Let to buy mortgages

What is let-to-buy?

Let-to-buy involves renting out the home you live in so you can buy a new one to live in elsewhere.

You’ll switch your current residential mortgage to a let-to-buy mortgage and get a new residential mortgage for the house you’re moving to. These happen at the same time.

Your previous home is then let out to tenants and the rent pays the let-to-buy mortgage, so you can use your income to pay your new residential mortgage.

How does let-to-buy work?

With a let-to-buy mortgage, you need to apply for two new mortgages:

1. A let-to-buy mortgage for your current property which will replace your current residential mortgage
2. A new residential mortgage for the home you want to move to

3. Often this will be with the same lender who specialises in offering let-to-buy mortgage solutions, but it can be with two different lenders.

   The let-to-buy mortgage lender allows you to raise a deposit for your next property by taking out extra borrowing without taking your current mortgage into account as a commitment.

   The projected rental income will have to cover the repayments once it's remortgaged as a buy-to-let property and you'll still need to have enough equity left in your property to meet your lender's minimum buy-to-let loan to value (LTV) ratio.

   For example, if your home is worth £200,000 and you still have £100,000 to pay on the mortgage, you might want to borrow some of your equity for a deposit on your next home.

   A let-to-buy lender with a minimum buy-to-let LTV of 75% might let you borrow £50,000 from the property as a deposit to purchase your next home and convert your previous home to buy-to-let.

   If your next home also costs £200,000, you’ll put down the £50,000 deposit and get a residential mortgage to cover the remaining £150,000.

   The rent you receive on your previous home will need to be enough to cover the let-to-buy mortgage comfortably.

   Who might want a let-to-buy mortgage?

   Let-to-buy products are for anyone who can't, or doesn't want to, sell their previous home before buying the next one.

   Some typical examples are:

   • You're working elsewhere for a few years and plan to move back eventually
   • You're finding it difficult to sell your home but you want to buy a different one
   • The value has fallen since you bought it and you want to avoid making a loss by selling now. So you rent it out in the hope its value will go up in the future
   • You want to move in with a new partner but don’t want to sell your home yet

   What’s the difference between let-to-buy and buy-to-let?

   A let-to-buy mortgage is actually a type of buy-to-let mortgage – the main difference is that it’s geared around accidental landlords and people who don’t set out to build a property empire.

   Because of this, it can be arranged while you’re still living at the property.

   This usually isn’t the case with a buy-to-let mortgage, as you can’t get one on a property you live in – you need to have already vacated. So a buy to let mortgage is usually for a property you’re buying or you own, but while you already live elsewhere.

   Lending criteria for a let-to-buy mortgage

   As with all mortgages, each provider will have its own set of lending criteria, but most will ask for:

   • Minimum of 25% equity left in the house you’re taking out the let-to-buy on, after any additional borrowing for a deposit for your next home (so 75% loan-to-value)
   • A maximum age at the time of applying or the time you’re set to have fully repaid the mortgage, for example 65 years old
   • Evidence that you’re buying another home at the same time
   • Evidence that your plan is to rent your current home out, and that you’re not selling it
   • An estimate of how much rent you’re likely to achieve, for example quotes from estate agents

   Advantages vs. disadvantages

   Make sure you’ve considered all the pros and cons before you apply for a let-to-buy mortgage:

   Advantages of let-to-buy

   • It can be difficult to organise a buy-to-let mortgage for the property you're currently living in, while simultaneously arranging a residential mortgage for your next home due to lenders' criteria for both types of loan – let-to-buy smoothes out this process
   • Takes the pressure off to sell quickly and make a loss in the process
   • You’ll end up owning two properties, so you'll increase your gains if property prices rise in the future
   • Interest rates and fees may be competitive compared with buy-to-let rates

   Disadvantages of let-to-buy

   • Owning two properties is a double-edged sword – if house values fall, you'll suffer steeper losses
   • Let-to-buy rates are usually higher than residential mortgage rates
   • Relatively few lenders offer let-to-buy deals, so you'll have fewer deals to choose from
   • You'll also be paying two mortgages, so your finances could be stretched if you don’t let out your previous home quickly
   • Buying a second property will probably result in a costly stamp duty bill – although the additional 3% will be refunded if you sell one of them within three years

   Alternatives to let-to-buy mortgages

   There are a few alternatives to get you moving when the state of the property market’s making it hard to sell up:

   Buy-to-let mortgage

   You move out, perhaps into rented accommodation, before taking out a buy-to-let mortgage on your previous home.

   The drawbacks are that it can be complex and costly and you might not meet lenders' buy-to-let criteria.

   Consent to let

   Some lenders will grant you consent to let on your residential mortgage, allowing you to move and let out your home for a relatively short length of time.

   But it might be harder to get a second residential mortgage to buy another home for yourself while you have consent to let.

   Renting

   If you really need to move for work or other reasons, consider whether you might be better off simply selling up and going into rented accommodation for a while.

   Although you might not get the full value you'd hoped for when selling your home, it'll put you in the advantageous position of being a chain-free buyer on your next home, which could help you to drive a better bargain.