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 flat but still have a mortgage on your current one, you have several options. The first and simplest is to simplysell your current property and pay off the mortgage with the proceeds from the sale. However, this has its drawbacks – both transactions, the sale and the purchase, must be synchronised in such a way that you do not lose your roof over your head – such an operation can be stressful and quite time-consuming. Of course, you can seek help from a relative or rent a flat on a short-term basis, but these solutions can be financially burdensome and simply inconvenient. In addition, early repayment of the mortgage may incur an Early Repayment Charge (ERC), which will add to the cost of moving.

Another option is mortgage porting, which involves transferring the entire mortgage to another property. This solution can be advantageous in that, thanks to the same mortgage agreement, the mortgage terms also remain the same. This also means that you do not have to pay an early repayment charge (ERC). However, remember that if you want to move to a more expensive property, a second mortgage may be required, which will have different terms and conditions.

What is Let to Buy?

Let to Buy is nothing more than renting your current property and purchasing a new one to move into. It is therefore not so much a specific type of mortgage as an operation to convert a regular mortgage into an investment mortgage.

In some cases, this form of financing can be a really attractive solution. Considering that with Let to Buy you become an investor in a sense – the property is rented out and you receive a regular income from the rent. Taking into account the gradual, long-term increase in property prices in the UK, Let to Buy can bring you a fairly substantial rate of return.

How does the whole process work?

Mortgage conversion

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

Converting a property into a Let to Buy rental property can only be done by refinancing your mortgage with a Buy-to-Let mortgage. It is a good idea to talk to your current lender and check what mortgage terms you can get. Remember that Buy-to-Let mortgages are generally more expensive (they have higher interest rates), while at the same time most of them are Interest Only mortgages, which means that the monthly instalment is much lower. Importantly, however, Buy-to-Let mortgages usually have a very limited LTV - usually no higher than 75%.

An important aspect to keep in mind is the ERC fee – if applicable, it can only be avoided by remortgaging with the same bank. This is an important factor when estimating the profitability of the entire undertaking – penalties for early repayment of the mortgage can be as high as 3% of its balance.

Please also note that creditworthiness assessment for Buy-to-Let mortgages is completely different from that for residential mortgages **. *Factors such as income, debt-to-income ratio (DTI), expenses and credit report are secondary – the most important factor is the profitability of the property, i.e. how profitable the rental is in relation to the mortgage costs. The bank will primarily check the ratio of the mortgage instalment to the rent – usually, the rent is required to be at least 140%-150% of the monthly instalment. This ratio is a consequence of the banks’ precautionary policy, which ensures that temporary problems with finding a tenant do not result in immediate delays in repayment.

• Remember that the 140%-150% values do not apply to instalments paid on a standard residential mortgages. In the case of interest-only mortgages, the monthly instalment only includes interest, but not capital, which makes it much lower than residential mortgage instalments.

Instead of remortgaging, can I use the bank’s consent to rent?

A question that may arise in some people’s minds is whether, in the case of Let to Buy* - it is possible to apply for a so-called Consent to Let and rent out the property on this basis*. This is a very important issue and can be confusing, so it is worth clarifying. Consent to Let is the bank’s consent to temporarily rent out the property. This means that, unfortunately, it will not work for long-term rentals, such as those that take place in the case of Let to Buy.

Attempting to circumvent the need for refinancing by unreliably obtaining and extending Consent to Let may end very badly for you and your mortgage. However, such a statement is useful in many other situations where the house will remain empty for some time for various reasons, e.g. when youleave Great Britain for a year or two.

Buying your next home

After converting your previous mortgage into a buy-to-let mortgage, you can take out another mortgage, this time a residential mortgage, to buy your new home. One thing that helps a lot is withdrawing part of the capital from your previous property and using it as a deposit for your new home. This will lower the LTV ratioof your second mortgage, resulting in better terms. Let us explain how it works:

Let’s assume that your previous property cost £300,000 and was half paid off, meaning that your buy-to-let mortgage should be taken out for a minimum of £150,000. Instead, you can take out a mortgage for a larger amount, for example 75% of the value of the house (the LTV will then be 25%, which is still a good value), i.e. £187,500. In this case, you will use £150,000 to pay off your previous mortgage, and £37,500 can be used as a deposit for your new home. This will obviously give you access to better mortgages - it is better to pay off two mortgages with an LTV of 75% each than one with an LTV of 50% and another with an LTV of 95%.

In what situations is it worth considering Let to Buy?

There are several situations in which considering Let to Buy may prove to be a very good idea and solve certain problems:

• **Selling your house at the moment is not profitable **– in a situation where the property market is unfavourable and prices are low, selling your house may simply not be profitable. A great solution to move and keep your previous home is Let to Buy, which gives you time for the property price to rise, during which you will profit from the rent;

• You want to move quickly, but the sale is delayed – for various reasons, no one wants to buy your property at the moment. A quick remortgage will give you much more time and the opportunity for a safe, potentially profitable investment.

• You want to start investing in property – Let to Buy can be a good start. Thanks to the fact that part of the capital from your current property has already been repaid, you can achieve a profit from your first investment faster while maintaining security.

Summary

The most important thing in Let to Buy is the investment strategy. Having two open mortgages at the same time is not an easy task and requires careful consideration of your action plan. You must bear in mind that a buy-to-let mortgage will most likely be an interest-only mortgage, which means that you will have to repay the entire principal at the very end, after paying all the interest. If you do not have enough savings to do this, the solution is to sell the property, which will most likely result in a profit, as there is a very good chance that the value of the property will increase during the time you are paying interest. In addition, you will have additional income in the form of monthly rent.

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 will be able to find the best financing offers on the market – with such operations, it is good to have someone who can answer all your questions and dispel any doubts.