An easy way to purchase a second property, is to use a let-to-buy mortgage. But what exactly is a let-to-buy mortgage and is it something you should consider?
A let-to-buy mortgage is used to refinance your current home so that you can purchase a second home. Your current home would be occupied by tenants after you have moved into your new home. Your current home will have a let-to-buy mortgage, and your new home will have a residential mortgage.
A let-to-buy mortgage is the perfect solution for anyone who wishes to move into a new home, but is unable to sell, or does not want to sell their current home, for whatever reason.
Here are some examples of why someone might consider changing their current home from a residential mortgage, to a let-to-buy mortgage:
1. The property market conditions for selling are not right, and other property owners are struggling to sell their homes for the price they would like. The home they would like to purchase is being sold at an attractive price and they would like to move NOW!
2. They are moving in with a partner who already has their own property. The market conditions for selling are not right OR they know that their type of property is in demand on the rental market and they would like to keep it as an investment and future pension fund.
3. They have a new job with a fixed term contract for several years. The new job is too far to travel daily, so they find somewhere closer to live with the intention of returning to their current home in the future.
4. They have considered investing in a buy-to-let property for a while, but have not yet taken the step. Now that they wish to move into a new home, they see this as an opportunity to fulfil both goals.
Essentially, a Let-To-Buy Mortgage is a great way to unlock the equity in your property and buy a new home.
These are just a few examples, but there are many different types of scenarios that would make people consider switching their home residential mortgage to a let-to-buy mortgage.
Note: I am a property investor and landlord, and I share my experiences online to help others who have an interest in getting started with property investing. I will do my best to provide unbiased information in this article, but please note I am not a mortgage adviser or broker. My aim is to help people make informed decisions. If you decide property investing is not for you, of course, that’s absolutely fine. At least you will have considered all your options.
Let’s take a look at some of the most commonly asked questions regarding let-to-buy mortgages.
What are The Advantages Of Let-To-Buy?
In my view, there are many advantages to having a let-to-buy mortgage when you are considering moving home:
1. Avoid Or Delay Selling Your Current Home
The main benefit of a let-to-buy mortgage is the opportunity to buy a new home with a mortgage, but without the need to wait until your current home is sold.
It removes the stress of having to sell quickly, and can make you a favourable buyer on your new property which will allow you to move home faster.
2. Ease Of Mortgage Applications
The process of the let-to-buy method will be much easier and faster compared to arranging two separate mortgage products at the same time. Applying for a residential mortgage in conjunction with a buy-to-let mortgage can be complex, as you will have to meet strict lending criteria.
3. One Of The Cheapest Methods Of Owning Two Properties
A let-to-buy mortgage is the cheapest and most cost effective way to own more than one property. People have actually been doing this for years with bridging loans, but interest rates with bridging loans are far higher than mortgage loans.
Let-to-buy means you’ll own your property through a mortgage agreement, and you’ll be able to rent it out to tenants until you’re either ready to sell it or move back in.
5. Additional Income
You’ll also receive an income from the rent of the property you let out, which can provide you with some extra money for a holiday, wedding, new car, home improvements or capital to purchase a third property in the future.
6. Additional Capital Growth
When property prices rise, you will benefit from owning not just one, but two properties. And investing in property for the mid to long term can be financially rewarding.
It’s worth taking the time to study how property prices have performed in the past, and I would recommend reading my ‘Do House Prices Double Every 10 Years?‘ article.
What Are The Disadvantages Of Let-To-Buy?
I am pleased that you are considering a let-to-buy mortgage, and there are many advantages to letting out your current home and moving into a new home.
However, let-to-buy mortgages do have drawbacks to consider and it’s important that you are aware of these before applying for one.
1. You Will Have Two Mortgages To Pay
Yes, I know, this sounds scary! But let me take this opportunity to reassure you that during the mortgage application process, your lender will conduct relevant checks to ensure that your current home will make a suitable rental property and that the mortgage payments due will be covered by the rental income.
In fact, you can do this yourself and I would recommend that you check the demand of the local rental market. Contact a few letting agents and ask them for their advice. They have nothing to gain by providing false information and they will likely want to assist you in the hope of winning your business when your home is ready to let.
There is a chance that the property will be vacant for a period of time and you will have to cover the mortgage payment. But providing you plan for potential void periods, you will still be able to earn money from your property over the year to offset the cost.
2. You Will have Two Properties To Maintain
Yes, two homes equals two boilers, two roofs, at least two kitchens and two bathrooms to maintain and more! However, when was the last time you had to fix a leaking tap in your home? When was the last time you had to fix a broken toilet seat?
Things happen, and there are no guarantees but I would like you to think objectively about this and not be instantly put off by the idea.
3. Additional Stamp Duty Land Tax Surcharge
When purchasing a second home, you will be required to pay the additional Stamp Duty Land Tax surcharge. You will be eligible for a refund if you sell your original home within three years, but you will need to pay the tax upfront.
