Let To Buy Mortgages
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Let To Buy Mortgages
Peter explains how a Let to Buy mortgage works.
What is a Let to Buy mortgage and how do they work?
A Let to Buy mortgage is a way to purchase another property without actually selling your own. It can also help you start building a Buy to Let portfolio.
What you’re actually doing is taking the house that you currently live in, converting that into a Buy to Let rental property with a Let to Buy mortgage, and purchasing a new home to live in with a residential mortgage.
There are other considerations to take into account such as stamp duty rates. A lot of people use Let to Buy when they haven’t been able to sell their property in a timescale that keeps the chain together. Rather than take a bridging loan, which is expensive finance, or cancelling the plan to move, they’ll let their property out. It can either be short-term or long-term, to keep the property chain going.
What is the difference between Let to Buy and Buy to Let?
To a large degree, there isn’t any difference, although Let to Buy can be regarded as consumer Buy to Let, where it is regulated and governed by the FCA. Different rules apply, and lenders may ask you to prove your income alongside the rental that you’re going to achieve.
Other than that, in the main, it’s just terminology. They are both Buy to Let mortgages and worked out on the basis of the rent achievable on the property.
Who is a Let to Buy mortgage for? Can anyone get one of these?
To a degree, yes, although obviously not a First Time Buyer because they don’t own a property to let out. It’s for homeowners that want to move, normally moving up market, but sometimes down market as well.
As you get older, you may have a large property with a smaller mortgage on it. Potentially you could let that out to provide you with an income as you move into a smaller property. You still keep the larger property there for capital growth.
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What criteria do I need to meet for a Let to Buy mortgage?
Loan to Value would probably be the largest factor in whether you qualify. That’s the amount that you’re borrowing against the current market value of the property. Typically, there is a maximum of 75% of the value.
Some lenders will go to 80% or even 85% Loan to Value, but because of the rent that would have to be achievable for that level of borrowing, it very rarely works. Typically in the south east we would see 70% to 75%. Where you have higher yields, such as in the north of the UK, then 75% and 80% is more achievable.
You do need to prove income to get the mortgage for the new property. The lender wants to see that at no point are you likely to move back into the property you’ve taken a Buy to let mortgage on – because that goes against the mortgage contract and is illegal.
If you ever wanted to move back into the property, you would have to change the mortgage back into a residential product.
How much deposit do I need for a Buy to Let? How much can I borrow?
The deposit can be 15% on rare occasions, but more typically it’s 25%.
What you can borrow depends on the rental and the interest cover ratio, shortened to ICR. Each of the lenders has a different calculation based on the rate that you’re applying for.
If you’re taking a five year fixed rate, lenders will quite often give you a higher loan than on a two year fixed, discounted or tracker rate. It’s because they know exactly what you’ll be paying out for a given period.
It also depends on your tax rate as well. If you’re a higher rate taxpayer, most lenders would seek a 145% cover ratio. For a lower rate taxpayer it’s 125%.
If you are looking into any kind of Buy to Let, you should take tax advice from a qualified tax advisor and accountant.
What are the pros and cons of Let to Buy?
The major pro, as we mentioned, is that it can be used to keep a chain together or build up a Buy to Let investment portfolio.
On the downside, you will have another property to take care of and maintain. You need to make sure that it abides by all the current legislation around letting a property out.
The major concern is the difference in stamp duty. If you sell your property to buy another one, the standard rates of stamp duty apply. If you are retaining your property, the property you’re buying is a second home, and different stamp duty rates apply.
Typically there’s a 3% loading and the thresholds are different, as well. You can get up to date figures on stamp duty from the government website, because they do change.
That increase in your stamp duty can be mitigated – if you do subsequently sell the rental property within three years, you can reclaim it. Again, all these things need specialist advice from a tax advisor.
Can I get a Let to Buy mortgage with bad credit?
Depending on the level of bad credit, yes, there are lenders that will assist. If you’ve got some hiccups on your credit profile, don’t assume that would negate any opportunity. Always speak to a mortgage broker for advice.
Can I get a Let to Buy mortgage as a First Time Buyer?
No, it would be unnecessary because you don’t own a property, so you haven’t got a property that you can let out.
How does remortgaging a Let to Buy work?
Let to Buy is really just terminology. Once the purchase is complete, it is a standard Buy to Let. When you come to remortgage, because the property has been let out for a period, most of the consumer Buy to Let products no longer apply. Typically that’s the case after six months. You’re just remortgaging a Buy to Let property.
What are the alternatives to a Let to Buy mortgage?
If this is being done because you haven’t been able to sell your property to achieve a move, you could look at a bridging loan, which is more expensive and typically very short term.
If you’re planning to retain the property as an investment for a longer period, you wouldn’t look at bridging. You would purely look at a Let to Buy mortgage.
How can a mortgage broker help with a Let to Buy mortgage?
A mortgage broker is more important than ever for this whole process. Each of the lenders has different calculations for their interest cover ratios. They have different calculations around the length of the fixed rate you take, or whether you’re taking a discounted rate or tracker mortgage. All of these bring in different provisos and underwriting criteria from each lender.
You’ve then also got to consider taxation; whether you’re buying the property with somebody else, and whether you’re joint tenants or tenants in common. So speak to a qualified mortgage broker – we’re here to help.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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