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Let To Buy Mortgages

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By Pete Mugleston   Mortgage Advisor

Last updated: 25th September 2018

If your goal is to purchase a new property while keeping your existing home and renting it out, a let to buy mortgage could be the answer.

Here at Online Mortgage Advisor, customers often ask us ‘What is let to buy?’, and if you’re someone who wants to find out more, you’ve come to the right place as this article provides everything you need to know about let to buy mortgages in the UK.

Let to buy mortgages are explained in this article and covers topics such as-

What is a let to buy mortgage scheme?

As we’ve already touched on, let to buy mortgages are aimed at borrowers who wish to buy a new home while retaining an existing property to rent out.

Let to buy mortgage … how does it work?

Often this consists of 2 mortgages, a buy to let on the property being converted into a rental, and a residential purchase mortgage on the new property being moved into. It’s common for borrowers to release equity from the property to be let, as deposit for the new purchase.

There are many scenarios where this is beneficial. For instance, couples who already had their own properties when they got together might choose let to buy when moving in together, as it allows them to keep both homes, living in one and letting out the other.

Alternately, you might have just landed a job in a new city, need to move quickly, but are having trouble selling your home. Taking out a let to buy mortgage would allow you to take up residence in the new location while generating rental income from your original home.

How is it different from buy to let?

At OMA, customers occasionally ask us “what’s the difference between let to buy and buy to let and how does let to buy work?” and it’s easy to see where the confusion stems from. Both products are geared towards those who are looking to rent out a property, but they function differently.

In order to provide a true definition of a let to buy mortgage, we must make it clear what sets them apart from buy to let agreements.

Let to buy schemes are different to their buy to let counterparts as they only apply when the borrower is already living in the home they want to rent out. Releasing equity from the property (assuming they have some) helps them get a deposit together for their new abode.

These deals can involve taking out two mortgages with the same provider simultaneously, although a more typical let to buy example is a borrower taking 2 new mortgages with 2 different lenders, to ensure they’re getting the best deals on both ends of the arrangement.

A let to buy remortgage - i.e. seeking a new deal for the property you have converted into rental accommodation, after you’ve moved on to your new home - would be treated as a standard buy to let remortgage application, and the purchase of the new home would be treated as any other purchase application by the majority of UK lenders.

If you have any further questions about let to buy properties, how to let to buy or want to know more about securing a mortgage for one; or have been turned down for this product by a lender, get in touch and the advisors we work with will gladly provide expert insight.

What is the lending criteria for a let to buy mortgage?

Many lenders have a strict let to buy criteria as they will only hand out this mortgage type to borrowers who meet their requirements, in both the buy to let and residential categories.

Let to buy mortgage providers will take the following factors into consideration when assessing applicants…

  • The applicant’s age
  • The size of the deposit or amount of equity
  • The monthly rental income
  • Affordability
  • Credit history
  • Other factors

Let to buy age limits

As a general rule, most let to buy lenders will turn away borrowers who are younger than 25 years of age, or those who are older than 75.

However, there are specialist mortgage providers out there who may offer let to buy deals to customers who fall outside of these parameters, including lifetime products that have no maximum age limit, and the expert advisors we work with can tell you who they are.

Let to buy mortgage deposit size and equity requirements

For the rental remortgage, the majority of let to buy mortgage lenders will insist on a fairly sizeable deposit or equity amount, usually around 25% (although some will consider 85% LTV). At many providers, the figure will be the same as their buy to let deposit requirement, so it could potentially vary between 20-40%, although there are a few lenders who will consider lower deposits.

For the new purchase element, some lenders also require more deposit and cap the new purchase LTV to 80% (although some will consider up to 90%+ in the right circumstances).

Monthly rental income

Lenders will only hand out this mortgage product if the investment is viable, so expect your provider to set a monthly rental income requirement for let to buy houses. Between 125% and 135% of either the existing mortgage payment, the interest payable on the outstanding balance at a nominal 5% or the lender’s standard variable rate is typically needed.

At some providers, however, the rental income requirements are higher, especially if the borrower is a higher rate taxpayer. At these lenders, 145-155% may be the minimum.

Affordability

As we’ve already touched on, your lender’s let to buy application process will include an affordability to check to ensure the investment is viable and the borrower is capable of servicing two mortgages. Providing proof of the anticipated rental income is a key part of this, so expect your lender to request it in writing from an ARLA-registered letting agent.

Moreover, certain mortgage providers also have a minimum income requirement - usually around £25,000 - to lend under these circumstances, though some may be flexible if your salary is adequate to service the outstanding amount on the existing mortgage.

It’s also standard practise for let to buy mortgage providers in the UK to carry out a full credit check on applicants, and a clean history will help you meet the eligibility criteria, though it may possible to secure one with bad credit, from a specialist lender. We work with advisors who are experts in finding mortgages for people with bad credit.

For the onward purchase, maximum loan amounts will differ lender to lender, but can be 4x joint income with most providers, 5x income with a few others, and one or two can even stretch to 6x income in the right circumstances. The income figures used for this are the same as with any purchase, with lenders using a varied amount of basic salary and additional incomes like bonus and commission.

They may also have different requirements for self-employed borrowers in terms of trading style, number of years accounts, turnover, profit and dividends (if Ltd).

If you want the right advice to ensure you’re getting the best deal, or to establish the top end of your affordability on both let to buy properties, then make an enquiry and we’ll refer you on to one of the experts.

So, can I get a let to buy mortgage with bad credit?

As a let to buy mortgage includes both residential and buy to let elements, the borrowing criteria can be stricter, especially where the mainstream lenders are concerned. So, those with any of the following against their name may not qualify for this product.

