In this brief guide, we are going to discuss let to buy mortgages

What is a let to buy mortgage?

Let to buy mortgage is where a borrower rents out their current property and uses the rental proceeds to qualify for a new residential mortgage. They let to buy mortgage is like a reverse buy to let mortgage on their property.

 But unlike a buy to let mortgage the let to buy mortgage is not taken out for the sole purpose of renting out the property.

The borrower will need to change their current mortgage to a  reverse buy to let mortgage and then get a residential mortgage from the same mortgage lender. 

If you still dont understand what let to buy mortgages are then read this: Let to buy mortgages are essentially letting your current residential home out on a buy to let mortgage and buying a new home with a residential mortgage- all with the same mortgage lender. This combined process is known as a let to buy mortgage.

Why would you get a let to buy mortgage?

Borrowers may get a let to buy mortgage for a variety of reasons including;

  • They think their property is a good investment and don’t want to lose it as they can generate good rental yields from it. 
  • You predict that house prices will rise in your current area and you don’t want to miss out on the capital appreciation
  • Sellers who are not receiving any interest for the sale of their homes due to a bad region or whatever reason.
  • They don’t want to miss out on their new house but at the same time they don’t want to sell their current house in haste and for a low price.
  • It’s a bad market to sell and they don’t want to lose money on their current house.
  • You are a couple who each have their own bouse but one to move into one house together. You could let one of the houses on a let to buy mortgage and get the other house on a residential mortgage with one mortgage lender.
  • You plan to move back to your old home one day in the future.
  • You don’t want to be in a long property chain and hence you can limit the length of the chain by letting your home rather than going through the stress of having to sell your home.
  • Borrowers struggling to find a new mortgage deposit for their homes may remortgage their current home to extract funds and then use a let to buy mortgage to increase their mortgage affordability for a new residential home.

How does a Let to Buy mortgage work?

As described above a Let to buy mortgage allows you to remortgage your current property to extract cash for a mortgage deposit for your new home and then rent out the property to cover its costs and potentially the cost of your new mortgage.

Buy to let mortgages usually require a larger mortgage deposit(30%+) and are usually more expensive than residential mortgages.

 In the same vein, a let to buy mortgage will need you to have sufficient equity in your home. Most let to buy mortgages insist on a 75% loan to value rate.

Your rent will need to cover your mortgage repayments on the let to buy mortgage for your original property.

Most let to buy mortgage lenders will expect that your rental overage is at least 125% (but this may be much higher based on the mortgage lender_ which may help you cover any shortfall in rent payments or any maintenance costs.

Rental coverage simply means that the rent should cover your monthly mortgage repayments by a certain percentile.

Example of rental coverage:

If your mortgage payment is £1000 a month and the let to buy mortgage lender insists on a rental coverage of 125% this means the rent you charge should be 125% of the monthly mortgage repayment.

You must, therefore, charge a rent of at least £1250.

If you are unsure of what rent you may be able to get from your property then it is best speaking to a lettings agent who will advise you on this as it will play a big factor on your mortgage affordability for a let to buy mortgage.

You should try to get rental figures from at least 3 local lettings agencies.

Alternatives to a let to buy mortgage

Consent to let

Some mortgage lenders will allow you to rent out your property on a residential mortgage (consent to let) for a short period(usually until you buy another property) of time after which you will need to switch to a buy to let mortgage.

This may be beneficial to you as the residential mortgage rates will usually be much cheaper than the buy to let mortgage rates which are applied to your original property.

A consent to let may be a good short term alternative to a let to buy 

mortgage if you need to move quickly. 

Buy to let

Another alternative to a let to buy is getting a buy to let mortgage. This will allow you to get two separate mortgages and shop for the best rate on each independently.

Sell and rent

The final alternative to a let to buy mortgage is to simply take the hit and sell your property 

You can then move into rented accommodation until you find a new place.

What are the mortgage lending criteria for a let to buy mortgage?

The let to buy mortgage lending criteria will differ from one mortgage lender to another but a general theme is listed below.

