Let to Buy: Explained

If you need to move house within a particular time frame, renting out your home, rather than selling, might be a tempting option.

Rather than waiting for a buyer to come along, you could move house, and collect monthly rent payments.

However, there are lots of things to consider before pursuing the 'Let to Buy' route. Most importantly: the cost of being a landlord, and the different conditions that come with a Let to Buy Mortgage.

In this article, we take a look at the things you need to consider before pursuing the Let to Buy route, as well as the pros and cons of renting out your current property rather than selling.

What is 'Let to Buy'?

'Let to Buy' means renting out your current home, in order to buy a new one to live in.

If you choose to rent out your home, rather than sell, you'll have two mortgages at the same time: one residential one, and one Let-to-Buy mortgage.

How does Let to Buy work?

The first step in renting out your property and buying a new one, is to get a Let-to-Buy mortgage. This will either involve converting an existing mortgage into a Let to Buy mortgage, or remortgaging, if you own the property outright. This will ensure you have permission from your lender to rent out your property, and will allow you to release some equity from your current home. This can then be used to pay for the deposit on your new home.

With a Let to Buy mortgage you'll be able to release equity from your property which you can then use as a deposit on your new home. For example, if your home is worth £250,000, and your mortgage is currently £180,000, you could remortgage and borrow £200,000, and use that extra £20,000 towards the deposit on your new property.

However, this is only possible if you have enough equity built up in your property, and the amount you want to borrow is in line with your mortgage provider's lending limits.

You could not for example borrow £240,000 on a £250,000 property, if your lender's borrowing limit is 75% of the property's value.

Note: Many Let-to-Buy mortgages have a maximum lending limit of 70-75% of a property's value.

The good thing about Let to Buy mortgages is that if you fulfil the criteria, you'll be able to borrow the money you need to buy your next property, without your lender having to take into account your second mortgage, or ability to sell, as part of the affordability requirements.

Because you're remortgaging to a different type of product, your financial situation will be assessed based against different criteria than when you applied for your residential mortgage. Usually a lender will check:

• How much rental income your current property will earn

You'll need proof that your home will bring in higher rent than the monthly mortgage repayments. Generally your predicted rental income will need to be about 145% of your monthly mortgage repayments. The best way find this out is to invite 2 or 3 estate agents round to value your home. Ask them how much they would expect you could earn in rent if they were managing the property. This will help you see whether you're likely to qualify for Let to Buy mortgages.

• The value of your current home

Like when you applied for your residential mortgage, your lender will want to assess the value of your property. This is to make sure that it is sufficient security for your loan.

• The amount you'll need to borrow for your new property

Although Let to Buy mortgage lenders base affordability on the rental income of the property you're renting out, your lender will need to know how much you hope to borrow so that you can afford to buy your next property. Most lenders will only allow you to borrow up to 70-80% of your current home's value. This may have an impact on whether or not you can afford the deposit for your next home.

• Your age

As a general rule Let-to-Buy mortgages have an age limit of 70-75.

Can I rent out my house on a residential mortgage?

No, renting out a property whilst paying a residential mortgage would breach the terms of your loan.

If you want to rent out your property, you'll have to convert your existing mortgage to either a Let-to-Buy product, or a Buy to Let mortgage.

These types of mortgages have different affordability requirements and lending criteria to residential mortgages. Lenders will want to reassess your financial situation if you plan to rent out your property.

Note: Most Buy to Let mortgage products are interest-only. You can read more about the different types of mortgages available in our guide.

Pros to Let to Buy

If you're thinking about applying for a Let to Buy mortgage, it's important to weigh up the pros and cons, and how that fits in with your personal financial needs.

On one hand there are a number of pros, including:

• Equity Release - You'll be able to access some of the value of your existing home, without having to sell.

• An alternative if you're struggling to sell - If you're in a rush to move, or you're finding there isn't much interest in your home, renting out your property can open up your options for moving home.

• Solution if you don't want to sell - In some cases you might want to buy a new house but don't want to sell your property. For example, you might be moving somewhere for work but plan to move back in the future, or you're moving in with a partner, and want the extra security of retaining your own property. Going down the Let to Buy route can support this.

• Can make you look more appealing to home sellers - Buyers that don't need to sell their home before they buy are more attractive to sellers, because there's a reduced risk that the sale will fall through. It can also help you move more quickly than a buyer that needs to sell. Many sellers will favour offers from buyers with no 'chain', and may even accept a lower price for their home.

• House values fluctuate - If house prices go up, you'll have twice the financial gain.

