A guide to Let-to-buy mortgages

A let-to-buy mortgage is the mortgage product you will need when you decide to rent out the house you are currently living in, in order to buy a new house you want to move into.

This process is necessary because it is generally not allowed to have a residential mortgage on a property that you are renting out instead of living in.

In this article, our experienced team of mortgage advisers at PIL Southampton answers the questions about let-to-buy mortgages that we are most often asked.

How does a let-to-buy mortgage work?

If you choose to rent out the home you are moving out of, you will need to remortgage, changing the type of mortgage you have on that property from residential to let-to-buy. 

Ideally, your tenant’s rent will cover your let-to-buy mortgage, leaving you free to use your other income to meet the mortgage payments on the home you have just moved into and taken out a residential mortgage on.

You may choose to arrange both mortgages with the same provider, but you don’t have to. An experienced mortgage adviser like one of the team at PIL Southampton will help you to get the best deal for you, whether both mortgages are with the same lender or not.

Who might want a let-to-buy mortgage?

Let-to-buy mortgages can be the right option for anyone who either can’t, or doesn’t want to, sell the home they are currently living in when they choose to buy and live in a new home.

This might be because they are finding it hard to sell their existing home but need or want to move to a new home. They might be moving into a new property with a partner but aren’t ready to sell their existing home yet.

Another reason might be that the value of your existing home has dropped and, although you want to move, you want to hold on to your old property hoping that its value will increase. 

Alternatively, you might be moving away for a few years but plan to move back at some point to the same house you left.

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

Although, technically, a let-to-buy mortgage is a type of buy-to-let mortgage, the main difference is that let-to-buy mortgages tend to be needed by accidental landlords – people whose circumstances have changed rather than people who are proactively choosing to increase their property portfolio.

Because of this different motivation, you can still be living in the property when you are arranging your let-to-buy mortgage, whereas you can’t get a buy-to-let mortgage on a property you are still living in.

What are the advantages of let-to-buy mortgages?

If there is enough equity in the property you are letting, you will be able to borrow an additional sum, secured against that property, to provide the deposit on the property being purchased. 

A let-to-buy mortgage takes the pressure off needing to sell one home to buy another, and avoids making a financial loss if you are in a negative equity situation.

Lenders’ criteria when organising a buy-to-let mortgage and a residential mortgage at the same time can make the process more difficult than arranging a let-to-buy mortgage alongside a residential mortgage.

Let-to-buy rates and fees can be more favourable than buy-to-let rates and fees.

Owning two properties potentially increases your equity gains if your properties rise in value in the future.

What are the disadvantages of let-to-buy mortgages?

You will have to ensure that your projected rental income will be enough to cover your let-to-buy mortgage payments.

Let-to-buy mortgage rates are usually higher than residential mortgage rates and they are not as common, so you will have fewer lenders’ deals to choose from.

Being responsible for two mortgages means that your finances could be strained if there is a period when your rental property isn’t occupied or if there are any issues with your tenants paying their rent.

Property values can fall as well as rise – owning two properties could increase your potential equity loss in the future, depending on fluctuations in the property market.

How much stamp duty do you pay on let-to-buy mortgages?

The amount of stamp duty you pay depends on the value of the home you are purchasing – there are five different price bands.

A 3% stamp duty surcharge is imposed for second homes purchased in England. However, this will be refunded if you sell of one of your properties within three years.

What is the lending criteria for let-to-buy mortgages?

Each lender will have their own set of lending criteria, including the standard credit and affordability checks, but it is also usual to be asked to evidence that you are buying another home at the same time, and that you are planning to rent out your existing home – not selling it.

You are likely to need to provide an estimate of predicted rental income for your current home, i.e. quotes from estate agents, which will probably need to be 125-140% of the mortgage interest payment.

The let-to-buy lender will usually have a set maximum age, for example 65, that you will need to be at the time you apply for the mortgage or when you are scheduled to have fully repaid the mortgage. And most lenders have a minimum borrowing age of 25.

You will need to have enough equity in the let-to-buy property to meet your let-to-buy lender’s minimum loan to value (LTV) ratio.

To use an example, if your ‘old’ home is worth £300,000 and you still have £140,000 left to pay on the mortgage, you could borrow some of your £160,000 equity to use as a deposit on your new home.

In this example, if your let-to-buy lender requires a minimum LTV of 75%, they may let you borrow up to £65,000 of your old property’s equity to use a deposit for your new home’s residential mortgage, when they convert your existing residential mortgage to a let-to-buy product.

Are there other options than getting a let-to-buy mortgage?

One alternative is a ‘consent to let’, which some lenders will grant you on your existing residential mortgage. This can be useful if you need to move out and want to generate rental income from your vacated property for a relatively short period.

However, it might be harder to obtain approval for a second residential mortgage whilst the consent to let is in place.

Another option is to move out of your current home into rented accommodation. As your home will then be empty, you would be able to take out a buy-to-let mortgage. Do bear in mind, though, that this process could be costly and complicated, and you may not meet lenders’ buy-to-let criteria.

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

Most lenders will require a 20-25% deposit for a let-to-buy mortgage. However, it’s worth remembering that you can add the deposit for your new residential mortgage to the amount you borrow for your let-to-buy mortgage, if you have enough equity in the property to do so.

How PIL Southampton can help you 

Let-to-buy mortgages are specialist products that our knowledgeable team of mortgage advisers are familiar with and can give you expert advice on.

We understand that every individual has unique circumstances. We will get to know you and your situation, then take that information and combine it with our comprehensive knowledge of the current mortgage market to find the most appropriate mortgage deal to suit your needs.

How you can contact PIL Southampton

Our expert mortgage advisers are here to guide you through the mortgage process, every step of the way. 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.