Let to Buy
Let to Buy: Move house whilst still owning current home
This type of mortgage is popular when property prices and transactions are depressed. The amount available to borrow is determined by the rental possibility of the property. The vast majority of lenders require the rental income to be 125% of the monthly interest only mortgage payments based on a notional interest rate of 5% i.e:
Property valuation – GBP 100,000
Mortgage amount – GBP 85,000
Monthly mortgage payments based at 5% per annum – GBP 354.17
Minimum rental income required – GBP 442.71
Calculate costs with our Let to Buy calculator
Letting your main home to purchase another
Let to Buy mortgages are a complete reverse from buy to let mortgages and are used by clients who want or need to move properties but are trapped in their current property because they either can’t sell or can’t sell at the price they require. In this situation clients are now more and more often letting their current property so they are free to move to a new area where they will either purchase a new property or rent. This situation could be driven by a number of factors i.e. to be closer to a good school, moving to a new area for a short/medium term period before returning etc.
The client has 2 options:
They can either speak to their current lender who may or may not allow them to rent their property and often charge a premium in terms of a higher interest rate for their agreement.
Alternatively, the client could obtain a Let to Buy mortgage. This mortgage is not regulated by the FCA and specifically allows a client to rent their previous main residential property to a non-related third party person.
With Let to Buy mortgages you are not required by all lenders to purchase a new property. Renting or living with family and friends is also acceptable however if you were to buy a new property you would have the added benefit of being able to port/move your current mortgage to the new property to be purchased. Many current borrowers have historically low interest rate mortgages on their main residential home that they do not want to lose. A Let to Buy mortgage can allow your current mortgage to be moved to a new property thus enabling you to keep that rate i.e.
Current property valuation – GBP 200,000
Current residential mortgage – GBP 100,000
New property purchase price – GBP 200,000
Savings – GBP 50,000
In this scenario, our whole of market mortgage brokers could (depending on potential rental income) arrange a LTB mortgage of say GBP 150,000 on the current residential property. This would repay the current mortgage enabling it to be moved to a new property and raising an additional GBP 50,000. With the clients GBP 50,000 in savings they now have the full GBP 200,000 required to buy the new property whilst keeping their existing property on a self funding LTB mortgage and just as important, keeping the current low interest residential mortgage.
What is Let to Buy?
The basic principles of Let to Buy are relatively simple. Rather than selling your existing home to relocate to a new property, you retain ownership of your former home and let it out to tenants.
It is more or less the opposite of Buy to Let, wherein a second property is purchased to be let out to both cover the mortgage and generate a profit. With Let to Buy, it is your existing home that you intend to let out, while purchasing a new property to live in.
What is the Appeal of Let to Buy?
The appeal of Let to Buy lies in the prospect of being able to move house as planned, while at the same time generating a reliable stream of income from your current home. Particularly if selling your existing home is proving difficult, Let to Buy could represent a viable and accessible alternative.
Long-term, it is also possible to generate significantly more money by renting out a former home, rather than selling it outright.
Who is Let to Buy Good For?
Given that the private renting sector in the UK is booming, letting out a property and generating a profit can often be simpler than attempting to sell your home outright. If you’re able to let out your home at a price that comfortably covers the mortgage and generates additional revenues, you could be looking at an additional long-term income stream.
In addition, some cite the potential capital appreciation of their current home. If you believe that the market value of your home will potentially rise, you may not wish to sell it at its current price. Instead, it could be better to let it out at a profit for several years, before selling it in the future for much more.
How Does Let to Buy Work?
Applying for a Let to Buy mortgage follows most of the same key principles as a traditional mortgage application. Some lenders may offer specially designed Let to Buy mortgage products.
Primarily, you will be expected to prove that the rental income your home generates will cover the monthly mortgage payments by at least 125% however personal income and equity requirements vary significantly from one lender to the next.
Let to Buy investments are normally made possible by way of a specialist loan that replaces an existing residential mortgage with a mortgage that gives permission for your current residential property to be rented. The new mortgage may also be used to raise additional funding so that a deposit is generated for the onward purchase which will require a residential mortgage to be arranged to complete the purchase. Mosthave a degree of flexibility to suit the requirements and personal circumstances of the applicant, assuming their financial position is strong enough to qualify for a loan.
Before applying for a Let to Buy mortgage, it is important to first consult with an independent broker. Along with helping you choose the most appropriate way forward; a qualified broker will ensure you get the best possible deal from a reputable Let to Buy specialist.
Always remember that the most dynamic deals on Let to Buy cannot always be found on the High Street. Discuss your requirements and your budget with an independent broker, who will conduct a whole-of-market comparison on your behalf.
How does Let to Buy help those who cannot sell their homes?
At certain times of the year or at other times when it is difficult to sell homes quickly and for a good price, it is perfectly possible that private rental demand could be extremely high.
If you are unable to sell your home for an agreeable price for any reason, Let to Buy could represent an accessible and affordable alternative. Let to Buy provides struggling sellers with the opportunity to let out their current homes, cover their outstanding mortgage payments and potentially leaving them free to use their own income to justify investing in a second home.
What about saving for a deposit on the second property?
Most lenders will demand an initial down payment of anything from 5% to 30%, as is the case with any conventional mortgage. The difference with Let to Buy is that you may have the opportunity to release some of the equity tied up in your current home, in order to cover the deposit on the new property.
After which, you will simply be liable for the monthly mortgage payments as normal. You may even turn a tidy profit each month, if the rental payment you collect significantly exceeds your former home’s mortgage repayments.
How competitive are Let to Buy borrowing costs?
The vast majority of banks, building societies and lenders do not impose any specific premiums or levies for these kinds of mortgages. Instead, their standard introductory and long-time mortgage rates will usually apply.
It is worth remembering that with specialist mortgages the most flexible and competitive deals are not always available on the High Street.
One of many reasons why it is essential to consult with an independent broker, before submitting a Let to Buy mortgage application.
What can I do to minimise overall borrowing costs?
For the most part, the exact same rules apply as those in relation to a traditional mortgage. For example, offering a larger down payment almost always guarantees lower overall borrowing costs. Your total mortgage balance could also be reduced by repaying the loan over a shorter period of time, while a good credit history can contribute to more competitive APRs and borrowing costs.
Above all else, keeping costs to absolute minimums means comparing the market in its entirety. Rather than limiting your search to the usual High Street lenders, make sure you consider every available option from established and independent lenders alike.
Some of the most competitive deals come from specialist lenders who offer their services exclusively via brokers.
How can I estimate projected rental income?
This is surprisingly simple, though lenders have their own unique policies in place regarding verification of future rent payments. For an accurate idea of how much you’ll receive in monthly rent payments, speak to a local letting agent and arrange a consultation.
It is worth remembering that in most instances, lenders want to see evidence of projected rental income of at least 125% of the monthly mortgage payments on the property. The higher the projected rental income, the more likely you are to qualify for a competitive Let to Buy mortgage.