Cons to Let to Buy

There are, however, a number of cons to Let to Buy that you must also consider:

• 3% Stamp Duty Surcharge - On top of the standard rates of Stamp Duty Land Tax, you have to pay an extra 3% when you buy a second property. If your new home is £200,000, this comes to an extra £6,000 on top of the purchase price.
• Costs associated with being a landlord - Being a landlord is expensive. You're likely to be subjected to a number of upfront costs to ensure that your property meets the minimum legal standards in things like energy efficiency and fire safety. There are then the ongoing costs of hiring a property management firm, landlord's insurance, and maintaining the property throughout the tenancies.
• On top of these costs, you're not guaranteed to find tenants straight away, which means you're not guaranteed to get paid rent every month. If you're considering a Let-to-Buy mortgage it's important to ensure that you are not just relying upon rental income to cover your monthly repayments.
• Tax implications - Any money you get from renting out your property can be taxed - and may even push you into a higher tax bracket. Ensure you've considered the tax implications of renting your existing home out before you decide whether it's right for you.
• Two mortgages at the same time - If you decide you want to Let to Buy, you'll have to be able to cope with the repayments for two different mortgages. It's vital that you make sure that you'll still be able to make your payments even during periods of reduced income, otherwise you could face repossession, of one or both of your properties.
• House values - House prices can increase or decrease. If house prices go down, the value of both properties will drop, leaving you with larger losses.
• Let to Buy Mortgages aren't very competitive - Let to Buy mortgages are more risky for lenders than residential mortgages. Because of this, Let to Buy products tend to have less favourable rates, and require a higher deposit. You should expect to pay a deposit of around 25%, with the cheapest deals requiring a deposit of closer to 40%.
• You can't put your property up for sale during the assessment process - If you're renting out your property temporarily whilst you wait to sell, you might find that applying for a Let to Buy mortgage will slow down the sales process.
• Not all lenders are happy to lend on a Let to Buy basis - The Let to Buy mortgage market is quite specialist, and not all lenders are willing to offer on this basis. If your lender doesn't offer this option, you might find you need to apply for a Buy-to-Let product, which does not offer all the benefits of a Let-to-Buy mortgage.
• Early repayment charges - If you're still within the fixed term of your residential mortgage, it's likely that you will have to pay a charge to exit your mortgage product early.

If you're unsure how pursuing the Let to Buy route will impact your financial situation, make sure you talk to an independent financial advisor. They will be able to provide advice tailored to your personal situation.

Alternatives to Let to Buy

If you're not sure that Let to Buy is right for you; you're worried about the costs and practicalities of being a landlord; or you find that you don't meet your lender's mortgage criteria, you may want to consider the alternatives.

Depending on your personal situation there are a range of options, including:

Consent to Let

Some lenders will allow you to remain on your residential mortgage and rent out your property, with a 'consent to let' agreement. This means you don't have to go through the whole remortgage process, nor pass any different lending criteria.

The consent to let option is most likely to be available if your move is just temporary. For example, you're looking to rent out your property for a year whilst you're away for work.

Most lenders won't consider a 'consent to let' application if you're looking to buy another home. And, it can be hard to get a second residential mortgage if you have a 'consent to let' agreement in place.

Sell & Rent

If you want to buy a new property, but are worried about property chains or not knowing quite how much you can afford to spend, selling your current property and renting could be a better option than Let to Buy.

Moving into a rental property will put you in the advantageous position of being a chain-free buyer when you find your dream home. This could help you secure a better deal. Some sellers will be willing to accept a lower offer from a chain-free or cash buyer.

Home Improvements

If you're considering Let to Buy because you're struggling to sell your current property, it might be worth trying some home improvements first.

Things like repairs, fitting a new kitchen, or converting an attic into another bedroom can massively increase the value and appeal of a property. This in turn, increases the likelihood of an interested buyer making an offer.

Change your estate agent

If you're struggling to sell, but believe that your property does not need any particular repairs or improvements, it may be worth considering a new estate agent.

You can usually tell whether it's time to change estate agents if your property has been on the market for longer than average for your area, and your agent has not suggested any alternative ways to drum up interest.

If you're unsure which agents get the best results in your area, try this comparison tool. It analyses data from the Land Registry and the major property portals to find out which agents are the best performers in each area across the UK. Just pop in your postcode, and see which agents near you sell property fast. Head there now.

Cash Property Buying Company

Another option if you're struggling to sell, but need to move within a set time frame is a professional cash property buying company. These companies buy properties a lower than market value, within a set time frame, for cash.

Unlike Let to Buy, this option removes the ongoing financial pressure of having two mortgages, gives you an exact time frame for your move, and lets you know exactly how much you can afford to spend.

For more information on professional property buyers, and how to tell which companies are legitimate check out our blog. Head there now.

Is it better to sell, or rent out my house?

Whether it's better to sell your property, or rent out your home before you buy will depend upon your personal situation.

Some people prefer the financial security of only having one mortgage at a time, while others are confident they can keep up with repayments on two mortgages (and have the extra cash on hand to cover the upfront stamp duty cost).

Rental income can be a helpful source of extra money, or you might find that the rental market in your area is more seasonal, meaning you can find have tenants for a few months of the year.

If you're unsure, consult an independent financial adviser. They will be able to provide support tailored to your personal financial situation.