Let to Buy Mortgages

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Let to Buy Mortgages

Gary Boyack joins the Mortgage and Protection Podcast once more, this time to discuss the ins and outs of Let to Buy mortgages.

What is a Let to Buy mortgage?

Let to Buy mortgages suit a situation when you want to rent out your existing home and buy a new one to live in. Rather than sell your current property, you let it out, and buy a new residential property.

How does Let to Buy work?

Essentially, it involves having two mortgages at the same time. You might convert your existing mortgage to a Buy to Let mortgage so that you can let it out. Then you would take out a standard residential mortgage on the new home you’re buying to live in.

What is the difference between Let to Buy and Buy to Let?

With a Buy to Let, you are purchasing a property with the intent to let it out from the outset, whereas with Let to Buy, it wasn’t initially your intention.

However, your circumstances have changed. It might be that you couldn’t sell your property or it’s taking too long, or you want to be able to keep that property for a little bit longer. At the same time you want to move somewhere else and live in that property as your main residence.

Who can get a Let to Buy mortgage?

Whether you can get a Let to Buy mortgage is generally down to the lender’s criteria and the applicant’s credit score.

Generally speaking, people who go for a Let to Buy mortgage have had a change in circumstances, or they’re in a hurry to move to a new home. Sometimes you can’t wait to sell your current property – especially if the market is a bit stagnant.

In the past 12 months we’ve seen this, where a client can’t sell and needs to let the property out to buy a new home.

Other typical circumstances are where someone wants to buy a property with a partner and get income from their current home. Or, they may be moving elsewhere for some time, perhaps for work, and plan on moving back in the future.

How much deposit do I need for a Let to Buy mortgage?

Typically, you would need to have equity in your property that equates to 25% of its value. Some lenders will allow 20%. This is an important thing to consider if you were hoping to use any equity as a new deposit.

Sometimes when people do Let to Buy, they raise some money from the existing property to help with the deposit for their new residential home. You will need to be sure there’s enough equity in the property to fit those criteria.

How much can I borrow for a Let to Buy mortgage?

This will partly depend on the expected rent your current property will achieve – just as with a typical Buy to Let mortgage. The lender will use their stress tests to determine the loan amount based on the rent you will receive.

They may also have a minimum income criteria, which can be around £25,000 per year.

What criteria do I need to meet for a Let to Buy mortgage?

There may be a minimum income requirement of £25,000 either for a sole applicant or joint applicants. Lenders may also require your onward purchase to be at a certain loan to value.

Again, that could mean you need a larger deposit than a standard residential purchase. Many lenders want around a 15% deposit on your onward purchase. So if you are looking to get a Let to Buy mortgage, you may find it difficult to find a 90-95% mortgage.

Generally, you’ll also need to complete both transactions simultaneously. So if you’re doing Let to Buy with different lenders for the Buy to Let and the onward purchase both mortgages will have to complete on the same day.

You can’t organise the Buy to Let mortgage, take your equity out and then wait a few months to buy the onward property – lenders won’t let you do that.

Is Let to Buy a good idea?

It’s really down to personal circumstances. Let to Buy can be a good idea, especially if you don’t want to sell your property – or it’s difficult to sell and you don’t want to miss out on an ideal house.

But you should consider all the factors involved. It’s not completely straightforward, you’ve got to think about all the pros and cons of being a landlord or landlady. Consider how you will cope if there’s no tenant for a while and you have to afford both mortgages. You will also have to fund repairs and maintenance on two homes.

Stamp duty is an important thing to consider, because when you buy a second property, you have to pay an extra 3% in additional stamp duty.

On the plus side, you’ve got somebody paying your mortgage for you. You’ve got the potential of capital growth and a bit of additional income as well. For the right client circumstances, then Let to Buy can certainly be a good idea.

What are the alternatives to a Let to Buy Mortgage?

If you plan on letting the property just for a short period, talk to your lender. For example, if you’re trying to sell it or are relocating for a certain time, you could get ‘consent to let’ from your current mortgage provider. This is simpler than switching to a full Buy to Let mortgage.

Lenders are often happy for you to let a property out for a period of time – it could be twelve months or 24 months. The downside is if the lenders do consent to let, they may review the deal annually and they could potentially put your interest rate up by 0.5% or so, as it’s not a straightforward residential mortgage any more.

Where can I get advice on Let to Buy?

We’re here to explain all the details and the pros and cons of everything involved in Let to Buy. We can also compare all the options in terms of mortgage products, rates, criteria and fees so that you can make an informed decision.

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