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Let to Buy Mortgages Explained

Buy to let

Let to Buy mortgages are mortgages that give home owners more flexibility without having to sell their property right away. Ideal for home owners who want to move to a new home, make the jump to landlord, or don’t want to lose money on poor property values, it is one way of ensuring solvency while enjoying the benefits of a new home.

What is a Let to Buy Mortgage?

Simply put; this mortgage turns a residence into a letting property. It allows homeowners to rent out their property and move into a new home with both receiving individual mortgages. This mortgage is popular with homeowners who want to move without losing their property.

A Let to Buy mortgage is also ideal for homeowners who are struggling to sell their home or have a property that has dropped in value. By covering the Let to Buy mortgage with rental payments and your new home mortgage with your own income, you can ensure you move into a new home without the pressure of rushing a sale.

How does a Let to Buy Mortgage Work?

If you have paid off enough of your current mortgage and have a significant amount of equity, you can remortgage and use the released cash to put down a deposit on a new home. While simple in theory it is a complicated procedure and not one taken lightly.

A simplified example of how a Let to Buy mortgage may work is as follows:

Your home is worth £250,000 and your mortgage is currently at £150,000. You can borrow £187,000 and use the £37,000 as a deposit on your new property.

You then pay off both the Let to Buy mortgage, using rental income, and your new home mortgage using your income.

Let to Buy vs. Buy to Let

Buy to Let mortgages are taken out by parties specifically looking to purchase a property to rent out.

Let to Buy differs in that it takes your current residence and turns it into a let while allowing you to move to a different residential address.

What do I need to take out a Let to Buy Mortgage?

Before taking the plunge, it is important to remember you will be responsible for two mortgages, even if your letting property remains empty. Along with this point, lenders will have various rules regarding Let to Buy mortgages but as a guideline homeowners can expect:

A maximum Loan-to-Value (LTV) ratio of 75%. This means that the maximum amount of money available is determined by the value of your property. For example, a property worth £200,000 will have a Let to Buy mortgage capped at £150,000.

  • A minimum and maximum age range. Usually between 25-70 years of age.
  • The rental income must cover the Let to Buy mortgage by at least 125%.
  • Some lenders will want to see evidence of an onward purchase.
  • The property you are letting can’t be put on sale or sold subject to the contract with the lender.

Finding a Let to Buy mortgage can also be difficult with some lenders only offering these mortgages through a mortgage broker. Using the expertise of a property broker is helpful in this instance to help you find the best deal and streamline the complicated paperwork.

As a general guideline, the risk incurred with a Let to Buy mortgage means you will need to put down a larger deposit, at least a quarter of the property value.

The Good, the Bad, and the Landlord of Let to Buy Mortgages

The Good

There are several benefits to a Let to Buy mortgage. It allows couples moving in together to keep the second home as passive income. Once the Let to Buy mortgage has been paid off, homeowners will have a property that is not only theirs but is actively making them money.

If the homeowner isn’t interested in owning two homes, the Let to Buy mortgage will buy some time when that dream property goes on the market. It allows homeowners to move without having to sell right away, instead waiting for the right time to sell without having to compromise their preferred living situation.

Let to Buy is also helpful if you are in a property chain. With letting opening up a few more doors you won’t need to ensure the sale of your old house before moving into your new home.

The Bad

As stated above, you will be responsible for two mortgages and that can bring its own added stress and pressure. Make sure your finances, planning, and wellbeing are suitably prepared for time without tenants, fluctuations in house prices, and other unknown entities.

Rates and duties are more severe for Let to Buy mortgages. Owning a second property means you will be hit with the Stamp Duty surcharge. Although if you sell your letting home within 36 months of completing the purchase of your new residential home, the HMRC will make a full refund.

Let to Buy rates are influenced by the increased risk of having two mortgages meaning you may have a higher rate to one you might expect with just a residential property.

The Landlord

Being a landlord can be good or bad depending on your experience, tenants, and the home itself. Homeowners letting a property will need to familiarise themselves with the laws surrounding the landlord-tenant relationship. This extends from how much rent to charge to dealing with problem tenants. A popular option is to employ a letting agent to handle the letting property. This allows homeowners to focus on their own careers while the letting agent finds tenants and manages the needs of both the landlord and the tenant.

Let to buy mortgages are just one of many options available to homeowners and worth discussing with your mortgage lender, bank, or solicitor before committing to a long-term investment. For more information or support contact Smith Partnership Move. Our dedicated team have jargon-free legal support and years of experience to help you make the most informed decision.