This guide was last updated 3 August 2016
We all know what a mortgage is and we’ve all got a good idea of what Buy to Let is, right?
Buy to Let is relatively self-explanatory – you buy a property for the purpose of letting it out. But what is Let to Buy? You can’t let a property in order to buy one, can you? Don’t worry, we’re here to give you the lowdown.
In a nutshell, Let to Buy means that instead of selling your property and using the capital to make a payment on a new one, you keep your current property and rent it out to tenants. The first obvious problem with this is that you won’t have the capital to invest in a new property.
If you own enough equity in your property, then you can remortgage against that and extract some equity to use as a deposit on a new property. Then you can use the new tenants’ rent for mortgage repayments on your older property while using your normal income to pay the mortgage of the new property.
You might be wanting to move to another home because your family has gotten bigger or maybe it’s time for an upgrade. However, there could be a number of reasons you don’t want to sell your old property yet: the economic status of the market might mean that it’s not convenient.
Meanwhile, the rental market in the area might be particularly lucrative. Many people who choose Let to Buy mortgages do so because the rent they can earn is significantly greater than the repayments on their mortgage. However, most lenders won’t let you rent out your property for the long term with a residential mortgage, which is where a Let to Buy mortgage comes in.
Alternatively, you may just prefer to have two properties, which, if you can pay them both off, will leave a much larger inheritance some day.
Let to buy mortgages can be very beneficial for those looking to increase their property portfolio and, if the property market works in your favour, you can gain more equity from both your properties.
Another popular reason for Let to Buy mortgages is people moving to a new location and not wanting to rule out coming back to the same place. Perhaps you are being relocated for work reasons, but don’t intend to stay there forever.
The first thing you need to know about Let to Buy mortgages is that they tend to be more expensive than residential ones, although in recent months this cost has come down considerably to record lows, so they may be more affordable than you first imagined.
The key is that you’ll often be required to put up a larger deposit, or in this case, leave a larger slice of equity in the property. These days this is usually at least 25%, which may not allow you to release quite enough to purchase your new place.
Let to Buy mortgage deals are usually based on your expected rental income from the property, rather than your salary income. This is helpful because it frees up your salary for your new home’s residential mortgage. However, you will need to prove that the rent you earn from the property is at least 125% of the new mortgage repayments, often at an assumed rate of 5% or 5.5%. The rent you receive needs to pay for the mortgage costs, but lenders also prefer to have some leeway in the event of gaps in tenancy or maintenance costs. Which brings us to the tenancy and actually being a landlord.
Before you would even begin working towards a Let to Buy mortgage, you’d need to research the local letting market. If there is no demand for your property to be rented then you’re either going to have a very tough time finding a lender willing to invest in you, or you’ll find yourself unable to pay back your mortgage and maybe even losing the house (negating the very reason you chose not to sell it in the first place).
Additionally, being a landlord isn’t for everyone and comes with its own costs. Maintenance and responsibility for another property is one thing, but the added costs could be a greater expense than you’d expect.
For example, from last April if you are keeping your existing property, in other words, you will have two or more properties at the end of the transaction, there is additional stamp duty to pay.
This equates to an additional 3% on top of what you are paying already on the value of the new property you are buying. Yep, that’s quite a handsome figure!
There are some conditions around this so make sure you fully understand your position by getting appropriate advice first, for example, you then have 36 months to sell your existing property and claim the stamp duty back.
Make sure you’ve done the calculations beforehand or you’ll find yourself backed into a financial corner.
Lastly, you will also need to pass the mortgage stress test: an assessment of whether or not an applicant will be able to afford a property in a changing financial environment, such as interests rates going up.
This is particularly difficult to predict on your own and professional mortgage brokers like Coreco are able to more accurately calculate the affordability of mortgages from different lenders for you, as well as help you find the best deal for your circumstances.
Brokers will charge a fee for their services, but will often save their clients more than that by helping them choose the best mortgage – including those that might not be advertised to the public.
There’s a lot more to know about Let to Buy mortgages and we’ll be glad to fill you in. Feel free to contact Coreco if you have any questions; we’d love to hear from you!