The Let to Buy Mortgage guide
We will set out how a let to buy mortgage works, how it can facilitate the release of equity from your residential property, how to calculate the maximum loan amount and Let to Buy lending criteria.
Quick Find
A let-to-buy mortgage enables the refinance of a principal residence and changes its permitted use for letting. The new mortgage usually releases equity as a deposit for a new home.
So What exactly is a Let to buy mortgage?
A let to buy mortgage is a product that allows the borrower to refinance their principal residence and change its permitted use to allow for the letting of the property. At the same time, you can release equity as a deposit for a new residential home.
A let to buy mortgage is different from a buy to let mortgage. It is designed to accommodate the regulations applied to accidental landlords and allow for the fact that the property has not been a rental property to date.
An example - how let to buy works
For example, your current home is worth £750,000, it will let for £3,000 per month and your current mortgage is £300,000.
You have found the perfect home for £1,500,000 but do not have a buyer for your current home and only £250,000 as a cash deposit. Without a sale of the current home the mortgage required would be approx £1,373,750. Over 90% loan to value.(£1,500,000 purchase price, £123,750 stamp duty, less £250,000 cash).
By utilising a Let to Buy mortgage, you could remortgage the current home to release £262,500 with a total mortgage of £562,500. This is based on a 75% ‘Loan to Value’ mortgage which would repay the current mortgage and release equity. At a rate of 3%, this equates to £1,406 per month and is covered by the monthly rental income.
The new mortgage for the onward purchase is now £1,111,250 or 74% ‘Loan to Value’ which is far more acceptable to the lender’s criteria and will attract more competitive mortgage terms.
What is the difference between Let to Buy and Buy to Let mortgages?
The difference between buy to let and a let to buy mortgage is more to do with regulation and lenders being comfortable with the change of property use. The FCA would have regulated a mortgage on a property that has been lived in by your family.
Buy to Let mortgages are unregulated, and so you would assume that a new let to buy mortgage would be free of regulatory restrictions. However, this may not be the case.
The property was never intended to be an investment property but a home for the owner. Therefore the borrower is viewed as an “accidental landlord”, which falls under consumer buy to let regulation.
Essentially, any lender providing a let-to-buy mortgage will need to adhere to enhanced borrower due diligence and protections within their Let to Buy lending criteria. Some mortgage lenders will not offer let to buy mortgages at all or have a completely different product range for Let to Buy mortgages.
Let to Buy mortgage rates & Let to Buy lending criteria
Let to Buy mortgage rates will be similar to Buy to Let products. However, for certain lenders, the terms will carry a slight premium.
Let to Buy lending criteria varies from lender to lender. Some will require the transaction to be complete simultaneously with an onward purchase, this can be restrictive as you may require the equity release to pay for an exchange of contracts deposit, normally 10% of the purchase price.
Other lenders will allow for a Let to Buy mortgage where there may be a delay to the purchase of your new main residence or facilitate a move to a rental property. There may be enhanced due diligence to enable these outcomes. For example, the lender may wish to see the mortgage offer for your new purchase, or if moving into the rental, the lender may wish to see the tenancy agreement and that you have physically moved from your current home. This will all depend on their specific Let to Buy lending criteria.
You do not need to be an experienced landlord to apply for a Let to Buy mortgage, lenders are quite happy to lend to first-time landlords in this regard, however, the mortgage will have enhanced consumer buy to let regulation in this situation.
Loan To Value restrictions of circa 75% – 80% will limit the maximum loan available for a Let to Buy mortgage.
A maximum age limit can apply for some lenders, however, this is becoming more relaxed and some providers can lend an extended mortgage term beyond the age of 80.
Interest-only is readily available for Let to Buy mortgages, as the property will no longer be your main residence and therefore lenders will generally allow for the mortgage to be repaid from the eventual sale of the mortgaged property.
What are the Advantages & Disadvantages of a let to buy mortgage?
It is important to receive advice from a tax advisor and mortgage broker before making any decisions on taking a let to buy mortgage. The suitability of this type of mortgage will very much depend on your individual circumstances and requirements.
Advantages of let to buy
Allow a quick transaction, presenting yourself as a chain-free buyer – with no property to sell you will be more attractive as a buyer for your onward purchase. There will also be less risk of the chain falling through due to your buyer pulling out.
You can keep your current property to start or add to a property portfolio as an income-producing asset.
The property can be a good long-term investment for capital growth and some use this asset as an alternative to a pension. It is important to speak with a IFA and tax advisor to make long-term investment plans.
