller mortgage than that, you can borrow the extra funds to go towards the deposit for the new property.
Again, very much like Buy to Let, the rental Income you will receive for the property needs to fit within the lender’s affordability criteria. The rental income needs to cover the mortgage payment by a certain percentage.
How does the rental income factor into the Let to Buy mortgage application?
With both Buy to Let or Let to Buy, what you can borrow is based on the rental income. That two-bed terrace home we mentioned might rent for £850 a month. Lenders will use that income along with other factors, such as your tax bracket and the type of product you take, to confirm what you can borrow.
A few lenders will do differently, based on your personal income rather than the rental income. Also, when it comes to the onward purchase of the new property, the majority of lenders won’t allow you to use the rental income for affordability. They see it as a future income which can’t necessarily be proved.
They will ultimately exclude the mortgage payment on the Let to Buy as well, so you’re at net zero on the residential mortgage. The thing to note is that you’re not going to boost your income by going down that route.
Are there any tax implications when switching to Let to Buy?
So the main one that we can discuss is stamp duty, although these are the rates as at September 2023 and they might change. Let’s say you’re buying a house for £300,000, and you’re not a first time buyer this time.
The standard stamp duty costs for that property would be £2,500. But if you go down the route of Let to Buy that same property would have stamp duty of £11,500 because it’s your second property. That’s a significant difference that you need to take into account.
It might affect the deposit you’re putting down and other costs. You can claim back the additional stamp duty if you then sell the property within three years – but you’re then going to potentially have Capital Gains Tax on the sale of the property, because it’s no longer your main residence. It’s an investment property. Again, speak to your accountant.
The rental income you receive from the property is taxable as well, and an accountant can give you scenarios of what that will look like for you.
What are the key advantages and disadvantages of switching to Let to Buy?
The main advantage is that you’re going to keep that property and potentially benefit from its growth as an asset. You’re also going to gain a second income from it which is always going to help.
On the downsides, there are the tax implications on the rental income and stamp duty. There’s also an argument around inheritance tax as well. If you now have two properties, when you pass away both will form part of your estate, which could then attract inheritance tax.
So there are a few benefits and drawbacks so do seek advice on what it means for you and your specific situation.
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What do current market conditions mean for Let to Buy mortgages?
So here we are in September 2023, and I’m sure everyone is aware of what’s happened over the last 18 months – obviously interest rates have gone up, come down a bit, gone back up and now they’re thankfully on the way down again.
In terms of your affordability, what you can borrow is based predominantly on three things – rental income, tax bracket and the type of product you take. Lenders use stress rates in their calculations. They have to allow for a certain level of rate increase. As interest rates have gone up, stress rates have gone up – and we’re finding now that people are struggling to borrow enough to actually complete the Let to Buy.
Two years ago, when interest rates were lower, they would have no issues borrowing the amount needed. So it’s definitely worth speaking to us to go through your options. We’ll give a realistic view of what you can do on Let to Buy.
What are the typical interest rates and fees associated with Let to Buy mortgages?
Right now in September 2023, if you were looking at two-year or five year fixed and variable rate mortgages, the common rates I’m seeing are somewhere between 5.7% and 6.5%. Fees are between zero and around £2,000.
On the Buy to Let side of things, some lenders out there are charging much lower rates – down to around 4.7% which isn’t bad. But what you don’t see is that there’s a 5% product fee involved.
If you were borrowing £150,000, 5% of that is £7,500 – which you either have to pay upfront or add to the mortgage, in which case it will accrue interest over the term of the mortgage.
So although there are cheaper interest rates, we always look at the true cost. If you can save yourself from adding £7,500 in fees that’s going to be a better outcome for you.
Is it possible to switch to Let to Buy if you still have an outstanding mortgage on your current property?
Yes, absolutely. Using the same example, if you’ve got £150,000 on a residential mortgage you could easily change that over to Let to Buy as long as affordability and everything else checks out.
The Let to Buy mortgage would replace your residential mortgage and you could potentially borrow more if you need to. An important caveat is that your current mortgage might have a penalty to come out of it, and if you’re not in a position to port that mortgage onto a new property, you might have to pay the penalty to change.
We can calculate all that for you. Sometimes it does work out to be more cost effective to pay the penalty than port the mortgage.
Are there any specific challenges or considerations that individuals should be aware of when switching to Let to Buy?
The biggest challenge at the moment, realistically, is finding the affordability to do the Let to Buy. A couple of years ago, interest rates were much lower. People were able to borrow more. Now, in September 2023 it’s more difficult to borrow the required amounts.
Another aspect is weighing up the pros and cons of the increased stamp duty and mortgage liability. You need to compare that with the value of that rental income you’ll be getting, and the capital appreciation of two houses rather than one.
What are the potential risks involved in switching to Let to Buy and how can they be minimised?
When someone changes their residence with Let to Buy and then buys a residential property, the purchase of the new home will hang in the balance depending on how the Let to Buy is progressing. If there’s a hiccup on the Let to Buy side, it will impact the onward purchase.
For example, a lender might come back with a down-valuation. They might say that the property is worth £20,000 less than you thought. That will have an impact on how much you can release for the new property, which could mean an increased mortgage amount.
When you go down this route it’s important to get accurate figures on the property’s value and what it will rent for. Ultimately, the lender will send a surveyor to the property to protect their own interests. If there is a discrepancy, it will delay your onward purchase.
Get some advice, speak to estate agents and letting agents and then you can manage everyone’s expectations from that point.
What are the potential financial implications of switching to Let to Buy?
The first is rental income – and as we’ve discussed that is taxable, so you need to talk to an accountant and get them to tell you the best route. The ownership of the property might be a big factor in how much tax you will pay on the rental income.
Then there’s rental yield – that will naturally change with market conditions. Rents will go up and down, as will interest rates. So with Let to Buy be mindful that what you’re getting today, tomorrow, next month or next year might not stay the same.
Finally there’s capital growth – having two properties, you’ll benefit if both go up 20% in value over the years. But we’ve also touched on the inheritance tax liability that might come with that further down the line.
There’s a lot to take into account. Speak to us and we’ll help you through the process.
Are there any specific timeframes or deadlines that borrowers should be aware of when switching to Let to Buy?
A very common condition with Let to Buy is that remortgage and the purchase of the new property must complete simultaneously.
There are very few lenders out there that will let you change your current residential mortgage and let you rent it out for a few months while you look at the market. This is becoming more common – people holding off on buying hoping that prices will come down.
But you’ll find a lot of lenders won’t let you do that. You will need to have found a property and for both mortgages to complete at the same time.
How can someone determine if switching to Let to Buy is the right financial decision for them?
Unless you’ve got a good knowledge of finance and property, it might be difficult for you to decide on your own accord. You’re ultimately going to need to engage with a mortgage advisor.
If you have any concerns, speak to us about it. We’ll be more happy to point you in the right direction. We’ll explain the implications of borrowing different amounts and the long-term implications of Let to Buy.
Bear in mind that if you go down the route of a Let to Buy, you’ll have two mortgages to worry about, not just one. It might be a good thing, but it might also be a bad thing. So have a chat with us to understand what it all means for you.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained within was correct at the time of publication but is subject to change.
