How Let-To-Buy Mortgages Work?

A let-to-buy mortgage is perfect if you have found your dream home but do not want to sell the one you already have at the same time of purchase. It helps you rent out your current property and buy another one on a new mortgage.

When you get a let-to-buy mortgage, you break the conventional property chain. In this guide, you will understand the basics of the let-to-buy mortgage and how to navigate it in the property market.

What Is A Let-To-Buy Mortgage?

A let-to-buy mortgage is an arrangement that involves getting a mortgage to let out the current property and buy a new one. You turn your current residence into a rental property and buy a new property as a new residential home on a standard mortgage.

Both of these mortgages run in parallel and need to be complete same time.

Three distinct types of homeowners choose let-to-buy:

• Reluctant landlords:

  These are the property owners who have already found a new house, but their existing property hasn’t sold.

• Strategic landlords:

  These homeowners have enough equity to move up the property ladder but want to keep their existing property as an investment.

• Household mergers:

  These are usually couples who have different homes and want to buy a “together home” without selling one or both of their existing properties.

Let-To-Buy Vs. Buy-To-Let: Understanding The Differences

Let-to-buy vs. buy-to-let is a common confusion among new borrowers and existing mortgage borrowers.

A buy-to-let mortgage involves buying a property specifically for renting it out, and the mortgage is arranged as a buy-to-let.

A let-to-buy involves renting out the property you live in and buying another one as a residential home.

Here is a quick comparison table for the two arrangements:

How does a let-to-buy mortgage work?

Let-to-buy involves a two-mortgage setup. You move the property you live in to a let-to-buy mortgage (which is essentially a buy-to-let product).

Then, you take a new (standard) mortgage on the property you want to buy and live in.

Mortgage lenders prefer these mortgages to be completed at the same time as each other. If homeowner have enough equity in their existing property, then they can borrow extra on their let-to-buy mortgage. Homeowners often do this to gather a deposit for the second property.

Here is a worked example for a let-to-buy mortgage:

Suppose you have:

• The current home value of £300,000
• The existing mortgage of £150,000
• The desired let-to-buy LTV of 75%

So, you can borrow up to £225,000 (£300,000 x 0.75) as your let-to-buy mortgage, subject to mortgage underwriting and assessment.

You will pay off your existing £150,000 mortgage from this amount, leaving £75,000 with you for a deposit.

Finally, you take a second mortgage to buy a new property. The £75,000 left with you can easily become the deposit for this second mortgage.

Eligibility criteria and lending rules for a let-to-buy mortgage

Getting approved for a let-to-buy can get slightly more complex than a standard mortgage. You will be assessed as a homeowner and a landlord.

Here are the key eligibility criteria and lending rules to keep in mind beforehand:

• Maximum LTV:

  Most mainstream lenders cap the loan-to-value at 75%.

• Residency history:

  Most lenders require you to have stayed in your house for at least 6 months before turning it into a let-to-buy.

• Rental coverage:

  Your rental income should cover your mortgage interest by a specific percentage (usually 125% for basic rate taxpayers and 145% for higher rate taxpayers).
• Minimum income: Some lenders will ask for a minimum personal income (other than the rent) of £25,000.
• Age limit: Lenders often require borrowers to be no older than 70 or 75 when the mortgage term ends.

• Adverse Credit:

  You shouldn’t have missed payments on your existing residential mortgage or on any secured lending.

Pros and cons of let-to-buy mortgages

Let us start with the major let-to-buy benefits:

• Breaking the chain:

  You can break the property chain by moving into your new house without selling the older one.

• Investment benefits:

  You get to keep two properties if you wish to continue for the long term as a buy-to-let.

• Income stream:

  You can profit from the rent after the mortgage and costs are covered.

• No rushed sales:

  You have enough time to sell your older property, which means you can secure the best price.

You also cannot ignore these drawbacks of let-to-buy mortgages:

• Landlord responsibilities:

  You take on additional responsibilities as a landlord (for EPCs, gas safety, tenant deposits, repairs, etc.)

• Negative equity:

  A decline in property prices will expose you on two fronts.

• Tax complexity:

  Rental income from let-to-buy is taxable, which can be 20% or 40% depending on your tax band.

• Exposure:

  If you do not find a tenant soon, you will have the running costs of both properties, like mortgage, council bill, water and gas bills.

The let-to-buy application process

The entire let-to-buy application process (after you have finalised the second property) takes around 6 to 12 weeks.

Here is a stepwise breakdown:

1. Start by checking the rental potential of your current house (you can refer to letting agent estimates).
2. Consult a trusted and local whole-of-market broker in London.
3. The mortgage broker will prepare and work on both applications.
4. The underwriting begins. Your mortgage lender will assess your credit, ICR, and affordability.
5. You will receive two mortgage offers.
6. Your solicitors will work on both the transactions of properties simultaneously.
7. Finally, you move out of your current property, the tenant moves in, and you move into your new house.

What are the let-to-buy alternatives

If you want to rent out your current property and buy a new one, here are some common options you can choose instead of a let-to-buy mortgage:

• Consent to let:

  You can ask your current mortgage lender for permission to let.” While this prevents full remortgage, it is often a temporary solution (not more than a year).

• Bridging loans:

  These loans offer short-term finance to buy a new property before selling the existing one, but this can be very expensive.

• Selling and renting:

  If you have enough time, you can sell your current property and move into a rental. Buy a new property when you find a suitable one.

Why work with a mortgage broker for let-to-buy?

Most mortgage brokers know lenders' requirements for a let-to-buy mortgage. When you work with a trusted let-to-buy mortgage broker, you can seamlessly arrange for both your mortgages.

At MariannaFS, our independent mortgage brokers in Hounslow and across West London know which lenders favour let-to-buy and ensure that your two mortgages align. We have garnered sufficient experience working with let-to-buy specialists and other lenders. This has allowed us to help several first-time buyers get on the property ladder and investors get healthy returns.

Get started with a free let-to-buy mortgage comparison call with us. Just give us a call on 02080902043 or send a WhatsApp message today.

Frequently Asked Questions

Can I get a 90% let-to-buy mortgage?

Most let-to-buy and buy-to-let mortgages require a deposit of at least 20% to 25%. This makes your LTV 75% to 80% at best.

How is a let-to-buy mortgage different from a standard mortgage?

A standard residential mortgage is taken when you want to buy a property and live in it. A let-to-buy mortgage is about renting out your current property and buying a new one.

Can a 70-year-old get a 20-year mortgage?

It is extremely difficult. Most mainstream mortgage lenders in the UK require borrowers to be anywhere between 70 and 80 years old by the time their mortgage terms end.

Do I need a new solicitor for let-to-buy?

You will need a solicitor to turn your current property into a rental one and buy a new property. A single firm or solicitor can handle both these deals.