Enables you to move and keep your property if not satisfied with buyer offers. This may be particularly true in a slower property market.
Save agent fees incurred by selling the property.
You may be relocating for work for the shorter or medium-term and need to rent out your current home until you move back.
Your circumstances no longer allow you to afford the property and rather than sell, you decide to let the property and retain the asset.
Disadvantages of Let to Buy
A Let to Buy mortgage will mean that you are keeping your current home and therefore likely to incur a 3% surcharge in stamp duty for your onward purchase. Try our stamp duty calculator to plan your costs.
You will have greater total mortgage debt when compared with just selling your current home. This is a risk and it is important to consider how this long-term debt will be repaid.
Mortgage interest is no longer a deductible expense and therefore you will need to consider your net profits after tax, especially if you are a higher-rate taxpayer
Capital gains tax will become applicable on a future sale, whereas this tax is not applicable on the main residence. Advice should be taken on this matter if you do intend to sell the property at some point in the future.
Additional costs need to be factored in for the maintenance and management of the property as well as the time cost of management.
Energy Performance & Gas and Electric certification
As you will be letting your home you will need to ensure your property meets EPC minimum standards, has recently passed gas safety checks which must be carried out annually and passed an electrical safety inspection valid for 5 years. This will also be part of a lender’s Let to Buy lending criteria.
Let to Buy mortgage calculator - What can I borrow?
The amount that can be lent on a Let to Buy mortgage will hinge mainly on the rental income achievable for your property. A bank valuer will set out what they believe is the market rent. A general rule of thumb will be:
Annual Rent / Rental Cover / Affordability Rate = Maximum mortgage
- Annual Rent = the annual gross rent for the property
- Rental Cover = the percentage the rent needs to cover the stressed mortgage payment by. This is usually 125% for a lower taxpayer and 145% for a higher or additional rate taxpayer
- Affordability Rate = The stressed rate applicable to ensure the borrower can afford mortgage payments now and in the future. This is typically 5.5% but can be lower for 5+ year fixed rates.
Example 1
A higher rate taxpayer lets out their home for £30,000 on a 2-year fixed-rate mortgage.
£30,000 annual rent / 145% / 5.5% = £376,175.54
Example 2
A basic rate taxpayer lets out their home for £30,000 on a 5-year fixed-rate mortgage.
£30,000 annual rent / 125% / 4.5% = £533,333.33
It is also important to consider that your onward mortgage may be impacted by the Let to Buy borrowing. Some lenders will want to see that your rental contract has started before eliminating the new mortgage cost from your expenditure.
It is key that the new lender can advance the required mortgage despite the new monthly mortgage cost or can consider the theoretical rental income to ignore the mortgage outgoing.
Consent to let vs Let to Buy
Consent to let is the process of applying for permission from your current lender to allow for the letting of your current residence. Mortgage lenders will typically put a time restriction on the permitted consent period and often impose a surcharge on your existing mortgage rate, this can be circa 1%. Consent to Let will also not allow for the increase in the current mortgage borrowing which may be key to funding your onward property purchase.
Consent to Let may be more advantageous if you are only looking to let the property for a short period of time. For example, if relocating for work for a short period. Consent to Let will therefore circumvent the need for valuation and legal fees applicable when remortgaging.
Not all lenders provide consent to let and so a Let to Buy mortgage may be the only solution if you are letting your current home. Most lenders will also want to know what your plans are and should you be buying a new property and retaining your current home as a long-term investment they will be less likely to grant consent.
Let to Buy mortgage lenders
Lenders that offer Let to Buy mortgages will often be those that offer buy-to-let mortgages. They will typically provide residential mortgages, as they will need an understanding of consumer buy to let regulations, which will overlap with regulated mortgage criteria.
There are often more factors to consider with a Let to Buy mortgage and normally a second simultaneous residential mortgage application. We would highly recommend that you work with a good mortgage broker with experience in Let to Buy mortgages. This process will also require a capable solicitor who can handle both mortgages, thus reducing the amount of communication and ensuring reasonable control of the legal process.
It can be the case that lenders only offer Let to Buy mortgages via brokers; Advias has excellent relations with Let to Buy lenders and can handle the sourcing and application process from start to finish.
Let to Buy stamp duty
As you will be retaining your current home, you will need to pay a 3% surcharge in stamp duty calculated on the purchase price of your new home purchase. The additional stamp duty can cost a significant amount which can be prohibitive.
If you sell the property within 3 years of incurring the surcharge then you should be able to claim this sum back from HMRC. Try our stamp duty calculator to work out this cost.
Author: Edward Checkley
Managing Director
