As the name suggests, let to buy is a type of finance which allows you to let out your current home and buy a new one to live in. Beckie Pepperrell, Head of Residential Mortgages, explains how it works and why you might want to use this type of finance.
The two most common reasons why you might use let to buy finance are:
- You are struggling to sell your current home
Perhaps the value of the property has dropped so it’s not worth selling right now. Or perhaps you’ve got a new job and need to move more quickly than the selling process will allow.
- You’d rather keep your current home as an investment
Letting it out will cover the ongoing property costs, may also provide you with a monthly income, and over time, the property should rise in value. We often see this scenario with new couples who each own their own home already, and then decide to move in together. WARINING: As with all investments, the value of property may go down as well as up!
How does it work?
Essentially, you are applying for two mortgages, often with the same lender – a buy to let mortgage for your current home and a home-mover mortgage for your new home.
As with any mortgage application, you will need to have a deposit for both transactions. These are usually raised by releasing equity in your current home but can be from elsewhere.
Getting the buy to let mortgage
Don’t assume that your property will be suitable security for a buy to let mortgage. Do lots of research to find out what your home is worth and check that it is lettable and will generate sufficient rent. Rightmove or Zoopla (other property websites are available) are good places to start. And talk to a friendly estate and letting agent.
When working out if you can afford to take on a buy to let mortgage, err on the side of caution and use a Rent to Interest (RTI) calculation of 145% at 5.5%. This means that the monthly rent should be 145% of the monthly mortgage payment multiplied by a notional interest rate of 5.5%. More generous RTIs are available, particularly on five year rates but it’s better to work on a worst case scenario. It’s also worth knowing that buy to let mortgages are typically more expensive than residential home-owner/mover mortgages. Use our buy to let mortgage rate finder and calculator to get an idea of what to expect.
Don’t assume that you will qualify for a buy to let mortgage. In addition to the RTI, these days lenders are also obliged to apply other affordability checks to ensure that you can cover the mortgage payments; they don’t simply rely on the rent from the property itself. Lenders will want to be comfortable that you can manage all of your outgoing commitments, so make sure your finances are in order and do take professional advice from an accountant or financial adviser on the most appropriate way for you to borrow. Recent changes to income tax relief have made it harder for landlords to make a profit in buy to let and you don’t want to come unstuck further down the line. Remember too, that there are costs involved in taking on a buy to let mortgage.
To ensure that you find the right buy to let mortgage for your circumstances do get in touch to talk through the options. Bear in mind that the majority of buy to let mortgages are only available via intermediaries, who act as a sort of quality control filter for lenders.
It’s also worth knowing that normally you cannot live in your current home when the buy to let mortgage kicks in. Most buy to let lenders will want to know the address of your new home (and see a new mortgage offer) to ensure that this does not happen The new purchase needs to complete simultaneously on the same day for this reason. Timing is very important. That’s why many borrowers opt to use the same lender for both transactions.
Becoming a landlord
As you might imagine, being landlord is laden with responsibility – you will have many legal obligations to fulfil as well as providing a home for your tenants. We recommend that you join a landlord association and get learning. Also consider using the services of a letting agent to find tenants and manage the property for you, particularly if you are moving out of the area.
Getting the home-mover mortgage
If you are on a good rate, it might be worth asking your current lender if you can port (transfer) the mortgage onto the new property. You could also consider asking your lender for “consent to let” your current home, although this will only be a short term solution (6-12 months max). Talk to us about the best mortgage rates available at the moment and which lenders offer let to buy options.
If you think all this is beginning to sound complicated – it is! That’s why most people use a broker to manage the process for them.
Here at Mortgages for Business, our expert consultants on the Residential Desk are qualified to advise on the entire let to buy process. We can work with you to find the most suitable rates for both properties and we’ll manage the mortgage applications for you. This means we will co-ordinate with all parties (you, lenders, solicitors, valuers, estate agents) to get completion of both mortgages on the same day. Of course, it doesn’t always pan out like that but we have a very good success rate in this area.
Beckie Pepperrell has left Mortgages for Business for pastures new. For more information or for any questions relating to this blog, please contact the Residential Team on 0345 345 6788, where one of our consultant mortgage brokers will be happy to assist.
ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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