What Is Let To Buy?
Let-to-buy (as opposed to buy to let) is the procedure of renting out your current home so you can buy a new one to live in. It involves having two mortgages at the same time. You must convert your existing mortgage to a buy-to-let mortgage so you can let out your current home, then take out a standard residential mortgage on the home you’re buying. conveyancing for buyers and sellers here.
There is a lot to think about when doing this as there are many potential complications. These include the costs and responsibilities of becoming a landlord. You will be paying two mortgages at the same time; you would have to convert your existing mortgage into a let-to-buy mortgage. You would then take out a standard residential mortgage for the home you plan on buying.
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Is Let-To-Buy A Good Idea?
Let-to-buy will appeal to some homeowners in the following situations:
- They want to use the equity in their home to buya new one, while keeping the existing home as an investment.
- They are in a hurry to move to a new home and can’t wait to sell their current property.
- Their property is taking a long time to sell.
- They want to buy a property with a partner but to hang on to their current home.
- Those moving elsewhere short term but plan on moving back
Let To Buy And Mortgages
You cannot rent out your home and buy another one without switching your mortgage first. Owning a rental property with a residential mortgage is likely to breach the terms of your current home loan. You will need to convert your residential mortgage into a buy-to-let deal (or obtain consent to let from your current lender).
This isn’t always straightforward. Buy-to-let mortgages are often interest-only and rates are usually higher than on residential loans.
If you wish to release equity from your current property to use as a deposit on your new one, this can add further complications: your existing lender may allow you to switch to a buy-to-let deal but this will rely on your finances being reassessed all over again, this time based on buy-to-let criteria.
Some lenders offer specialist let-to-buy mortgages, which take some of the complications away. The criteria for Let-to-buy mortgages will include how much rental income you can bring in from the property you’re letting out, rather than how much you earn.
Specialist let-to-buy mortgages are available from a few providers and these will have different requirements including:
- A borrowing limit of 75%-80% of the value of your current home – if you want to release equity when remortgaging you’ll need to factor this into your calculations.
- Proof that you’ll bring in higher rent than your mortgage repayments: lenders usually require rent to cover around 145% of monthly repayments.
- Proof that you’re buying a new home at the same time as switching your mortgage: such as a mortgage offer for your new home.
- That you use the same solicitor for both transactions: this isn’t always required but is by some lenders. Maximum age: 70 or 75, usually.
Let To Buy Advice
Let-to-buy has lots of variables and therefore, a lot can go wrong. It is highly recommended that you speak to one of our conveyancing experts to seek advice on your options. We will help you from start to finish, ensuring you can complete in a timely manner. Finally, many let to buy mortgages are only available through brokers rather than directly from lenders. A broker may be able to access deals you won’t be able to get on the high street.
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Let To Buy And Stamp Duty
When buying your new property, you will have to pay a 3% buy-to-let stamp duty surcharge on top of normal rates. This can add thousands to the bill so it’s hugely important to budget for this. The surcharge is applied because you will be buying a second home (even if youre living in yourself). If you sell your original property within three years, you can claim the difference between what you paid.
Buy-to-let isn’t always as viable as it sounds, so it’s important to ensure letting to buy is a sensible and cost-effective decision. As well as bringing in more than enough rent to cover the mortgage payments, you’ll need to contend with the costs of managing the tenancy. This could include employing a letting agent if you don’t plan on taking on the responsibility yourself.
Finding tenants can be particularly costly for landlords, especially since the introduction of the tenant fees ban in June 2019. You’ll also have to file tax returns each year for your rental income through self-assessment. There are further considerations in this area for landlords, as the government is currently reducing how much mortgage interest can be claimed against your tax bill.
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What Are The Downsides Of Let To Buy?
- You will be responsible for two mortgages and that can be worrying for some people.
- You’ll be hit by the stamp duty surcharge rates (3% on top of the Stamp Duty band) when you buy a second property, although if you sell your first home within 36 months of completing the purchase, HMRC will make a full refund.
- Let to Buy mortgage interest rates are not as good as standard residential mortgages (because of the increased risk).
- If you own two properties and house prices fall, you’re hit twice as hard.
Are There Any Alternatives?
If you are struggling to sell your home but are not in a mad rush to do so, one option is to stay put for now and see what happens with the property market post pandemic surge.
It can be a financial alternative for homeowners to fund renovations or home improvements by remortgaging. Not all improvements will succeed in adding value to your property though. It’s’s important to weigh up the pros and cons. Develop an understanding of your local property market before spending extra money on your home.
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We always recommend using a Conveyancing Store expert to carry out the let to buy legal process on your behalf. Our quality conveyancing services will see you from start to finish: we deliver an excellent and efficient service to ensure your property transaction is completed with expert legal advice and service.