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Let to Buy Mortgage Guide 

 October 18, 2020

By  Michael


A let to buy mortgage works on the same principle as a buy to let mortgage. Typically on an interest only basis with equity of 25% in the property as collateral for the bank. 

The major difference is a let to buy mortgage is specifically used when the property you wish to obtain the mortgage on is your current residence and soon to be your previous residence. 

This is a very common scenario people find themselves in when moving up and down the property ladder and retaining their previous residence. 

The industry even has a term "accidental landlords" referring to people who find themselves using this route of finance when the main goal was not business or property investment purposes 

Important

Using a buy to let mortgage when the correct product is a buy to let may be a breach of your lenders mortgage conditions and could have consequences. It important you get personal professional advice from a qualified mortgage broker. 

Pros and Cons of let to buy & Becoming a landlord.

Pros

  • Move home fast and without a chain. 
  • Receive a residual income from the monthly rent.
  • Retain ownership of an asset which typically increases in value

Cons

  • Liability of the let to buy mortgage payment when not rented to a tenant. 
  • Additional obligations to ensure the safety of the tenants
  • Liability of repairs and maintenance to the property 
  • Requirement to submit a tax return and declare rental profits

Example Scenario

Here is a common example of a couple John & Jane moving from a 2 bedroom flat worth £100,000 and moving in to a house worth £150,000. 

Their flat has been on the market for several months with no offers while at the same time a perfect house in their desired location has come to market. 

Rather than loose the new house due to being in a chain or take a reduced price on their existing flat to sell it quick they have asked their adviser to look at creative ways via a let to buy mortgage. 

The £100,000 flat the couple own has an outstanding mortgage of £60,000 with Halifax bank. The adviser has arranged a new let to buy mortgage with a new bank who will lend 75% of the flats value. 

This means that after the couple pay back Halifax the £60,000 they will have raised £15,000 by borrowing more out of the equity in the flat. 

This £15,000 will serve as the 10% deposit on the new £150,000 3 bedroom semi and allow the couple to move home without waiting on a chain or taking a reduced asking price on their flat. 

The couple will of course have numerous other costs involved as normal such as solicitors and stamp duty. The stamp duty in this scenario would also be eligible for the 3% surcharge however in certain circumstances it is possible to avoid this surcharge. 

Another benefit of retaining their old flat is that they are now a landlord and will have a monthly residual income from the rent. This increased in come will help the couple pay the new increased mortgage on their more expensive home.   

I recently completed a similar case for clients which resulted in them being better off each month from a cashflow perspective while also moving up the ladder to a much larger home. 

Its important however that you understand this will now make you a landlord which comes with legal responsibilities and the liability of the additional mortgage should you fail to rent out your previous home. It is therefore advised you think about the situation holistically before committing to this course of action. 


In the even you decide to proceed and become a landlord via a let to buy mortgage it is something you can reverse at a later date. If there is any doubt about this course of action it would be wise to choose a short product term. 

The reason for this is that lender charge you a penalty for exiting a mortgage during an agreed term. 

By choosing a shorter term say 2 years, you would be able to list the property 18 months later and aim to complete a sale post the 2 year mortgage tie in. 

If John and Jane from our example above were to sell their flat for £100,000 at the 2 year point they would simply repay the bank the £75,000 and recoup the £25,000 equity which was left in the property as collateral.  Again subject to associated costs such as solicitors fees. 

One point worth noting here is that in this scenario the current stamp duty rules at time of writing this article would allow the couple to apply for a refund of the 3% surcharge they initially paid when buying their new home. 

For more information or a personal illustration please get in touch. 


Michael


Hi I'm Michael a CeMAP qualified mortgage broker and property investor. Have a question I have not answered in this blog..then please get in touch

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