  • Late payments
  • CCJs
  • Defaults
  • Debt management plans
  • IVAs
  • Bankruptcy
  • Repossessions

The good news, however, is that there are brokers out there who are more sympathetic to borrowers with any of the above, and they have a strong track record when it comes to negotiating let to buy loans in niche situations, with success often depending on how long the adverse credit has been on the customer’s file.

The brokers we work with have access to whole market of lenders, and will search to get you the best deal, whatever your situation.

Other factors

The above variables are paramount when it comes to applying for a let to buy mortgage, but they aren’t the only factors lenders base their decision on. Most would be unwilling to offer a let to buy mortgage with no onward purchase in place, and the majority also require you to have been living in your residential property for a minimum amount of time, usually at least six months to a year.

That said, there are specialists who offer let to buy mortgages without a residential, or who will consider remortgaging within 6 months ownership - If you’re unsure whether you meet the lending criteria for a let to buy mortgage or have been turned down for any reason, get in touch! The whole-of-market advisors we work with will reassess your application, compare let to buy mortgages, and pair you with a lender tailored to your circumstances.

How much can I borrow?

Prospective let to buy borrowers often ask us “how much can I borrow?” and here, we attempt to answer that question.

At the time of writing, the typical loan to value rate (LTV) offered by UK providers is around 75%. Some lenders are offering slightly lower at 70%, but others will go higher. Specialist providers can stretch to 80%, and a minority to 90% and up, under the right circumstances.

Some lenders will place a cap on the amount they are willing to loan, typically between £500,000 and £600,000, but specialist providers will go much higher, as long as you tick the relevant boxes during the eligibility and affordability checks.

To find out exactly how much you’re able to borrow, make an enquiry and the advisors we work with give you a clearer idea and connect you with the broker most qualified to arrange the best let to buy mortgage deals for someone in your circumstances.

Getting the best let to buy mortgage rates in the UK

There are a number of variables which will impact on the let to buy mortgage rate you’re eligible for, and they include…

  • The amount of equity/deposit you have
  • Your age
  • Your income type
  • Your credit history

Equity/deposit amount: Put simply, borrowers with a sizable deposit or a large amount of equity are more likely to be put forward for a favourable loan to value (LTV) ratio by a let to buy mortgage broker.

Age: The borrower’s age impacts on the rates they qualify for as the younger you are, the longer you can borrow for. Many lenders refuse to offer mortgages to applicants over 75 or under 25, but there are specialists who impose no such limits.

Income type: Some providers are reluctant to take forms of income such as regular overtime, commission, bursaries and state benefits into account, as well as deal with applicants who are self-employed. Others are more flexible, but the more widely accepted your income, the better the rates you will be eligible for.

Credit history: We’ve already talked about how adverse credit can impact on a let to buy remortgage application, but the important thing to keep in mind is that credit issues are less problematic at some lenders than others. Generally speaking, the older the credit issues, the better the rates you’re likely to qualify for.

If you have any of the above on your file, it’s important to find out how let to buy mortgage rates compare from lender to lender with this in mind. The brokers we work with have access to the whole of the market and can point you in the direction of the provider offering the best deals for somebody in your shoes.

Let to buy stamp duty charges

When considering whether a let to buy mortgage is the way to go, it’s important to factor in the extra costs you will incur on this product, such as additional stamp duty charges.

In accordance with stamp duty changes rolled out by the government in 2016, homeowners are required to pay an additional 3% on second properties. This means that a £200,000 house you’ve obtained a let to buy mortgage for comes with an extra bill of £6,000.

However, if you sell your original property within three years of buying the new one, the government will refund that additional 3% in full.

Alternatives to let to buy

Anyone aiming to rent out a property they own and live elsewhere should weigh up the potential alternatives to a let to buy mortgage, as one of them may be a better fit for somebody in their circumstances. Other options include…

  • A buy to let mortgage: If having two mortgages on your plate sounds less than ideal, remortgaging your residential property as a buy to let and moving into rental accommodation may be an option, providing you meet the lender’s BTL criteria. For more information, consult our dedicated page on buy to let mortgages.
  • Consent to let: Rather than switching the mortgage products on your existing property to be let out, your lender might give you permission to let your residential property out while you purchase elsewhere or move into a rental. This may be viable for those who only plan on renting their home out for a limited time.
  • A second charge mortgage: A second charge mortgage is a loan secured against your property and a method commonly used by homeowners who wish to raise funds without remortgaging. It’s basically a mortgage on top of your existing mortgage, and the equity it unlocks could be invested in a second property. If there’s enough released, you may be able to buy the new property outright in cash or put it towards a deposit if not. Whether this is a more favourable option than a let to buy depends entirely on the terms you’re eligible for in each category. For more information about second charge mortgages, consult our in-depth article on the topic.

Can I get an interest only let to buy mortgage?

Yes! The buy to let element of a let to buy mortgage will typically be offered as interest only, and some lenders may be willing to grant you a residential deal on this product if you can prove you have a repayment vehicle in place.

Acceptable repayment plans include…

  • Pension funds
  • Endowment plans
  • SIPPs
  • Bonds and ISAs
  • The sale of another property
  • Investment bonds
  • Cash savings
  • Unit trusts

Not every lender will recognise all of the above and the rates they offer you may vary depending on what kind of repayment vehicle you have.

If you’re unsure what kind of let to buy mortgage rates your repayment plan makes you eligible for, get in touch and we will talk you through your options and connect you with the broker who is best suited to dealing with somebody in your circumstances.

Speak to an expert about let to buy

Of course, the above options may not be the only let to buy alternatives to somebody in your situation. Make an enquiry and the whole-of-market advisors we work with will carry out a let to buy mortgage comparison and suggest the best course of action.

If you like anything in this article or you’d like to know more, call us today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 25th September 2018
OnlineMortgageAdvisor 2018 ©

FCA disclaimer

The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.

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