Let to Buy – What is it and when should you consider it?

There are many reasons why you might want to move house – sometimes it will be necessary, for example due to a change of job or other life circumstances, or you may simply want to move to a place that is more convenient for you and your family. If you have an outstanding mortgage on your current home, the process may be a little more difficult, but it is still entirely possible. There are several good ways to move house with a mortgage, and one of them is the Let to Buy strategy.

Let to Buy among other solutions

If you want to move to another home but still have a mortgage on your current one, you have several options. The first and simplest is to sell your current property and pay off the mortgage with the proceeds from the sale. However, this has its drawbacks – the sale and the purchase must be timed so that you are not left without a place to live, which can be stressful and time-consuming. You can stay with a relative or rent a home for a short time, but these solutions can be costly and inconvenient. In addition, repaying the mortgage early may incur an Early Repayment Charge (ERC), which will add to the cost of moving.

Another option is mortgage porting, which involves transferring your mortgage to another property. Porting is not guaranteed: you usually need to apply and meet the lender’s current lending criteria, including affordability. If it is approved, you can usually keep your existing deal and avoid an early repayment charge (ERC) on the amount you port. However, remember that if you want to move to a more expensive property, you may need to borrow more, and the extra borrowing may come on different terms.

What is Let to Buy?

Let to Buy means letting your current property and buying a new one to move into. It is not so much a specific type of mortgage as a way to switch your residential mortgage to a buy-to-let mortgage.

In some cases, this can be an attractive solution, because with Let to Buy you become a landlord – the property is rented out and you receive income from the rent. However, property values and rents can fall as well as rise, so a profit isn’t guaranteed.

How does the whole process work?

Mortgage conversion

To do a Let to Buy, the first thing you need to do is turn your current home into a rental property. Remember that if you have a standard residential mortgage, one of the conditions of the agreement is that the property will be your place of residence. Letting it out without the lender’s consent is a breach of contract, which can lead to really serious consequences.

Letting your home long term usually means switching to a buy-to-let mortgage, either with your current lender (if it offers one) or by remortgaging to a new lender. It is a good idea to talk to your current lender and check what terms you can get. Remember that buy-to-let mortgages generally have higher interest rates, while most of them are interest-only mortgages, so the monthly payment covers only the interest and is lower than on a repayment mortgage. However, buy-to-let mortgages usually have a lower maximum LTV – usually no higher than 75%, although some lenders offer more.

Check whether an early repayment charge (ERC) applies to your current mortgage. You may avoid one by waiting until your deal ends or, if your current lender offers buy-to-let products, by switching with it; check the terms. This matters when you work out whether the plan makes sense. Early repayment charges are usually a percentage of the outstanding balance – often between 1% and 5%, depending on the lender and how early you leave the deal. Check your mortgage offer for the exact charge.

Please also note how affordability is assessed for buy-to-let mortgages. Buy-to-let lenders mainly assess the rent: they usually require the expected rent to exceed the monthly mortgage interest, calculated at a stressed interest rate, by a margin each lender sets (the interest coverage ratio). They may also take your personal income into account and check your debt-to-income ratio (DTI) and credit report. When setting this margin, lenders take into account the costs of letting, such as letting and management fees, repairs, insurance and periods when the property is empty between tenants (voids).

Instead of remortgaging, can I use consent to let?

A question some people ask is whether, for Let to Buy, they can apply for consent to let and rent out the property on that basis. This can be confusing, so it is worth clarifying. Consent to let is the lender’s permission to temporarily rent out the property. This means it will not work for long-term letting, as in Let to Buy.

Trying to avoid refinancing by repeatedly obtaining and extending consent to let may end very badly for you and your mortgage. However, consent to let is useful in other situations where the home will be empty for some time, e.g. when you move abroad temporarily, for the period your lender agrees.

Buying your next home

After switching your previous mortgage to a buy-to-let mortgage, you can take out another mortgage, this time a residential mortgage, to buy your new home. It can help to release part of the equity from your previous property and use it as a deposit for your new home. This will lower the LTV of your second mortgage, which may give you access to better rates. Here is how it works:

Let’s assume that your current home is worth £300,000 and you still owe £150,000 on it. If a buy-to-let lender lends 75% of the value (an LTV of 75%), you could borrow up to £225,000. £150,000 repays your existing mortgage, leaving up to £75,000, less fees and costs, towards the deposit for your new home. The amount you can borrow depends on the rent passing the lender’s interest coverage test and its lending criteria, so check that your lender allows money raised this way to be used as a deposit.

Costs and tax to check

Because you will own two homes, the new purchase is usually charged at the higher rates of property tax for additional dwellings: the higher rates of Stamp Duty Land Tax in England and Northern Ireland, the Additional Dwelling Supplement to Land and Buildings Transaction Tax in Scotland, and the higher residential rates of Land Transaction Tax in Wales. The rules and reliefs differ in each nation, so check the current rates before you commit. Rental profit is taxable income, and individual landlords cannot deduct mortgage interest as an expense; instead they get a basic-rate tax credit. If you later sell the let property, you may have to pay Capital Gains Tax.

In what situations is it worth considering Let to Buy?

There are several situations in which Let to Buy may be worth considering:

• Selling your house now would not be profitable – when the property market is weak and prices are low, selling may not make financial sense. Let to Buy lets you move and keep your previous home, giving the market time to recover while you receive rent, although prices may not rise and rental income isn’t guaranteed;

• You want to move quickly, but the sale is delayed – for various reasons, no one wants to buy your property at the moment. Switching to a buy-to-let mortgage can let you move without waiting for a sale, although the remortgage takes time and depends on the lender’s approval.

• You want to start investing in property – Let to Buy can be a starting point. Because you have already repaid part of your current mortgage, you may be able to use that equity, but borrowing against property carries risk and your home may be repossessed if you do not keep up repayments.

Summary

The most important thing in Let to Buy is the investment strategy. Having two mortgages at the same time is not easy and requires careful planning. Many buy-to-let mortgages are interest-only, which means you will have to repay the entire amount borrowed at the end of the term. You need a credible repayment plan, such as savings or selling the property, but property values can fall, so a sale may not cover the full loan. Rental income can also stop if the property is empty.

However, Let to Buy requires considerable financial capacity, as repaying two mortgages at once is a significant burden and not everyone can afford it. The whole subject is quite complicated, so in order to maximise profits and minimise costs, it is best to work with an independent mortgage broker who can compare the mortgage options available to them, taking account of costs and your circumstances – approval and terms depend on the lender.