What is a Let to Buy Mortgage and what are the benefits?
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What are let-to-buy mortgages?
If you want to move to a new house and thinking of keeping your current property as an investment, or if for other reasons it is beneficial to keep it for the short, medium or long term, let-to-buy is something you may want to consider. This involves moving out of your existing property and renting it out, as well as borrowing against it to buy a new property.
Letting out your property could allow you to move into a new home without feeling pressure to sell in a rush and potentially at a loss. It’s also useful if you decide to move in with your partner, and both of you own a property or want to purchase a new property together.
This article explains how let-to-buy mortgages work, and what the alternatives to let-to-buy mortgages could be.
How do let-to-buy mortgages work?
With let-to-buy, you are taking out two mortgages at the same time. If you own enough of the equity in your existing property, you remortgage and release some cash to put down a deposit on a new home.
You’ll do this using a let-to-buy mortgage, which is essentially a buy-to-let mortgage, often taken out on an interest-only basis. You then let out your existing property and use the rental income to cover the cost of the mortgage.
This, in turn, will free you up to take out a standard residential mortgage for a new home and cover the repayments with your salary or other sources of income.
What’s the difference between let-to-buy and buy-to-let?
Buy-to-let mortgages apply to those who want to purchase a property for the specific purpose of renting it out to tenants. A let-to-buy mortgage is designed for those who have been living in a property and want to keep hold of it to purchase a new home. They may choose to sell it a little later down the line and settle the let-to-buy loan or continue to rent it out.
Although some lenders will allow you to let out your home on a residential mortgage, this will normally only be on a temporary basis. This is known as ‘consent to let’.
So, unless you are only going to be letting it out for a short time, it is likely you will need a let to buy mortgage.
Let-to-buy mortgage lenders: what they look for
Generally, let-to-buy mortgage rates tend to be a little more expensive than residential loans, and you will need to put down a larger deposit, at least 25%.
Lenders will also want to see evidence that your rental income will comfortably cover your mortgage repayments, to at least 125% of your mortgage payments. Speaking to letting agents and looking at local property listings should give you an idea of typical rents in your area.
So, for a let-to-buy loan, you’ll need:
·To have at least 25% equity in your home (meaning you own 25% of it outright)
·Evidence of rental income covering 125% of mortgage repayments
·To be aged under 75, sometimes younger, when you apply
·A good credit history
Let-to-buy and stamp duty
If you’re purchasing a second property, you will pay an additional 3% stamp duty on top of the normal stamp duty rates. In Scotland, you’ll pay an additional 4% from 25 January.
If you were buying a property worth £200,000 and it was your second property, you’d pay £7,500 in stamp duty. If you were only buying one home and selling your other, you’d pay just £1,500.
If you sell your original property within 36 months, you can claim the extra amount back. You have 12 months from date of the sale of your old home to claim the tax back.
What are the alternatives to let-to-buy?
If you are struggling to find a buyer and you don’t need to move, it may also be worth considering staying put for now and investing some money in improving your current home. You could perhaps add an extension, redecorate or make changes to the garden.
Depending on your circumstances, you may be able to fund these changes through remortgaging your current property. Our advisers can help you to decide if this is the right option for you.
Let to buy mortgages are just one of many options available to homeowners and worth discussing with one of our experienced Mortgage Advisers, who will be able to give you a full illustration of all your options.
Becoming a Landlord
it is essential that you understand before making a final decision that you will have to take on the responsibilities of being a Landlord if you are renting your house out.
Remember as an Independent Mortgage Broker, we are regulated to offer you the best advice.
For expert advice and more information or to book your FREE consultation please visit one of our websites, call or email.
Bristol Mortgages Online www.bristolmortgagesonline.comTel 0117 325 1511
Bath Mortgages Online www.bathmortgagesonline.comTel 01225 584 888
Exeter Mortgages Online www.exetermortgagesonline.com Tel 01392 690 888
Email i nfo@swmortgages.com
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