What is a Let-to-Buy Mortgage?
A let-to-buy mortgage allows you to buy a new home and let out your existing property to bring in extra income. It can be useful if you can’t or don’t want to sell your current home, but can be a difficult process to negotiate. Consent to let is an alternative to let to buy you might consider.
Let to buy is a type of mortgage designed for people who want to buy a new home to live in but cannot, or do not, want to sell their existing property.
In practice, you will have two mortgages with the same lender. One will be a traditional residential mortgage to purchase the new property you now want to live in, while the other will be a buy-to-let mortgage on your existing property allowing you to let it out to tenants.
How does let to buy work?
A let-to-buy mortgage allows you to release some of the equity in your existing property to use as a deposit on the new home you want to buy. As you’ll be renting out your old home, the mortgage on this must usually be converted to a buy-to-let mortgage.
The rent you earn is then used to cover the monthly repayments on your buy-to-let property.
» MORE: Learn how to rent out your house
Is let to buy different from buy to let?
While the names are similar, let to buy and buy to let are different propositions. A buy-to-let mortgage is a loan to purchase a property you specifically intend to let out.
However, a let-to-buy mortgage is designed for those who want to buy a new home but are either unable, or unwilling, to sell the home where they currently live.
What you need to get a let-to-buy mortgage
There are certain criteria a lender will ask you to meet if you want to use let to buy. In particular, you’ll usually need to provide:
- a deposit to cover buying the new property
- proof that you can afford the mortgage repayments
- an expected rental income for the property you want to rent out that will cover repayments on the buy-to-let mortgage by at least 25%, but perhaps by as much as 45%.
- a copy of the mortgage offer on the new property to allow you to convert your existing mortgage
The pros and cons of let to buy
Let to buy can prove useful if you want to keep the home you already have as an investment while buying somewhere new. Or perhaps you need to move elsewhere but want to move back into your original home a few years down the line. You may also consider let to buy if you’re finding it difficult to sell your home but you urgently need to move home.
On the flipside, you will effectively have two separate mortgages to pay, and with fewer lenders offering let-to-buy mortgages it may be tricky finding a suitable and competitive deal.
Stamp duty – the tax paid when you purchase property – is another important consideration. The tax rates are 3% higher when you are buying a second home, so choosing let to buy rather than selling your old home will mean a larger tax bill. However, if you sell your rental property within three years you can apply for a refund of the surcharge.
» MORE: Learn about stamp duty
Are there alternatives to let to buy?
Let to buy should not be entered into lightly, and it’s always worth weighing up the alternatives first. These include:
A traditional buy-to-let mortgage
Rather than looking to buy a new home before you’ve sold, perhaps you could find somewhere to rent or move in with family. If your finances allow, you could then attempt to take out a buy-to-let mortgage on your old home.
» COMPARE: Buy-to-let mortgages
Consent to let
While you’re not usually allowed to let out a property that has a residential mortgage against it, it may be possible if you ask your lender for consent to let. This is where your existing lender gives you permission to let out a property that you originally bought with the intention of living in it yourself.
However, not all lenders are willing to grant consent to let, and if they do, it will generally only be in certain circumstances and for the short term – for instance, a number of months while you try to secure a buyer, or perhaps a year if your job takes you away for that length of time.
Selling anyway and renting
If you’re exploring let to buy because you have decided not to sell your home or you’re not being offered the price that you want (rather than not being able to sell it at all), it may be worth thinking about the advantages of selling anyway and perhaps renting. That way, when it comes to buying your next home, you’ll have no chain and the deposit waiting in the bank, both attractive bargaining chips when it comes to negotiating.
Getting let-to-buy advice
Let-to-buy mortgages are specialist products that only a handful of lenders tend to offer. It can also be a difficult process to negotiate, particularly given you’ll effectively have two mortgages and need to be able to afford both. So while you may be able to arrange a let-to-buy mortgage for yourself, using a mortgage adviser can be a good idea.
An independent adviser should be able to guide you towards the lenders that do offer let-to-buy mortgages and then help you through the process as well.
» MORE: How mortgage advice can help you
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more