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Let-to-buy mortgages
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YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
What is a let-to-buy mortgage?
Let-to-buy actually refers to a set of circumstances where you have two mortgages at the same time, a standard residential mortgage and a buy-to-let mortgage, rather than a stand alone product.
This can be a helpful way to keep your existing home when you buy a new one. It’s a fairly niche area of lending, but there are lenders who will set up the entire let-to-buy mortgage package for you, giving you two mortgages with the same lender. It’s also possible to take a residential mortgage with one lender and buy-to-let mortgage with another.
The latter can be beneficial if better rates are available using two separate lenders. However, due to the complexity of setting up let-to-buy mortgages, the guidance of an experienced mortgage broker is often best.
How to get a let-to-buy mortgage
Let-to-buy can be a very practical solution to multiple home buyer scenarios, including being stuck in a chain, however, it is a complicated lending process and certainly an area where seeking advice before you commit to anything is a good idea.
As you are taking out two different types of mortgage, in some cases with more than one lender, you'll need to meet the criteria for both product to qualify for let-to-buy. As residential and buy-to-let mortgages are structured and calculated slightly differently, there will also be differences in how the lender decides the loan figure for each mortgage.
How does let-to-buy work?
When you plan to buy a new home, but want or need to keep your original property, let-to-buy allows you to remortgage your existing property onto a buy-to-let mortgage, whilst simultaneously taking out a residential mortgage to buy a new home.
Once you have the buy-to-let mortgage in place, you'll be able to accept tenants in your original home, so the rental income could pay for the residential mortgage taken out to buy your new home. Usually the equity built up in your current home will serve as a deposit for the new residential mortgage you take out.
How much can I borrow with a let-to-buy mortgage?
As with any mortgage, how much you can borrow depends on your individual circumstances.
In this case, how the lender calculates your loans also differs between the two let-to-buy mortgage types:
Buy-to-let remortgage
When you remortgage your existing home onto a buy-to-let mortgage, the lender will base the size of your loan on the potential rental income it will earn. Some lenders may also be willing to look at your personal income alongside the rental income (or yield) generated from the property you let out. Although keep in mind that you'll also need to meet the affordability criteria of the other mortgage as well.
Residential mortgage for your new home
This will be calculated in a similar way to your current mortgage deal on your home, so will be based solely on your income and broader financial circumstances. The majority of lenders allow you to borrow between four and four and half times your unencumbered income (income minus outgoings). It’s worth bearing in mind that your buy-to-let mortgage repayments will be considered as an expense.
Who is a let-to-buy mortgage suitable for?
Basically, anybody who’s looking to move to a new home without selling their existing one could benefit from let-to-buy. Some popular examples of circumstances where this could be helpful are:
To save losing out on your newly found dream home if your current home hasn’t sold in time to make an offer on it
If your current home holds sentimental value but is no longer a good fit for your family
You’re moving in with a new partner, but you both have your own homes and neither is ready to let them go entirely
If you’re in a rush to move, perhaps due to a new job elsewhere, but your property is either not ready for sale, or the market is not optimum for achieving the price you want
If you need to move away for an extended period, but plan to return to your family home eventually
How is let-to-buy different to buy-to-let?
A buy-to-let mortgage is a specific product, whereas let-to-buy is not an individual product type, but rather a set of circumstances where two mortgages are taken out simultaneously for a specific purpose.
A buy-to-let mortgage is used as part of the let-to-buy mortgage set up, but can also be taken out individually by those who intend to be professional landlords. Let-to-buy, on the other hand, is designed to cater for those who didn’t originally intend to become landlords, but chose to do so in order to keep their existing home when they move elsewhere.
Lending criteria for a let-to-buy mortgage
As you are taking out two mortgages with let-to-buy, you'll need to meet the lending criteria for both. This is the case whether you use one or two lenders, as each mortgage type has different requirements.
