If you have owned your existing home for a while, naturally, you are likely to have grown fond of it. More often than not, its value has increased in line with the overall increase in house prices. As you have been paying off your mortgage, so your equity in your current property is also likely to have increased.
So, a home that you have grown to love and one that has increased in value may be one that you want to hold on to as a long term investment if you decide to move home. Not only that, but it might also give you the chance to release some of the equity in your current home to buy the new, second property.
How does a let to buy mortgage work?
Let to buy mortgages offer you the opportunity of doing precisely that. As the term suggests, this type of mortgage is based on your letting your current home. So, its value continues to work hard for you through the income stream from rents, and you also release some of the equity you own in that home as the foundation for the mortgage that allows you to buy your new home.
It is not a standard residential mortgage.
As Which? magazine explained in an article dated September 2019, let to buy mortgages are effectively two mortgages wrapped up in one:
- a buy to let mortgage, founded on the rental income you intend to generate from your current home; and
- a new, regular residential mortgage for the purchase of your new home.
Who may a let to buy mortgage be suitable for?
A buy to let mortgage might be especially helpful if you want to move home but are having difficulty selling the house in which you currently live.
Even if you have not managed to sell the current home, you can still release the equity that has been built up in it by using it to secure a buy to let mortgage and running your former home as a business. The let to buy mortgage then gives you sufficient deposit to purchase your new home at a higher loan to value (LTV) ratio than you might otherwise enjoy.
In short, let to buy mortgages might be attractive if:
- you want to release equity in your current home;
- you want to move to a new residential property, but are having difficulty in selling your present home or have a problem in the property chain;
- you are seizing the business opportunity of using your current home as a source of income (from the rents you will receive); or
- although you are intent on buying a new home, you want to leave open the option of returning to live in your former home in the future.
Is a let to buy mortgage the same as a buy to let mortgage?
The terms might appear similar, but there is a world of difference between a let to buy mortgage and a buy to let mortgage.
A buy to let mortgage is based on the sole business purpose of owning a property which you can let to tenants for the generation of rent. A let to buy mortgage involves letting the home in which you currently live to generate the rent with which you will help to repay the mortgage on a new home you want to buy.
How much can I borrow on a let to buy mortgage
It may be worth saying again that any mortgage based on the potential for your property to earn an income from rent is calculated regarding that business purpose – in other words, whether your rental income will cover the mortgage repayments.
According to statistics released by the Financial Conduct Authority (FCA) on the 8th of September 2020, 14.42% of all new mortgages issued during the second quarter of that year were buy to let mortgages – all granted on the strength of the rental income to be generated.
Based on the FCA’s lending criteria, therefore, let to buy lenders are likely to require a rental income on your current home that is at least 125% of the monthly mortgage repayments on the new home you want to buy. A typical loan to value (LTV) ratio for the mortgage on that new home is 75%.
What are the lending criteria for a let to buy mortgage?
A let to buy mortgage is granted based on your managing and repaying two mortgages – the buy to let mortgage on your current home and a regular, owner-occupier’s mortgage on your new home.
The monthly mortgage repayments are payable, of course, whether or not you continue to have paying tenants in the home you let.
Both the rental income anticipated from your current home and the affordability of the mortgage repayments on your new home need to be considered and taken into account by any let to buy mortgage lender.
Remember, too, that there will be various costs associated with arranging the mortgage and buying the new property – and that includes your liability not only for any stamp duty but also the 3% stamp duty surcharge payable on the purchase of a second home (even though it’s the one you intend to be living in).
How can I find a let to buy mortgage?
It will be evident that let to buy mortgages are specialist mortgages. Therefore, not all mortgage lenders will offer the product.
To identify those that do – and to help you secure a let to buy mortgage on suitably favourable terms – you might want to consult an experienced mortgage broker.