Let to Buy Mortgages Explained
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Let to Buy Mortgages
Let to Buy mortgages increased in popularity a few years ago, when fluctuations in the housing market made it more challenging for people trying to sell their own homes. A Let to Buy mortgage enables home-owners to rent out their existing property while retaining ownership, and take out a new residential mortgage to buy another home to live in. Of course, this comes with its own advantages and disadvantages.
Let to Buy Mortgages Information
How do Let to Buy Mortgages work?
A Let to Buy mortgage is a term that has been adopted to make the concept more easy to understand, but in practice this product is a facility for purchasing property, and is the process of buying and completing on two mortgages at the same time. Here is how the process works out, step-by-step:
- We’ll identify a lender that is willing to offer acceptable terms on a Buy to Let mortgage on your existing property (as your residential mortgage will not allow for a tenancy).
- This Buy to Let mortgage will then enable you to access some of the equity in your current home (ideally as much as possible) to use as a deposit on your new property purchase. The release of this equity/deposit will usually be timed to coincide with the completion of the purchase. Remember that the larger deposit you can provide, the better interest rate you will get.
- We’ll then source a lender for the residential mortgage on your onward property purchase who is willing to lend on the basis that your current residence will be let out on the completion of both mortgage transactions, with the rental income from your current home being used to pay the Buy to Let mortgage (with perhaps a surplus profit).
- When both transactions are complete, we will coordinate the cash transfers with your solicitor to ensure that the equity released from your current house forms the deposit for your new purchase. You should be able to complete the purchase of your new home using the monies from your existing property and the amount borrowed through the new residential mortgage – in this way, you retain ownership of your original house as a Buy to Let property while being able to move into your new home.
This process can be quite complex, and part of our role is to make sure that all agreements and transfers are carefully thought out so they occur at exactly the right times to produce the desired outcome. Our advisers are well-versed in all these matters and will be happy to guide you through each step and make sure that your plans have the greatest chance of success.
What are the criteria for Let to Buy Mortgages?
With a Buy to Let mortgage, you will have to meet two sets of criteria – those for both the Buy to Let agreement on your current property, as well as those for the residential mortgage on your new home.
With the Buy to Let mortgage, these will be:
- A Buy to Let mortgage typically requires a deposit of 25%, so you will need to ensure that there is still equity to meet this amount in your property after you have taken out what you will need for your next purchase. The exact amount will be determined by a surveyor’s evaluation.
- Most Buy to Let mortgage lenders need to see proof of a minimum personal income, usually anything between £15k-25k.
- An independent surveyor will need to confirm that the level of rental income you expect to receive from your current property is in line with the current local rates (and you haven’t been bargaining on too high a figure!)
- The lender will also assess the anticipated rental income to ensure that it will be enough to meet the mortgage payments and allow for extra costs, such as agency fees, repairs, decoration, etc. They usually expect rental income to be 125% of the mortgage repayment amounts, but may stipulate as high as 145% in some cases.
Once the Buy to Let criteria have been met, you then have the residential mortgage criteria to contend with:
- The lender will conduct an assessment of your application based on their own affordability guidelines, but will include considering your own personal income and that the letting mortgage will not place too high a strain on your monthly outgoings.
- You must provide a large enough deposit to be able to obtain the mortgage and purchase your new home – you will usually be able to show this from either your savings or details of your Buy to Let agreement, which will reveal the equity being transferred from that property.
- All other criteria will be as per a conventional residential or Buy to Let mortgage, with the usual credit record checks and surveys.
If you have any doubts about being able to meet any of the above criteria, or would like a personal run-through of the process, please contact one of our expert advisors today.
What Deposit Do I Need For a Let To Buy Mortgage?
As the Let To Buy mortgage is actually two transactions combined together, there are actually two aspects to the deposit process.
For the property you are letting, you will typically need to provide a 25% deposit or level of equity remaining in the house after you have taken out the cash you need for the deposit on your next residential purchase. There may be some lenders who will require less than this, but you should allow for it.
For the property you are buying, the level of deposit will be as for a typical residential agreement – usually 10%, but some lenders will accept 5%. Lenders’ terms and deals are constantly evolving to meet competition and changes in the market, so it’s a good idea to get a free consultation with an expert mortgage advisor to ensure you are aware of the most suitable deals to meet your needs.
How Much Can I Borrow With a Let To Buy Mortgage?
Again, this is more complex due to the double-mortgage nature of this agreement. With the property you are letting, the amount you will be able to borrow will depend on the anticipated rental income from the house, and the market value of the property, as determined by a surveyor. The general rule is a lender will be willing to let you borrow up to 75% of the Buy to Let property’s value, although some may squeeze this to 80% or 85% in certain circumstances.
With the property you are buying, it might be possible to borrow up to 95% of the property’s value, although 90% is more common. However, the exact figure will depend on your personal income level (from whatever streams you have), and how the lender translates this into what they perceive you will be able to afford in monthly repayments. As ever, the higher the level of deposit, the more affordable your monthly repayments will be.
