For many buyers, finding their new home is not the main issue, selling their existing one is the frustrating part.
With demand for rental property at a high and rental incomes rising as a result, a growing number are looking at keeping their existing property and becoming landlords themselves. This has given rise to the let to buy mortgage, which allows you to take a mortgage on your new home, whilst renting your existing home out to tenants.
As a professional mortgage brokerage, we are well versed in this type of transaction and we thought it would be useful to put together a brief, plain-speaking guide to the things to watch out for when looking at this type of product.
- You can earn rent from your existing property and purchase another property anywhere in the UK, very useful if having to relocate
- It can make all the difference in a chain situation if selling the property is proving more difficult than initially envisaged
- It enables you to keep your current property as a long-term investment whilst the mortgage is paid by the tenants and it will even become the start of a property portfolio
Affordability and rental income
In general, any new mortgage lender calculates the maximum that they are prepared to lend you and does not take your existing mortgage into consideration as a commitment as long as the rent covers the existing mortgage payment. Different lenders have differing calculations for this, for example, a lender may want the rent to equal 125% of the mortgage payments at an assumed interest rate of 6%. If the rent does not cover this, then any additional payments will be taken off your income when calculating how much you can borrow on the new property. It can all get rather complicated! If your income is sufficient to cover your new loan and your existing mortgage, then you are home and dry.
Consent to let
Many lenders who are granting the mortgage on your new property will now want to see Consent to Let from your existing lender. This shows that your existing mortgage provider is aware that the property is going to be let out and is happy for you to do so. Some lenders will only grant this if there is a good reason, for example, job relocation, whilst others will accept but will increase the current interest rate you are paying. Whilst there are lenders who do not ask for such consent, it is always important to be above board with both lenders. Not being so can void your mortgage contract, your buildings and contents insurance and potentially lead to serious allegations.
Buy to let mortgages
Remortgaging your existing property on to an official Buy to Let or Rent to Buy Scheme is the best option for many, as this could enable you to release somemuch needed equity in your current property to use as a deposit for the new one. Lenders will assess the borrowing capacity not on your current income, but on the rental income that can be achieved which is then put through a specific formula. For example the rental income must equal 125% of the mortgage interest payments at the mortgage pay rate. This cover does vary from lender to lender so it is important to speak to an expert who understands all the small print.
Being a landlord
Whilst being a landlord can be highly profitable it is certainly not for everyone. Being woken up by the phone ringing at 3 am because of a faulty boiler and finding the time to fix little niggles can prove to be too much. Employing the services of a good management agent will reduce this stress, but eat into your profits so make sure this is costed in from outset. You should also prepare for the possibility of the odd void period. Suddenly having to pay two mortgages may be a stretch so it is a good idea to have at least 3 to 6 months mortgage payments in an emergency account just in case. There are also a plethora of rules and regulations a landlord should know, so make sure you do your homework and know what you are liable for.
Points to consider
- Not all homes are suitable for letting, for example, some areas may have an over-supply of one bedroom flats making renting similar property difficult
- If your property is leasehold you will need to make sure that your lease has no restrictions on the letting of your property
- You must inform your building and contents insurer
- It is important to speak to an experienced Mortgage Adviser to gain all the facts before proceeding