Every lender has their own set of criteria for each of their products, so not all of these will necessarily apply in every case, but they are typical of most lenders:
Buy-to-let criteria
You typically need to hold a minimum of 25% - 40% equity in your home, depending on the lender
Your property should be able to produce a rental income of 125%-145% of the mortgage repayments - this may need to be confirmed by an ARLA registered rental agent
There may be a minimum income requirement for applicants (usually £15,000 - £25,000)
You usually need to provide evidence of an onward purchase (new residential home)
You may also need to show proof of your intent to let out your current home, and that it is not for sale
Buy-to-let mortgages are typically interest-only, so you'll need a viable repayment plan to repay the loan at the end of the mortgage term. Traditional landlords tend to sell the property to repay the loan, but if you're looking to keep the property, investments or savings may be another option
Residential (onward purchase) criteria
You'll need a deposit, but 5% is usually sufficient for a residential mortgage, however, interest rates will be lower, the greater the deposit you can offer. Most people use the equity from the remortgage of their existing home for this purpose
Some lenders have a minimum income requirement (typically £20,000) but even if not, you'll need to meet the affordability criteria for the loan size required
As let-to-buy is fairly niche, fewer lenders are willing to accommodate bad credit applications, so you'll typically need a strong credit record
As you’re taking on two mortgages, lenders can be a bit stricter with the age limits of a residential mortgage that sits within a let-to-buy arrangement. Similarly to the buy-to-let mortgage, you will probably need to be between 25-75 years old to apply
Let-to-buy mortgage rates
As you have two separate mortgages, you'll be paying two separate rates of interest with let-to-buy. Buy-to-let rates tend to be higher than residential, however, neither of the mortgages should be charged at a higher level of interest than if you took them out individually.
You may also need to go through a mortgage broker to access some of the lenders in this field, as there are some specialist lenders who don’t deal directly with the public.
Of course, as with any mortgage product, the actual rates you are offered for let-to-buy will depend on your personal circumstances, the type of deal you go for (fixed-rate, tracker rate or discount rate) and the chosen lender.
Advantages and disadvantages of let-to-buy mortgages
Let-to-buy makes the process of buying a new residential home whilst keeping your existing home possible
It removes any urgency to sell your home if now is not the right time, which could save you from losing out on the sale price you want
The financial gains from owning more than one property could be beneficial in the long run, especially if property prices rise
You will be responsible for repaying two mortgages, which may become difficult if you don’t have tenants in the rental property at all times
If the housing market declines, you could potentially end up in negative equity on two properties
Second homes incur an additional stamp duty charge - If you sell the rental property within three years of taking out a let-to-buy mortgage, however, you can reclaim the additional stamp duty
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Let-to-buy FAQs
Is let-to-buy a good idea?
It depends on your personal circumstances. Let-to-buy can be really beneficial for people in specific circumstances, such as those in a property chain and unable to sell their home, or those wanting to move home, but keep their original one.
Don't forget, however, you're also taking on two mortgages at the same time, so it depends on your financial circumstances, and appetite for risk.
How much deposit do I need for a let-to-buy mortgage?
You'll need around 25-45% for the buy-to-let element of the arrangement, and a minimum of 5-10% (depending on the lender) for the residential mortgage. Some people are able to cover both of these deposits with the equity in their existing home, however.
That said, offering a larger deposit will give you access to the best mortgage interest rates, so it’s better to offer more than the minimum amount required, if possible.
Will I have to pay stamp duty if I let-to-buy?
Yes, on your new residential property. As it will be your second home, stamp duty will be charged at the additional rate of 3% above the standard fee. Use our stamp duty calculator to work out how much to pay.
If you sell your original home within three years, however, you can claim the second home stamp duty back from HMRC.
Can I remortgage if I have a let-to-buy agreement?
Yes you can, although the pool of lenders available is fairly small, so there will be less choice than if you simply remortgaged a residential or remortgaged a buy-to-let property in isolation.
You should consider the costs involved with remortgaging two deals at a time, however, as in some cases, this will be more expensive than staying with your original let-to-buy set up.
Which providers offer let to buy mortgages?
Let-to-buy is considered a fairly niche area of mortgage lending, so there are not many mainstream lenders offering this type of product. For the most part, you'll need to use a mortgage broker to find one. It's mainly specialist lenders that offer them, but even bigger names, like Nationwide, only operate via an intermediary for let-to-buy mortgage products.
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YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
Uswitch makes introductions to Mojo Mortgages to provide mortgage solutions. Uswitch and Mojo Mortgages are part of the same group of companies. Uswitch Limited is authorised and regulated by the Financial Conduct Authority (FCA) under firm reference number 312850. You can check this on the Financial Services Register by visiting the FCA website. Uswitch Limited is registered in England and Wales (Company No 03612689) The Cooperage, 5 Copper Row, London SE1 2LH. Mojo Mortgages is a trading style of Life's Great Limited which is registered in England and Wales (06246376). Mojo are authorised and regulated by the Financial Conduct Authority and are on the Financial Services Register (478215) Mojo’s registered office is The Cooperage, 5 Copper Row, London, SE1 2LH. To contact Mojo by phone, please call 0333 123 0012.