What are let to buy mortgages and are they suitable for you?

Do you want to move home but you can’t find a buyer for your existing property? If you have enough equity in your home, then you might benefit from finding out more about let-to-buy mortgages. Equity is the difference between the market value of your home and the amount of mortgage you have left to pay on it.

What is a let-to-buy mortgage? It’s a mortgage where you raise the deposit for the home you want to buy from the equity you’ve accumulated in your existing property, and then:

  • take out a mortgage on the property you want to move into and
  • let out your existing property to tenants to create rental income that allows you to continue to pay the mortgage on that property

There are a number of advantages to taking out a let-to-buy mortgage, the main one being that you have time to get settled into your new home without feeling pressurised into selling your existing one. After all, moving to a new home can be stressful enough without having to deal with selling your existing house at the same time. A let-to-buy mortgage offers you the flexibility to sell your home at a time that’s convenient for you.

At Lend4, we’ve put together this handy guide to your options on let-to-buy mortgages including information on:

  • how let-to-buy mortgages work
  • are you eligible for a let-to-buy mortgage?
  • how to find out what the rental potential on your current property is
  • the stamp duty situation with let-to-buy mortgages
  • what you have to be aware of if you take out a let-to-buy mortgage
  • alternatives to let-to-buy mortgages

So, how do let-to-buy mortgages work?

If you decide to let-to-buy, you’re effectively taking out two mortgages at the same time. Similar to a buy-to-let mortgage (LINK TO SECTION) and taken out on an interest-only basis, a let-to-buy mortgage allows you to use the rental income generated from the tenants in your original property to cover the repayments on the mortgage.

This then allows you to apply for a normal residential mortgage allowing you to purchase a second home – or your new primary residence.

Am I eligible for a let-to-buy mortgage?

As there is more risk involved for the lender, let-to-buy mortgage rates are often slightly more expensive than normal residential loans and they often require an up-front deposit of at least 25%.

Additionally, there are a number of things lenders look for when reviewing applications for a let-to-buy mortgage, including:

  • a strong credit history (LINK TO SECTION)
  • evidence that you own at least 25% of your home
  • evidence of your rental income (must be at least 125% of mortgage repayments)
  • evidence of an onward purchase
  • you’re under the age of 70

If you’re able to meet these requirements, let-to-buy mortgages are a suitable way for you to move into your new dream home without having to wait for a buyer to purchase your existing property.

How do I find out what my rental potential is?

The recently imposed letting fees ban and clamp-down on tax breaks was designed to reduce the amount that letting agents can charge tenants. As you’d expect the new rules have had an impact on landlords too, including people taking out let-to-buy mortgages if they are using a letting agent’s service.

Did you know that 25% of private landlords are now considering selling up, according to the Residential Landlords Association (RLA), because of the new rules?

Other recent rule changes have meant that mortgage lenders now require landlords to achieve higher levels of rent in relation to their mortgage repayments. To find out how much rent you’ll likely be able to generate from your property, it’s a good idea to research typical letting prices in your local area.

Do I have to pay stamp duty on a let-to-buy mortgage?

As a let-to-buy mortgage means you’ll be purchasing a new property while renting out your existing one, you will have to pay an additional 3% stamp duty (or 4% in Scotland) to pay on top of the regular stamp duty rates.

For example, if you purchased a second property worth £200,000, you’d pay a total of £7,500 in stamp duty.

The good news, however, is that if you sell the property that you’re considering renting out within three years then this fee will be returned to you.

It’s worth using a free online buy-to-let stamp duty calculator to find out how much you’ll be paying in stamp duty if you decide to purchase a second property. Alternatively get in touch with our friendly team of experts today on 03330 161 444 or email info@lend4.co.uk and we will guide you through your options.

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

There are a number of pros and cons to owning two properties. One disadvantage to be particularly aware of is that If property values drop, you run the risk of facing steeper losses than if you owned just one home.

Compared to standard residential mortgages, many high-street lenders don’t offer let-to-buy mortgages, and, when they do, the rates are often at higher rates than standard mortgages.

As you’ll be owning two properties – regardless of whether you’re renting one out or not – you’ll also have two mortgages to pay which is risky unless you’re on a sound financial footing.

What are the alternatives to let-to-buy mortgages?

As explained above, let-to-buy mortgages generally have more conditions attached to them so it’s worth considering what alternatives are available to you if you’re struggling to find a buyer for your existing home.

If you’re in no particular rush to move to a new house, making upgrades and modifications to your home is one way of potentially increasing interest from buyers and indeed your property’s overall value. Home renovations can typically be funded by taking out a loan or re-mortgaging your property.

Do you need advice on let-to-buy mortgages?

If you’re interested in taking out a let-to-buy mortgage, get in touch with Lend4 today on 03330 161 444 or email info@lend4.co.uk and our experts will guide you through the process and happily answer any questions you may have.