Understanding Let-to-Buy Mortgages

There are many reasons to buy a new home while keeping your current one to earn rental income, but is this possible, and if so, how?

In this article, we’ll examine how let-to-buy could be the right solution, how it works, and how to find lenders willing to consider this type of mortgage scenario.

What is a let-to-buy mortgage?

Rather than being an actual mortgage type, let-to-buy is a set of circumstances in which you take two different mortgages simultaneously, allowing you to keep your existing home to let out and purchase a new one.

With let-to-buy, you remortgage your current home onto a buy-to-let mortgage, which allows you to advertise it on the rental market. The rental income from that property will need to cover the buy-to-let mortgage repayments, allowing you to take out a new residential mortgage to buy your new home. Typically, buyers use the equity in their original home as a deposit for their new one.

Some mortgage lenders offer a complete let-to-buy service, which means they will arrange both mortgages for you; however, in some circumstances, taking each mortgage with a different lender can be more beneficial. A mortgage broker who specialises in this niche will help you find the most cost-effective and suitable option.

Who is this suited to?

Whilst taking on two mortgages at once might sound daunting, there are a few circumstances where it can be a very helpful option, such as:

• You’re unable to sell your home but have found a new one that you want to buy
• You don’t want to sell your home for sentimental reasons, i.e. it was inherited from family, but you still want to move to another property.
• The current market is not optimum for selling your property at a good price, but you want to move now.
• You need to move elsewhere for a number of years due to work or family commitments, but you plan to move back home in the future.
• You want to buy a home with a new partner but retain your home(s) for security.
• You want to move but feel that your original property is a good investment to keep for the future.

How they are calculated

Each mortgage you take out in this scenario is different, so they will be calculated slightly differently. You’ll need to meet both sets of criteria for this to work. We’ll take a more in-depth look at the criteria later in the article.

The loan amount for the buy-to-let mortgage that you take out on your existing property will typically be based on the potential rental income it can generate. It’s a good idea to do some research to find out the income that a property of a similar size and state could achieve in the local area.

You can use our buy-to-let mortgage calculator below to work out this aspect of your let-to-buy agreement.

The residential mortgage loan will be based on your personal income and affordability using a standard loan calculation of 4.5 times your annual income to determine the size of the loan. However, it’s sometimes possible to borrow more than this if you’re a professional, have a very strong application in general or are a high-net-worth client.

One thing to bear in mind is that lenders will use a typical mortgage affordability assessment to ensure that you can afford the repayments. This will include looking at your outgoings, which will include the buy-to-let mortgage payments on your original home. Although rental income will need to be high enough to cover these, there is always a chance that you’ll have periods without tenants and/or rental income.

Use or mortgage affordability calculator below to work out this aspect of your arrangement.

Eligibility criteria and deposit/equity requirements

Whether or not you decide to take both mortgages with the same lender, given that they are different types, you’ll need to meet two sets of criteria.

This will typically include the following:

Buy-to-let criteria for existing home

The criteria for the investment mortgage on your existing home is as follows…

• Equity requirements – The maximum LTV (loan to value) on this type of mortgage is typically 75%, meaning a minimum of 25% will be required, but this could be as much as 40%, depending on the lender and your circumstances. The LTV can also vary based on the cost of the property, and some lenders will reduce it where properties are higher than a certain limit
• Minimum income requirement – Personal income requirements don’t always apply to buy-to-lets but are more likely to in a let-to-buy scenario. The minimum requirement usually ranges between £15,000-25,000, depending on the lender. The property you’re remortgaging must provide a rental income of between 125%-145% of the repayments. This will need to be confirmed by the surveyor and/or an experienced rental agency
• Age Limits – The age restrictions can be more stringent in this niche, and many lenders will only look at applicants between the ages of 25 and 75
• Evidence of onward purchase – the vast majority of lenders will want to see evidence that you’re in the process of buying a new residential home. This should be organised so that as far as possible, the completion of both mortgages coincide with each other
• Evidence that the property will be rented – Most lenders will want reassurance that your existing home is not advertised for sale or sold subject to contract