  • You will usually need to be no more than 70 years of age
  • Minimum age of 25
  • A good credit score
  • You can expect a maximum loan to value of 75%
  • You will need to provide proof of onward purchase
  • Your current property cannot be listed for sale or subject to any sales contract

What are the advantages of a let to buy mortgage?

  • A let to buy mortgage helps you shop without any time pressure or property chains
  • A let to buy mortgage lets you have the best of both worlds as you get t benefit from any capital appreciation of your original property.

What are the disadvantages of a let to buy mortgage?

  • You will be responsible for two mortgages and if things spiral out of control you could quickly find yourself in a lot of debt.
  • The mortgage rates on the let to buy mortgage for your original property which is now being let out will be similar to buy to let mortgage rates which are usually more expensive than residential mortgage rates.
  • As you are now a landlord you will need to meet certain regulations and ensure you have adequate landlords insurance which could be costly.
  • If house prices fall you will take the hit on equity twice as you now own two properties.
  • You may have huge tax implications and need specialist tax advice.
  • You will have to pay stamp duty on your new property at the additional rate although if you sell your original home within 36 months then HMRC will refund you the additional rate stamp duty on the second home.
  • Qualifying for a let to buy mortgage may be much harder than a residential mortgage.
  • Not a lot of mortgage lenders offer let to buy mortgage deals. This means they are not very competitive.

Can you get a let to buy mortgage with bad credit?

You may find it much harder to get a let to buy mortgage with bad credit but there are some mortgage lenders who may consider your case based on the type of bad credit.

Bad credit could include:

County court judgements

Bankruptcies

Home repossessions

Defaults

Missed credit repayments

Can you get an interest-only let to buy mortgage?

You may be able to get an interest-only let to buy mortgage if you have a suitable capital repayment vehicle.

Repayment vehicles could be:

Sale of the property

Sale of another property

Investments

cash

Where can I get a Let to buy mortgage?

Contact a good digital mortgage broker who will be happy to assist and point you towards the right mortgage lender.

Let to buy vs buy to let:

Let to buy mortgages and buy to let mortgages are both similar but don’t expect mortgage lenders to have similar affordability assessments for both of them.

The only differentiation is that a buy to let is when you want to simply buy out a property for rental gains while let to buy is a situation where you have a residential property you which to convert to a  reverse buy to let for a short, medium or long term whilst you acquire another residential property.

Let to buy mortgage calculator

You can use a let to buy mortgage calculator to see how much you may be able to borrow on a let to buy mortgage.

You should be aware that a let to buy mortgage calculator will only give you an indication on what you may be able to borrow but will not provide you with a definite answer on how much a let to buy mortgage lender may lend to you and at what rate.

The only real way you can find out what you can afford on a let to buy mortgage is to get a mortgage offer on a let to buy mortgage. A let to buy mortgage broker may be able to help you with this.

FAQs: Let to buy mortgages

How much deposit do I need for a let to buy mortgage?

You will usually need to have at least 25% equity in your existing property for you to get a let to buy mortgage. The equity in your property will stand as your mortgage deposit. If you do not have enough equity then you may need to put down a further mortgage deposit.

Is a let to buy mortgage regulated?

Let to buy mortgages are not regulated as they are essentially a buy to let mortgage.

Do you pay stamp duty on let to buy?

A let to buy property will have already had stamp duty paid on it as it will have already been purchased and have an existing residential mortgage on it so no additional stamp duty will be needed when converting your residential mortgage to a let to buy mortgage. 

You may, however, have to pay stamp duty on your new residential property at an additional rate. You should get independent tax advice on this. You will usually be able to get a stamp duty refund for the additional rate if you sell your original property within 36 months.

Using a Let to buy mortgage broker

You may want to consider using an independent let to buy mortgage broker to get a mortgage as most let to buy mortgage deals are actually only available through mortgage brokers so if you go to the high street you may end up not getting the best let to buy mortgage deal for you.

Let to buy mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.

A Let to buy mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer. Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

Conclusions on Let to buy mortgages

The let to buy mortgage can provide great value but it is worth thinking about how it changes your income tax status and the legal responsibilities of a landlord

Good luck with your shopping and remember your home may be repossessed if you do not keep up your mortgage repayments!

In this brief guide, we discussed let to buy mortgages.  If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.