Let-to-buy mortgages are useful for when you don’t want to sell your home but want to buy another property to live in. A let-to-buy mortgage would then allow you to let out your current home whilst providing funds to purchase your new home.
The reason for not selling your existing home will vary for different homeowners.
For instance, it may not be practical to sell for the following reasons:
- You plan on moving back into your home
- You’re unable to sell your home
- Property values have dropped since you purchased your home
- You want to retain your existing property as an investment
There may be other reasons why you’d choose to let your property instead of selling it. Nonetheless, a let-to-buy mortgage can provide you with a perfect solution plus rental income each month.
What is a let-to-buy mortgage?
A let-to-buy mortgage allows you to let your home while providing you with a loan to purchase a new home.
Although a let-to-buy mortgage sounds like a single mortgage, it actually involves two mortgages. One mortgage is required for your existing property and a second mortgage is required for your onward purchase.
Your existing home will require a mortgage so that you can let it out. As you intend to let the property, you’ll need a buy-to-let mortgage. Your new property which you intend to live in will require a residential mortgage. This is how a let-to-buy would essentially work.
If you have equity in your current property or even own it outright, you may be able to release equity with a remortgage. This can then provide you with a deposit to help fund your new purchase.
Depending on the let-to-buy rates you qualify for, you should be able to use your newfound rental income to cover your mortgage. You may even have some funds left over to help you with your residential mortgage.
How to get a let-to-buy mortgage
Applying for a let-to-buy mortgage would involve an assessment carried out by your lender. As you’ll be needing both a buy-to-let mortgage and a residential mortgage, you’d have to meet the criteria for each of them.
- To qualify for a let-to-buy you will need to:
- Meet the affordability for your new home
- Aim for a minimum 10% deposit for your new home
- Have a 25% deposit for your buy-to-let mortgage (this can be equity in your existing home)
- Ensure your rental income will cover 125% of your buy-to-let mortgage repayments
- Have a good credit score, although there are lenders that may approve you even with bad credit
How much can I borrow?
The majority of lenders will only lend 75% LTV on buy-to-let mortgages. This means that you’ll need a deposit of at least 25% for your existing property.
If you have enough equity, you may be able to use this as your deposit, or at least part of it. There are also lenders that will consider a higher LTV if you’re struggling to raise a 25% deposit.
Buy-to-let mortgage lenders also require rental income to cover 125% of the mortgage payments each month. If you’re unsure about how much your property will rent for, you can speak to a local letting agent who may offer you a free rental valuation.
Having a rental valuation in writing can also be useful if your lender is having doubts over what rent is achievable.
For the home you’re moving into, it’s advised to have at least a 10% deposit. The more you can save for a deposit, the better. This is because you’ll have access to more lenders and better rates.
For residential mortgages, lenders will largely focus their assessment around affordability and your credit score.
Will I have to pay stamp duty if I let to buy?
It’s important to understand what stamp duty land tax you’d be paying under a let-to-buy deal.
As you’ll be purchasing a second property, you’ll be liable to pay additional stamp duty on your new home. Additional stamp duty starts from 3% and can go up to 15%.
You can claim back any additional stamp duty you’ve paid if you sell your second property within three years. That said, you’ll need to make a claim within twelve months from when you sold your property.
If you’re lucky enough to find a property under £40,000, you won’t be subject to second home stamp duty.
Speak to a let-to-buy mortgage broker
As let-to-buy mortgages involve getting two mortgages, the process is far from simple.
Even if you were taking out a single mortgage, having a broker can ensure you’re not overpaying by securing you the best possible deal. With two mortgages involved, it’s very risky trying to do it all by yourself.
Let-to-buy brokers can assess your situation and guide you on what the best possible solution is. Furthermore, an advisor can also speak to underwriters should there be any issues.
Mortgage advisors will only consult lenders where you meet their criteria, such as affordability. Even if you have bad credit or have recently become self-employed, going to a high-street lender yourself will more than likely result in your mortgage being declined.
