A guide to let-to-buy mortgages

Sometimes, you find yourself in the position of wanting to buy a new home when you can’t sell your existing mortgaged home. In this situation, a let-to-buy mortgage could be the solution for you.

Let’s look at what’s involved in a let-to-buy mortgage and what you need to consider, to help you decide if it’s right for you.

What is let-to-buy? 

Let-to-buy is a type of mortgage specifically designed for people who want to move house without needing to sell their existing property. It enables you to switch to a mortgage that is solely to be used when you are renting out your existing property to tenants, and take out a mortgage to buy a new home.

What are let-to-buy mortgages and how do they work? 

With a let-to-buy mortgage, you transfer your existing standard mortgage to a let-to-buy mortgage in order to buy a new property. Rather than selling your existing property, you keep it as an investment and, ideally, you’ll earn rental income from tenants and you’ll also hopefully benefit from building up equity in that property if its value increases.

This type of mortgage can also be a good option for couples who each own a property when they choose to move into together – they can keep one of the properties and rent the other one out with a let-to-buy mortgage.

A let-to-buy mortgage enables you to release equity from your property which means you can borrow at a higher LTV (loan to value) ratio. For example, if your existing mortgage is £100,000 and the property is worth £200,000, you could borrow £150,000, using the extra £50,000 as a deposit on your new property.

Note: Your let-to-buy mortgage and your new standard mortgage do not need to be with the same lender.

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

A buy-to-let mortgage is for people who buy a property specifically to rent it out, or to remortgage a property they already rent out. 

A let-to-buy mortgage, on the other hand, is used when you already own the property, but you want to rent it out because you are moving into another property. 

If you are still renting out your existing property when your let-to-buy mortgage deal ends, it will be treated as a buy-to-let mortgage from then on. 

What are the advantages of let-to-buy? 

A let-to-buy mortgage gives you the freedom to buy a new home and move on, even if you can’t sell your existing home. It removes the potential stress of relying on a chain that could fall through, which would result in you losing the property you had hoped to buy.

Another advantage of a let-to-buy mortgage is that you can release equity from your current home to use as a deposit on a new home.

Having two properties doubles the potential gain if house prices increase, and you could also be increasing your household income if you are able to consistently rent out your existing property for more money than you are paying out in mortgage repayments.

What are the disadvantages of let-to-buy? 

Keeping your existing property means that you will have less deposit to put towards your new property than if you were selling it, as you will need to retain at least 20-25% equity in the property you are renting out. 

And, you will pay higher stamp duty on your new property as you will now own two properties. We cover this in more detail further on in this article.

Let-to-buy mortgage interest rates are generally higher than standard mortgage interest rates, due to the higher risk of you managing two properties and potentially relying on the rental income you are earning from tenants.

Being responsible for two mortgages can be more of a financial burden and cause you worry, and owning two properties means that you are twice as vulnerable if house prices fall.

Also, taking on a let-to-buy mortgage means that you will also be taking on the responsibilities of being a landlord which can be time-consuming and stressful.

You may have to pay additional tax on the income you make as a landlord, too.

Do I have to pay Stamp Duty if I let-to-buy? 

Yes, because you will have a second property you will be liable for the Stamp Duty surcharge which is 3% on top of the Stamp Duty band. However, if you sell your existing home within three years of completion, HMRC will give you a full refund on that stamp duty surcharge.

The amount of Stamp Duty that you will have to pay will depend on the value of the property that you are buying; there are five different rate bands. You can see how much you would have to pay using HMRC’s Stamp Duty calculator.

What are the lending criteria for let-to-buy? 

Each lender will have their own criteria but, typically, they will offer a maximum LTV of 75% and they will want to see evidence that you are buying another property.

The lender will also want to see evidence that you are likely to be able to rent your property out for at least 125-140% of the mortgage repayment.

You will need to be at least 25 years of age when you apply for a let-to-buy mortgage and under 75 years of age, though some lenders will stipulate a lower maximum age limit than that.

The property you are taking out a let-to-buy mortgage on cannot be listed for sale or be sold subject to contract at the time you switch to let-to-buy.

And of course, as with any mortgage application, you will need to have a good credit rating and pass the lender’s affordability assessment.

How much equity do you need for a let-to-buy? 

As lenders see a let-to-buy mortgage as higher risk than a standard mortgage, they ask for a larger deposit – usually around 25%. However, this can hopefully be funded by using the equity from your existing property.

How PIL Southampton can help you 

Our expert team of financial advisers are experienced in the field of let-to-buy mortgages and can guide you through the products that are available to you across the marketplace. They will take the time to get to know your individual circumstances so they can help you to make the right decision for you.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.