Let to buy: a step-by-step guide
The term ‘let to buy’ refers to when someone lets out the property they currently live in so that they can purchase a new residential property.
There are a few reasons why you might want to do this. If, for example, you’ve found your dream home and can’t wait to sell your existing property, a let to buy arrangement might be suitable.
Alternatively, it might suit those who simply can’t sell their property for the price they are looking for.
Another common reason is that someone wants to keep hold of their existing property as they believe it is a sound long-term investment and would prefer not to sell it.
What does let to buy involve?
By changing the use of a property from residential (a property you live in) to buy to let (a property you let out), you will probably need to change your existing mortgage to a buy to let mortgage and also take out a new residential mortgage on your new home that you will live in.
You cannot live in a property that has a buy to let mortgage against it and you can’t rent out a property that has a residential mortgage against it without the lender’s prior consent.
The let to buy process is considerably more complex than the process for a standard residential or buy to let mortgage, but Mint FS experts can offer you advice about a let-to-buy mortgage based on your personal circumstances.
Let to Buy FAQs
What are let to buy mortgages?
If you want to move house but you’re struggling to sell your current home or your property has dropped in value, let-to-buy is something you may want to consider.
This involves moving out of your existing property and renting it out, as well as borrowing against it to buy a new property.
Letting out your property could allow you to move into a new home without feeling pressure to sell in a rush and potentially at a loss.
It’s also useful if you decide to move in with your partner, and both of you own a property or want to purchase a new property together.
This guide explains how let-to-buy mortgages work, and what the alternatives to let-to-buy mortgages could be.
How do let to buy mortgages work?
With let-to-buy, you are taking out two mortgages at the same time.
If you own enough of the equity in your existing property, you remortgage and release some cash to put down a deposit on a new home.
You’ll do this using a let to buy mortgage, which is essentially a buy to let mortgage, often taken out on an interest only basis.
You then let out your existing property and use the rental income to cover the cost of the mortgage.
This, in turn, will free you up to take out a standard residential mortgage for a new home and cover the repayments with your salary or other sources of income.
What’s the difference between let to buy and buy to let?
Buy To Let Mortgages apply to those who want to purchase a property for the specific purpose of renting it out to tenants.
A Let To Buy Mortgage is designed for those who have been living in a property and want to keep hold of it to purchase a new home. They may choose to sell it a little later down the line and settle the let-to-buy loan, or continue to rent it out.
Although some lenders will allow you to let out your home on a residential mortgage, this will normally only be on a temporary basis.
This is known as ‘consent to let’.
So unless you are only going to be letting it out for a short time, it is likely you will need a buy to let mortgage.
Let to buy mortgage lenders: what they look for?
Generally, buy to let mortgage rates tend to be a little more expensive than residential loans, and you will need to put down a larger deposit, at least 25%.
Lenders will also want to see evidence that your rental income will comfortably cover your mortgage repayments, to at least 125% of your mortgage payments.
This is called stress testing – and it is this calculation along with the rental amount per month which allows your loan to be approved.
Speaking to letting agents and looking at local property listings should give you an idea of typical rents in your area.
You can also use our mortgage repayment calculator to get an idea of your monthly mortgage payments may be.
So, for a let to buy loan, you’ll need:
- To have at least 25% equity in your home (meaning you own 25% of it outright)
- Evidence of rental income covering 125% of mortgage repayments
- To be aged under 75, sometimes younger, when you apply
- A good credit history
Let to buy and stamp duty
If you’re purchasing a second property, you will pay an additional 3% stamp duty on top of the normal stamp duty rates.
In Scotland, you’ll pay an additional 4% from 25 January.
If you were buying a property worth £200,000 and it was your second property, you’d pay £7,500 in stamp duty. If you were only buying one home and selling your other, you’d pay just £1,500.
Use our stamp duty calculator to find out how much you’d pay.
If you sell your original property within 36 months, you can claim the extra amount back. You have 12 months from date of the sale of your old home to claim the tax back.
What are the alternatives to let to buy?
If you are struggling to find a buyer and you don’t need to move, it may also be worth considering staying put for now and investing some money in improving your current home.
You could perhaps add an extension, redecorate or make changes to the garden.
Depending on your circumstances, you may be able to fund these changes through remortgaging your current property. Our advisers can help you to decide if this is the right option for you.
Let To Buy in 7 steps
1. Value your current property
Find out how much your current property is worth and compare this with your outstanding mortgage balance.
Look at similar properties in your area and their recent sale prices – it’s best to look at three to five properties that have similar characteristics to yours and compare prices.
A local estate agent will also be able to give you an estimate.
2. Research rental income potential
A letting agent will be able to give you an idea of what your property could rent for. It’s best to choose a letting agent who’s registered with ARLA (The Association of Residential Letting Agents).
The amount you can rent your existing property out for has a large bearing on how much you can borrow, so it’s important to get an accurate a figure as possible.
3. Speak to your existing mortgage provider
Your mortgage lender might allow you to move (known as ‘porting’) your existing residential mortgage to your new residential property.
Your existing lender may also allow you to let out your property for a short period, known as ‘consent to let’, meaning there’s no need for you to go through the let-to-buy process.
It makes sense to speak with your existing lender as well as seeking independent advice to ascertain the best course of action.
4. Take independent, professional mortgage advice
Let To Buy transactions are much more complex than standard residential mortgages or buy-to-let mortgages.
This is because you’re applying for two mortgages at once, both a residential and buy to let mortgage and process needs to be managed as a whole to avoid hold ups. An independent mortgage adviser can manage the whole application process for your through to completion.
Here’s an example – from our long experience of managing let to buy mortgages. We often find that neither lender wants to be the first to approve the mortgage and you can enter a kind of stalemate.
The timing of completion on each mortgage is also key – you cannot complete on the buy to let mortgage while you still live in the property without the lender’s consent, so typically it would be necessary to complete each mortgage on the same day.
5. Check affordability
With let to buy, it’s vital that you can afford the payments on both mortgages if your rental property was empty for several months, or if interest rates rise and your repayments increase.
A mortgage adviser will run through these scenarios with you to make sure that you can afford both mortgages, and that you have to capacity to financially absorb periods where you’re receiving no rental income.
6. Be aware of your responsibilities as a landlord
Becoming a landlord is not something to take on lightly and it’s important to do your research beforehand.
You have legal responsibilities to ensure the safety of your property for tenants, and will face more complex income tax rules to ensure you pay the right amount on your rental income.
7. Factor in extra stamp duty
If you’re buying a second property, you’ll pay an extra 3% on top of normal stamp duty costs. Use our stamp duty calculator to find out how much you’ll pay.
You can get this refunded if you sell your older property within 36 months of buying a new one.
You have 12 months after you’ve sold the property to claim a refund, as long as it was sold after 29 October 2018