Advantages of Let to Buy
Obviously, the main advantage of a Let to Buy mortgage is being able to retain ownership of your current house as an investment property that can provide a new income stream, while you can also buy a second property to live in.
This arrangement is also particularly useful for people who have had trouble trying to sell their existing home in order to complete a house-buying ‘chain’. Releasing equity on the current property to use as a deposit on your ongoing purchase effectively breaks the reliance on the ‘chain’ and allows the purchase to proceed.
Without the need for a buyer to be in place for your existing property, you become a more attractive prospect in the eyes of the seller of your next new home in that you can complete quickly, much in the same way as a cash buyer or a first time buyer.
Disadvantages of Let to Buy
On the surface, keeping your existing property as a Buy to Let investment can seem like an excellent idea, but you should bear in mind that being a landlord comes with its own set of responsibilities and costs.
Primarily, the property must be maintained to a legally acceptable standard in order for it to be let out to tenants. You will also need to pay for maintenance, decoration, repairs and improvements to make sure it is habitable and a pleasant place to live in. If you let the property through an agent, rather than manage it and liaise with tenants yourself, you will also have to pay them a fee to do so, which could be around 10% of the rental income plus admin fees each time a tenancy changes.
There is also the risk of the property standing empty for periods between tenancies, in which case you will still need to cover the mortgage payments on the house. Meanwhile, all rental income you receive will be taxable and must be declared to HMRC though annual tax returns, with the additional cash perhaps pushing you into a higher tax bracket. Some landlords prefer to set up their lettings business as a limited company for tax efficiency, which can be further work and require accounts to be prepared by a chartered accountant.
Finally, by keeping your existing property, you will be liable for Stamp Duty on the purchase of your new home, which could amount to several thousand pounds depending on it’s price. It can be very helpful to have a proper, in-depth discussion about all the factors and possible ramifications around a Let to Buy mortgage, so please don’t hesitate to get in touch with our team at The Mortgage Centres for a free consultation.
Let to Buy Mortgage Rates
Let to Buy mortgage rates are more complex to consider, but do not work out to be any different to typical rates charged for a conventional Buy to Let or residential mortgage. It will depend on which lenders you speak to – some will not want to get involved with a Let to Buy arrangement at all, but there are plenty of others who will, and will be prepared to offer competitive rates.
With the wide range of lenders in the market, it’s always best to get expert advice to ensure you get the most favourable rates possible. However, with a Let to Buy mortgage, the challenge is not always finding the best rates, but is identifying the most amenable lenders. You must make sure the criteria and deals for both properties will work favourably for you in the long run and coordinate all the transactions to happen at the correct times.
Our team at The Mortgage Centres is made up of specialist advisors from every area of the mortgage market, and we’ll be able to offer sound strategic guidance as to what your best next steps should be.
Can I Get a Let To Buy Mortgage With Bad Credit?
It can be a challenge to obtain a Let to Buy mortgage with a bad credit history, but as we always say, it is by no means impossible, and you will not face that many more difficulties than you would for a standard mortgage.
In more recent years, with more specialist lenders entering the market, many mortgage lenders have become increasingly flexible in their approach and will take a more sophisticated view of an applicant’s financial status in relation to their credit history. Those who in the past would have felt they would not qualify have been able to access the lending they need. It’s also worth remembering that the type of bad credit event and the length of time since it happened will have a bearing – a few missed payments on a card three years ago will have far less weight than a County Court Judgement in the last six months.
If you are concerned about a bad credit history affecting your application for a Let to Buy mortgage, please discuss your circumstances with one of our expert advisors. In the first instance, we will need to see a copy of your credit report in order to know how much we will be able to help, but it’s important to note that every case of bad credit is individual and our advice will depend on the data within your credit file.
Let to Buy Mortgage Lenders
This sector within the mortgages market used to be a very specialist niche, but these days most mortgage lenders are willing to consider a Let to Buy arrangement. With more lenders continuing to enter this area, availability is not an issue and competition is healthy – the challenge instead comes from ensuring that all the varying criteria, calculations and terms come together to suit your individual circumstances and objectives. With access to the whole mortgages market, we are able to source options from specialist niche lenders as well as household high street names.
Let to Buy Mortgage Advice
Applying for a conventional mortgage can be daunting enough, but applying for a Let to Buy mortgage can be a complicated and time-consuming experience that relies on a high level of competence. For the whole process to come together properly, it is vital that the two sides of the arrangement – the Buy to Let and the residential mortgages – can be applied for and complete simultaneously, and that they are both a good fit for the process. With each enquiry being slightly different, the challenge is in making sure the outcome is a success for all parties, and you get to retain ownership of your property while still being able to purchase a new home to live in.
It’s vital to get the right advice and an expert hand on the wheel with this kind of transaction, in order to make sure everything runs smoothly. Without it, you could end up losing a lot in terms of money, time and a place to live. If you are concerned about any aspect of Let to Buy mortgages and need help navigating the process, our team at The Mortgage Centres offer free initial consultations and no-obligation quotes, so you can see the options open to you and make informed decisions about your future. Get in touch with us today.