Here is a link to the government website for the current Stamp Duty Land Tax rates. Also note the additional surcharge you will be required to pay as a second home owner.
4. Property Prices Could Fall
It’s true, when you own two properties you are more exposed to the market than your average home owner.
However, providing you have a tenant who continues to pay the rent, and there is a demand for the property, should the tenant decide to leave, then you will not find yourself in a position whereby you have to sell. You simply need to sit back and wait for prices to recover.
5. You Will Have Extra Responsibilities As A Landlord
Being a landlord is a big responsibility. You will need to be familiar with the laws and regulations regarding tenant’s rights, gas safety checks, electrical safety checks, PAT testing and much more.
You may sometimes work with tenants that are very needy and insecure and you may have to exercise restraint and patience when dealing with difficult tenants.
That said, you will never be alone. There will always be people available who can answer any questions you may have at every step along the way.
For instance, if you use a letting agent, they will have a responsibility to advise and make sure you are adhering to the regulations when letting a property to tenants.
If you have any technical questions with regards to investing in property and being a landlord, there are a number of online forums where you can become a member for free and ask questions and learn from other peoples experiences. My preferred online forum is PropertyTribes.
Some people, if not most, will view the points I listed above as disadvantages. But I see them as opportunities and learning experiences (with the exception of the additional Stamp Duty Land Tax).
As I mentioned earlier, I am an investor myself so I am bias, but I realise that being a landlord is not for everybody.
What Is The Criteria For A Let-To-Buy Mortgage?
Every mortgage lender will have their own lending criteria for each of their mortgage products. There are some criteria’s that are universal with all lenders, although some may be subject to change, as market conditions adapt over time.
- To give you an idea, here is a list of the most common criteria’s to qualify for a let-to-buy mortgage:
- The minimum age, for most lenders, is 25 years old.
- The maximum age is 75 , but exceptions may be made on a case-by-case basis with some lenders.
- You will require an amount of equity in your home, usually around 20-25%.
- The property would need to command 145%, or more, in rental income of the mortgage interest to be paid. e.g. if the monthly mortgage payment is going to be £100 per month, the monthly rental will need to be £145 per month.
- Your current home cannot be listed for sale or sold subject to contract.
- You will need proof that you are buying a new home at the same time as you are switching your home mortgage. This will usually be in the form of a Mortgage Offer for your new home.
- You will need to have a good credit rating.
- You will need to pass the individual lender’s affordability assessment.
- You will need to have a net disposable and allowable income.
- You may be required to to use the same solicitor for both mortgage transactions on your current and new home.
The above list is designed to give you an oversight on what to expect when applying for a let-to-buy mortgage. A sort of ‘heads-up’. It’s not a definitive list, and I know from experience that criteria’s change all the time.
If you are seriously considering a let-to-buy mortgage, my advice is to contact a mortgage broker to discuss your position to find out what offers are available to you.
There are many mortgage lenders and brokers that will be happy to assist you. For details of the mortgage brokers I have used in the past, and that I am happy to recommend to my family and friends, please click here.
What’s The Difference Between Buy-To-Let And Let-To-Buy?
Let-to-buy and buy-to-let sound similar, but are very different. A let-to-buy mortgage is for home owners when they wish to purchase a new home to move into, whilst keeping their current home to let to tenants. A buy-to-let mortgage is needed when purchasing a property to rent to tenants.
In other words, you do not need to be a home owner in order to qualify for a buy-to-let mortgage, whereas you do need to be a home owner to qualify for a let-to-buy mortgage.
Either way, you will be a landlord and there are terms and conditions that will need to be met before an application is approved.
Is A Let-To-Buy Mortgage A Good Idea?
The answer to this question is – it depends. The real question should be ‘Is let-to-buy a good idea for me?’ And only you can answer that question.
Providing you have taken the time to understand the principles of a let-to-buy mortgage, AND you have contacted a mortgage broker to discuss the options that are available to you, then you will be in the best position to answer that question yourself.
The appeal of a let-to-buy mortgage is that you get the best of both worlds. You gain the benefit of not having to sell a property, thereby saving time and avoiding the selling fees, whilst being able to move into your new home. You also become a landlord and the proud owner of two properties!
You won’t necessarily save money because you will have to pay the additional Stamp Duty Land Tax Surcharge. But ask yourself this, would you rather pay an estate agent a selling fee that you will never see again, or would you rather pay tax on an asset that is likely to reap some rewards in the future? Just food for thought!
A let-to-buy mortgage is also a great product for those who do not wish to be a landlord or own two properties in the long term, but wish to purchase their new home before they miss the opportunity. It helps to ease the pressure when they are struggling to find a buyer or sell at the right price.
In the past, the best option a home owner had, was to apply for a bridging loan when they struggled to sell their current home in order to purchase their new home.
The fees and interest rates associated with a bridging loan are far higher than that of a let-to-buy mortgage. And providing they sell their previous home within three years of moving into their new home, they can apply for a refund of their Stamp Duty Land Tax Surcharge.