Let to Buy Mortgages
How to turn your home into a Buy to Let and raise money to purchase your new home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
All information was accurate at the time of publication.
21st May 2024
Have you ever thought about buying a new house but weren't quite ready to say goodbye to your current one? That's exactly what a wonderful client of mine recently faced. They were really attached to their home (it has great memories), but also excited about a new place. Their idea? To rent out their current house while they buy their new one! This way, they could use the equity in the property as a deposit and get a mortgage on the new property as well. They also saw this as a smart long-term investment, hoping the house value would keep climbing. They weren't sure where to begin, so they reached out to me for some guidance.
What is a Let to Buy Mortgage?
Let’s start with some jargon. When you convert your home in to a Buy to Let with the intention of purchasing a new home, you are essentially letting your home out to buy a new property. This is called Let to Buy.
As you have lived in this property, it will also be classed as a Consumer Buy to Let (CBTL). The Mortgage Credit Directive Order 2015 defines a consumer buy-to-let as a buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purpose of a business carried on, or intended to be carried on, by the borrower.
The long and short of it means that these Buy to Let applications are regulated by the Financial Conduct Authority (FCA).
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
Why would I want a Let to Buy Mortgage?
As I mentioned above, a let to buy mortgage is perfect if you're not quite ready to say goodbye to your current home but are excited about a new place. There are all sorts of reasons for this – maybe the market isn't ideal for selling right now, or perhaps you think you might want to return someday. Maybe it's a house filled with cherished memories, and the idea of someone else living there just doesn't feel right. With a let to buy mortgage, you can become a landlord and keep your existing home while buying your new dream house to move into.
If you let the property out, you will need a Buy to Let mortgage which in this scenario is called a Let to Buy mortgage.
Can I raise money as part of a Let to Buy mortgage application?
There are a few factors that come into play when you are looking to raise money as part of a Let to Buy application. Most Buy to Let lenders will have a maximum loan to value of 75%, although in some instances, some lenders may be able to lend more than this. This means that if you home is valued at £200,000, you can borrow a maximum of £150,000, which is 75% of the property value. If the property is £500,000, 75% would be £375,000.
This would replace your existing mortgage and anything above your existing mortgage would be released to you to be used as a deposit on your new purchase.
If you’ve got savings already which you wish to use as a deposit, you don’t need to borrow more than your existing mortgage, but you will need to repay your existing mortgage.
The other variable which will impact how much you can borrow is how much you can let the property out for. Each lender will have their own calculator, which is why you will need to speak with a broker to make sure you can get the mortgage you require. Depending on if you are a higher rate tax payer or not will also have an impact on the calculations.
For example, using The Mortgage Works calculator (the Buy to Let arm of Nationwide), with a rent of £1,000 per month a higher rate tax payer could potentially borrow up to £156,576 on a 5 year fixed rate, but only £134,453 on a 2 year fixed rate.
A low rate tax payer could borrow up to £200,417 on a 5 year fixed rate, but only £105,042 on a 2 year fixed rate, with the same rental income of £1,000 per month.
In some instances, the banks and building societies can use earner income in rental assessments to allow you to borrow more. This is known as Topslicing, although some lenders won’t allow this on Let to Buy Applications.
Can I release the money from a Let to Buy before I’ve found the property I want to purchase?
We often get asked if it’s possible to raise the money first, so that when they have found the right property they can call themselves a cash buyer and be more likely to have their offer accepted.
Unfortunately, the lenders are unable to release the money before you have found your new home.
The process would be that you would speak to myself before you have started your property search, I can then provide you with a quote for the Let to Buy mortgage on your home and indicative figures for the mortgage on your new home. I’d confirm the numbers by email and if you were happy with the figures, you would provide me with your documentation so that I can produce the agreement in principles with both the lender providing the Let to Buy mortgage and also the lender who will give you a residential mortgage on your new home.
Once you’ve found your new home and had an offer accepted, using your agreement in principle, we would firm up the numbers, provide new recommendations using the correct figures and then proceed with the applications on both mortgages. Once the underwriters have completed their assessments and the surveys have been completed you will receive a mortgage offer for both mortgages.
