A let to buy mortgage, also known as a reverse buy to let mortgage allows you to let the property that you currently reside in.
Let to buy mortgages will allow you to earn a rental income from your residence while simultaneously taking out a new mortgage on a second property that you will move into.
You will almost certainly need the help of a mortgage broker if you wish to take out a let to buy mortgage. These are niche products offered by a small handful of lenders, so enlisting the services of a professional will open doors that otherwise remain closed.
What is let to buy?
Let to buy mortgages involve renting out your residential home to a tenant, and taking out a new mortgage on a different property that you plan to move into. This means that you can retain ownership of your home while somebody else is living in it while also taking on a mortgage for a second property.
How does let to buy work?
The let to buy process involves managing and maintaining two mortgage products. You’ll convert your existing mortgage from residential to let to buy, and take out a new mortgage for the second home. This is different to requesting consent to let from your mortgage provider, which involves retaining your existing residential mortgage and renting it for a short time.
Your new let to buy mortgage will be based on the expected rental income that you’ll receive from your current property. The mortgage on the property that you plan to purchase will be based on your income and outgoings, as with any residential mortgage.
Who can get a let to buy mortgage?
In theory, anybody with a clean credit record and no existing payment arrears can apply for a let to buy mortgage. You may even make the cut if you have a less-than-stellar credit score, but as with all mortgage applications, this can make the application more challenging.
Reasons to consider let to buy
There are a handful of reasons why you may want to consider let to buy mortgage. These include:
- You need to relocate for work and do not wish to rent a property, but you do not want to give up your current home. You retain the option to eventually move back into your original home by maintaining a let to buy mortgage.
- You want to sell your primary residence, but are struggling to attract a buyer willing to meet your asking price or feel that property costs will experience a sharp increase in the future. A let to buy mortgage will give you some time and breathing space.
- You want a safety net while you trial a new living arrangement, such as moving in with a partner or trying out a new city. A let to buy mortgage means you will not lose your home if things do not work out.
- You are experiencing financial hardship and want to downsize to free up some money without sacrificing home ownership. If you think your money worries are temporary, a let to buy mortgage may allow you to earn a rental yield that exceeds your outgoings on a second property.
Keep reading – Bad credit buy to let mortgage.
How does let to buy differ from buy to let?
Aside from reversing the terminology in their titles, there are two core differences between these products. The fundamental variations are:
- While you can have multiple buy to let mortgages, most people only have a single let to buy mortgage. These products are designed for people acting as landlords due to changes in circumstances, not investors looking to build a property portfolio.
- If you have a let to buy mortgage, you will be free to live in the property until the arrangement concludes and tenants have signed a lease. If you have a buy to let mortgage, it will violate your mortgage agreement to use the property as your residence. You’ll need permission and a valid explanation to spend as much as a night in the building.
Let to buy mortgage criteria
The lender will set the criteria for your let to buy mortgage, so team up with a broker to find the best deal for your needs. You will find that most lenders will set criteria similar to the below, though.
- A maximum loan-to-value ratio of 75% on your new mortgage, so you’ll need at least 25% of equity in your existing property.
- Proof that you will purchase a second home while renting your existing property.
- Provide evidence that you have sufficient funds for a deposit on your new property – typically at least 10%.
- Estimates of a prospective rental income from an industry professional. A reputable estate agent should be fine. When a valuation report is undertaken, an assessment of your likely rental income will be included, but it’s a good idea to get a professional opinion prior to committing funds to a valuation.
Age will also play a role in whether you are accepted. Some lenders will not be willing to grant this mortgage if your lending term takes you beyond retirement. This means that if you are older than 40, you are unlikely to be awarded the standard 25-year mortgage term.
What are the pros and cons of let-to-buy?
Like all mortgage products, there are advantages and drawbacks to taking out a let to buy mortgage. The benefits of this kind of arrangement include the following:
- The ability to continue living in your property until the new mortgage is agreed upon will give you some welcome breathing space – there is no need to vacate until you’re ready.
- You will not feel unwelcome pressure to sell your home if the circumstances making it unsuitable are only temporary.
- As you will own two properties, you have a larger property portfolio and greater potential to sell at least one for a profit down the line.
- You will likely get a better interest rate than on a buy to let mortgage.
On the other hand, there are also some concerns to be aware of when considering a let to buy mortgage, which include:
- You will need to pay income tax on your rental yield and, as your new mortgage will be considered a second home, you will pay 3% more in stamp duty on the initial purchase. This will be refunded if you sell one property within three years.
- The interest rate on your new mortgage will likely be higher than it would be on a traditional residential mortgage.
- Two mortgages means two sets of repayments – will you be able to afford your new mortgage if your tenants move out or withhold rent?
- You will not have control over the tenants’ behaviour in your former residence. You may find that your property is damaged when you return.
- Acting as a landlord is not for everybody. Do you have the time and inclination to deal with tenants and their concerns?
What are the alternatives to let-to-buy mortgages?
Let to buy mortgages are quite a niche product, so genuine alternatives are limited. Your options ultimately boil down to the following.
- Moving out of the property, converting your residential mortgage to a buy to let mortgage, and renting it out. This is not necessarily advisable as buy to let mortgages are complicated and time-consuming to apply for – and more expensive.
- Apply for consent to let your home for a short period from your mortgage provider. This will entitle you to move out and gain rental income in your property, but you may struggle to get a new residential mortgage under these terms. You’ll likely need to rent a new property, which may not be the most cost-effective solution.
- Selling the property, renting an alternative, and starting the process for a residential mortgage afresh when you find somewhere else to live. While this feels like you’re starting from the bottom rung of the property ladder, you may find that not being part of a chain makes you an appealing buyer for a new home.
As you can see, a let to buy arrangement is pretty unique and should be considered if you find yourself eligible and need such a deal.
How to get a let to buy mortgage on your existing home
To get a let to buy mortgage, you should either contact a broker, or spend time looking for the best deal yourself.
You should consider whether you will meet a particular lenders criteria and affordability rules. If everything looks suitable and you’re happy with the product offered, you can request an agreement in principle.
If your application is approved in principle, you can then submit a full let to buy mortgage application.
Do I need to use a broker for this type of mortgage?
Let to buy mortgages are a very niche product, so it’s highly advisable to team with a broker to find the best deal for your needs. It’s highly unlikely that you will find a let to buy mortgage product on the high street, and any rudimentary online search may not connect you with the best outcome. If you would like to discuss the possibility of a let to buy mortgage with ABC Finance, our team will be delighted to discuss your options.