Residential mortgage criteria for new home

The criteria for your onward purchase would be as follows…

• Deposit requirement – this will vary, but typically a minimum of 5-10% will be required. Most applicants take equity from their existing home through the remortgage process in order to fund this deposit
• Income/affordability– There’s not always a minimum income requirement, however, some lenders will ask for a minimum of around £20,000 for residential mortgages.
• Age Limit – Whilst you may meet the age criteria for a residential mortgage in isolation, where it is taken as part of a let-to-buy agreement, you’ll usually need to meet tighter limits, as mentioned above, of 25-75
• Creditworthiness – If you have bad credit, it may affect your suitability for a let to buy arrangement, given the added risk of taking on 2 mortgages. There may be bad credit mortgage options available with specialist lenders, however, you should expect to pay a higher interest rate and potentially need a larger deposit in these circumstances

Much like any mortgage product, the criteria tend to vary from one lender to the next, which can make it even more complicated to find a lender(s) for whom you meet all of the criteria necessary for 2 separate mortgages.

How to get a let-to-buy mortgage

Here are the steps to follow to get your let-to-buy mortgage application off to the best possible start…

Step 1: Seek advice from a specialist let-to-buy broker

This is a particularly complex finance arrangement to set up, given that you need to not only find 2 different mortgages that you qualify for but also organise them simultaneously. To add another level of difficulty, there are significantly fewer lenders in this niche, and many of those that do offer let-to-buy options will only do so via an experienced intermediary, such as a broker.

Speaking to a broker with specific experience in this area should be your very first step, as they will help you look at the viability of this option based on your specific circumstances. The brokers that we work with help let-to-buy applicants every day, so they know the criteria of lenders in this niche, and regularly deal with those lenders that are not accessible to the general public.

As well as recommending the most affordable and suitable options, they’ll be able to manage the progression of both mortgages to ensure they align, which can save a great deal of stress, especially if there are 2 different lenders involved. To speak with a let-to-buy expert, get in touch now.

Step 2: Research the rental potential of your current home

Once you’ve had a good look at the local rental market and gauged the level of income you think may be achievable for your original property, it’s a good idea to speak to a number of rental agents to obtain a variety of quotes. Most rental professionals will offer a free evaluation, and your broker may be able to recommend reputable agents in this field.

Step 3: Find a new home that you love

In order to progress with the remortgage of your original property onto a buy-to-let mortgage, you’ll typically need to be in the process of buying your next home and provide evidence of this. Your broker will be able to provide an agreement in principle at the beginning of the process so that you know what budget you have to work with.

Which lenders offer them?

Although this is still a relatively niche lending area, more lenders are in the market than there once were. Even a few high street lenders are willing to consider let-to-buy; however, their criteria tend to be stricter. For example, Natwest will provide both mortgages required to complete a let-to-buy purchase, so long as the combined LTV is not more than 90% and the rental income is confirmed by an ARLA (Association of Residential Letting Agents) registered agent.

Other lenders who consider these agreements include…

• Pepper Money
• Barclays
• Virgin Money
• HSBC
• Leeds Building Society

The smaller and more specialist lenders typically have slightly more flexible criteria. However, many of them are only available via an intermediary and may have caveats, such as the requirement that you take both mortgages with them.

What interest rates to expect

You’ll need to consider the fact that you’re paying 2 separate rates of interest and that buy-to-let mortgages are charged at a higher rate than residential mortgages, but unless you have credit issues, neither set of rates should be any more expensive than they would be if you were taking the mortgages out individually.

The rates table below provides an indication of the best interest rates currently available for residential mortgages.

This table is a snapshot of the best rates for buy-to-let mortgages.

The rates quoted above were correct at the time of writing and are subject to change at the lender’s discretion. Speaking to a mortgage broker is the best way to keep track of the rates available at any given time.

Remortgaging a let-to-buy agreement

When it comes to remortgaging your let-to-buy mortgage, you have similar options as you would have done when you set up the arrangement. If you would prefer to keep both mortgages with the same lender, you’ll need to find another one that offers both residential and buy-to-let mortgages for the purposes of a let-to-buy.

You could also choose to remortgage each element separately, switching the residential element to one lender and the buy-to-let element to another. However, the costs involved with two remortgages may well outweigh the benefits, especially when interest rates are generally high.

Get matched with a let-to-buy mortgage broker

The brokers we work with have substantial experience in the let-to-buy market and will be able to take the reins on this for you to ensure the smoothest, most cost-effective transaction. Every one of them offers their first consultation for free, under no obligation, so there’s no risk involved in considering this as a potential option.

Simply make an enquiry or call 0330 818 7026 to take advantage of our free broker-matching services. We’ll pair you with the most relevant expert broker for your needs.