It’s then down to the conveyancers (property solicitors) to finalise exchange and completion on the purchase. They will receive the money from the Let to Buy mortgage, this will be used repay the mortgage you have on your home, any excess will be used as a deposit on the new property along with the new mortgage on your new home. This all happens simultaneously and is why it’s worth having a good conveyancer who knows what they’re doing and can remove any stress and uncertainty. We’re happy to recommend a conveyancer if you don’t already have one.
The process we use is very clear and one step leads into the next, so you’ll be fully aware of where we’re up to at each stage of the application, and you’ll know what happens next and how long that will take. We pride ourselves on good communication as that is the simple thing that when it’s not there, often causes the most problems.
Once I have my Let to Buy mortgage sorted, what happens with my new residential mortgage?
In all honesty, both applications will happen at the same time alongside each other. As part of the residential mortgage application, we will need to provide the lender with both the illustration and decision in principle from the Let to Buy application, and they often ask for a letter from a letting agent who is registered with the Association of Residential Letting Agents (ARLA), confirming how much the property can be let out for. We would suggest speaking to a local letting agent and asking them to produce this letter. The reason they need this is to show where the deposit is coming from, how much the mortgage will cost and that the rent will cover the mortgage payment. This will be used alongside the usual payslips and bank statements for the underwriter to assess the application. Once everything has been approved you will receive a mortgage offer that are generally valid for 6 months, giving you plenty of time to arrange exchange and completion.
Does my Let to Buy mortgage need to be on a repayment or interest only basis?
There are two ways to repay a mortgage, repayment, where at the end of the mortgage term you will have completed repaid the mortgage, and interest only, where you don’t repay the mortgage, simply pay the interest and at the end of the term, the original mortgage balance is still left outstanding. There are pros and cons for both options.
You may be able to get a combination of interest only and repayment, but this is seen more on residential mortgages, not Buy to Let mortgages. We’ll happily provide you with illustrations to demonstrate what the different positions would be.
If you have the mortgage on a repayment basis, you are guaranteed that you will have repaid the mortgage at the end of the term. This means that you will own the property outright and if you continue to let the property, the rental income will go into your account and you no longer will need to repay the lender. It’s worth getting some tax advice in regards to this as there may be Capital Gains Tax (CGT) to be paid either during the mortgage or when you sell the property. The monthly payments will be higher than interest only as you are repaying the debt, so this means less of the rent you collect will go to you.
With interest only, you are not repaying the debt, so the more of the rent you collect will go to you. You will be in a different position with the tax as well, so once again, it’s worth getting some tax advice when it comes to letting a property. You will pay more in the long term compared to a repayment mortgage as you will still have the full balance to repay at the end of the mortgage term. Because the maximum loan to value is 75% in most cases, when you sell the property, there should be enough equity to repay the mortgage, as long as the property hasn’t dropped in value.
Which to choose depends on what your goals are. Some people want to repay the mortgage so they own the property outright and can continue to receive an income from the property once the mortgage has been repaid. Other people might want an interest only mortgage to maximise the income they receive from the rent, as interest only mortgages will have a lower monthly payment compared to repayment mortgages.
You may be able to get a combination of interest only and repayment, but this is seen more on residential mortgages, not Buy to Let mortgages. We’ll happily provide you with illustrations to demonstrate what the different positions would be.
If I don’t sell my home when I purchase a new home, will I have to pay more stamp duty?
As things stand, if you don’t sell your home when you buy a new home, you will have to pay an extra 3% stamp duty on the value of your home. I like to use Stamp Duty Calculator as it’s easy to use. They have lots of information on stamp duty and hopefully will provide you with the answers you need.
A silver lining is that you can claim a stamp duty refund up to 12 months after selling a previous home as long as the old home is sold within 3 years of purchasing the new one. This means that if you buy a property in June 2024, without selling your home you will pay the 3% surcharge. If you sell your previous property before June 2027, you have until June 2028 to claim a refund on that 3% surcharge.
If you are considering renting your home out instead of selling it when you look to purchase a new property there are lots of things to consider. My advice would be to contact me sooner rather than later so you can put a plan in place and know what your options are. It’s also worth getting some tax advice in regards to letting the property out and what tax you’d have to pay on the rental income and also any capital gains tax you may have to pay.
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