Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Let to Buy Mortgages

Introduction

A let to buy mortgage is a new slant on buy to let that allows homeowners to let their existing home and buy another elsewhere.

Prior to the surge in popularity of buy to let, most lenders viewed taking on a second mortgage as a purely commercial operation and heavily loaded the interest rate as a result. But now, an increasingly demanding and sophisticated borrowing public have forced lenders to be more flexible in their approach and more competitive in their product offerings. As a result, let to buy mortgages are fairly common (though there still aren't a huge number of lenders offering let to buy schemes) and increasingly competitive.

Here are the main features of a let to buy mortgage:

A let to buy mortgage works by allowing you to borrow money to buy a new home to move into, while you existing residence is let out to tenants.

The lender will more than likely gain independent verification of the fact that the achievable rental income is well above the mortgage repayment on your existing property, much as they would do with any other buy to let mortgage. This helps ensure that there is enough money in the kitty for you to be able to cope financially if your tenants default. Most lenders will look for rental income of around 130-150 percent of the mortgage repayments on your existing property.

On top of this, the lender will look at your disposable income to assess how much they will lend you on your new residence.

As long as the likely rental income on your existing property will pay your old mortgage with enough to spare, some enders will offer you a mortgage for the new property based on the their normal income multiples.

Others base the amount that they will lend on your salary and the existing loan commitments that you have, but then apply the 'deduction rule'. This means that they will lend up to 3.5 times your income (or whatever salary multiple applies), minus a representative figure for annual mortgage payments worked out at a pre-set level of interest. Confused?

Say you earn £40,000 and have an outstanding mortgage balance on your property of £120,000. Under the rule, the annual mortgage repayments may be calculated as £10,000. This would be deducted from your salary to leave £30,000, which is then multiplied by 3.5 to give £105,000 - the amount that you are able to borrow.

Most lenders will also set a fairly rigid and fairly demanding loan-to-value requirement on the amount to be borrowed, depending on the size of the sum you are asking for. Don't be surprised if you are required to stump up a 15 or 20 percent deposit, though you may be able to get away with 10 percent or even less on a smaller loan. Why let to buy?

The most reason that is cited for the popularity of let to buy is that homeowners wish, or are forced to move house, but do not want to lose ownership of the property. It is fairly natural that in booming property market homeowners are reluctant to give up an increasing asset for fear of loosing out on greater gains.

The most likely reason for a move is a long-term job relocation or temporary spell in another part of the country, but there are other reasons why you may wish to move out of your house but retain ownership of the property.

If your circumstances have changed, for instance your kids have moved away leaving you in need of a smaller more manageable property for yourself, then it can be a good idea to move into a new property yourself and let your existing one out.

This can even act like a form of long term pension provision - once the mortgage on the property is paid off, it will go on providing an income, with the added advantage that you also retain the underlying asset.

In some areas of the country, it may be extremely difficult for some budding landlords to get a foothold in the property market, due to the size of the deposit required for a buy to let property, or the erosion of rental yields by high property prices. But if the property you own has been yours for some time, the mortgage repayments may be significantly lower than they would be on a similar property bought now. This may mean that your existing home offers the potential for a much better rental yield than a newly bought property would do.

Another reason that you may wish to retain ownership of a property is a little more practical - you may wish to move back into it at some point in the future! It may be a home that has been in the family for a long time, or you may have a particular affinity for an area. You no longer want to live in the property, but nor do you want to lose it for good. If you are selling in the south and moving to the north or from one area with rapidly rising prices to another with more steady growth you may be right to fear losing out financially if you ever need to return.

If you were to sell your home and buy another in the area you are moving to, you may enjoy slow growth in the value of the new property but find that prices had spiralled when you returned.

Potential pitfalls of let to buy

Even if the idea is absolutely perfect for you, not all homes are suitable for renting. The location can be wrong for tenants, the property can be the wrong size, or the whole idea can be financially unsustainable for some other reason.

Furthermore, the terms of your existing mortgage may not allow for the property to be let, certainly not without the lender's consent. This means that you may have to remortgage to a lender that will allow such a situation, thereby incurring a whole new set of costs. Also, if the property is leasehold, you may have to get consent from the freeholder before you can let the property out, if they let you at all.

Some areas are already saturated in terms of the number of rental properties available to let, particularly in some parts of London. This means you face an increased risk of longer void periods where the rental property is empty and you are left to pick up the tab for the mortgage on two properties.

Taking on the burden and financial risk of two mortgages is not something that should be done lightly. This is particularly so because lenders may be less flexible if you miss a payment than they would be if you had a single mortgage, due to the size of the overall debt.

You will need to be able to fund all aspects of running a second property as you would with buy to let - insurance, letting fees, maintenance, periodic redecoration etc. Remember that management fees can be as high as 15 percent of your rental income, that void periods can easily account for two months' worth of rent each year and that income from the rental property is subject to tax.

The Home Energy Conservation Bill 2002 is new legislation that requires councils to set up a register of all rented properties that are occupied by four or more tenants. The new laws also establish new rules for fire safety, energy efficiency and management of common areas, most of which place additional responsibilities and costs on landlords.

Other points about let to buy

You can even let to buy if you do not have a deposit, assuming that you have a reasonable amount of equity in your own home. You can always remortgage your existing home to cover your current mortgage, but also raise an additional sum whilst you are at it, in order to put down as a deposit on the new home you are buying.

Say you bought your house for £150,000 with a ninety percent mortgage of £135,000. The value has since risen to £200,000 and you have reduced your mortgage debt to £100,000. Therefore your equity has effectively risen from £15,000 to £100,000. By using a let to buy mortgage, you can refinance the property, release some of the capital, and use this money to fund the deposit for the purchase of another property.

Under the terms of your existing mortgage, some lenders will not allow you to let your original property commercially. Other lenders may increase your interest rate slightly, to bring it into line with other buy to let mortgages.

If you are prohibited from renting out your property with your current lender, but are desperate to let to buy, you can always remortgage your original property with a different lender. Just check the finer details in the mortgage documentation or speak to a financial adviser to make sure that you are able to do this without penalty.

Before you let your home out, you should also tell your buildings and contents insurer, as your existing policy may not cover you for the perceived high risk of having tenants live in your property. Again, avoidance of this is not clever, as you could lose everything if the house burns down and you find your policy has been invalidated.