Let-to-buy explained

What is let-to-buy?

Let-to-buy is when you rent out your existing home and buy a new one to live in.

Essentially, it involves having two mortgages at the same time. You convert your existing mortgage to a buy-to-let mortgage so you can let out your current home, and then take out a standard residential mortgage on the home you're buying.

There are various considerations and complications with let-to-buy, including the costs and challenges of becoming a landlord, and the need to manage two mortgages.

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Reasons to consider let-to-buy

There are a number of reasons you might be considering let-to-buy.

Perhaps the most common is that you want to use equity you've built up in your home to enable you to move to a new one, while also keeping the existing home as a long-term investment.

Let-to-buy could also be suitable for homeowners in the following situations:

• You're in a hurry to move to a new home and can't wait to sell your current property.
• You have struggled to sell your home due to market conditions.
• You want to buy a property with a partner but maintain ownership of your current home.
• You're moving elsewhere for a few years but plan on moving back to your home in the future.

How is let-to-buy different from buy-to-let?

Let-to-buy and buy-to-let might sound similar, but in reality they're very different.

With buy-to-let, you're purchasing a property specifically to rent out, whereas with let-to-buy you're buying a new property to live in yourself and renting out your current home.

Let-to-buy mortgages

The big challenge with let-to-buy is that you can't simply rent out your home and buy another one without first switching your mortgage, as operating a buy-to-let property with a residential mortgage will be breaching the terms of your home loan.

Instead, you'll need to convert your residential mortgage to a buy-to-let deal (or obtain consent to let). This isn't always straightforward, as buy-to-let mortgages are generally interest-only, rather than repayment, and rates are usually higher than on residential deals.

If you're looking to release equity from your current property to use as a deposit on your new one, this can add a further layer of complexity.

Switching to a buy-to-let mortgage

Your existing mortgage lender may allow you to switch to a buy-to-let deal, but this will rely on your finances being reassessed based on its buy-to-let criteria.

If you can't switch to a buy-to-let deal with your current provider, you could try remortgaging to another lender, though if you're still in the introductory fixed term of your mortgage you could face expensive early repayment charges.

Taking these complexities into account, some lenders offer specialist let-to-buy mortgages, which take some of the stress out of it all.

Let-to-buy mortgage lending criteria

When switching to a buy-to-let mortgage, your eligibility will be based on how much rental income you can bring in from the property you're letting out, rather than how much money you earn.

Specialist let-to-buy mortgages are on offer from a handful of providers, and you'll generally be required to meet the following criteria:

• 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 in to your calculations.
• Proof that you'll bring in higher rent than your mortgage repayments: most lenders 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: they'll usually request a copy of your mortgage offer for your new home.
• Same solicitor for both transactions: this isn't always required but is by some lenders.
• Maximum age: 70 or 75, usually.

Do you need to use a mortgage broker for let-to-buy?

Let-to-buy has lots of moving parts, so it's highly recommended that you seek advice on your options from a whole-of-market mortgage broker.

As well as finding you the right buy-to-let and residential mortgages, a good broker will be able to manage the process from start to finish, helping to ensure you can complete both mortgages simultaneously.

Finally, many buy-to-let mortgages are only available through brokers rather than directly from lenders, so a broker may be able to access deals you won't be able to get on the high street.

Can you take out both mortgages with the same lender?

With let-to-buy, you could find yourself dealing with two or even three mortgage lenders at the same time, which can create problems in terms of getting your transactions completed at the same time.

Some lenders will allow you to take out both your buy-to-let and residential mortgage deals with them.

For example, if you're switching your existing residential mortgage to a buy-to-let deal with The Mortgage Works (Nationwide's buy-to-let arm), then you can also take out the residential mortgage on your new property with Nationwide.

This service may be available from other providers, but they won't necessarily state this on their website. This is another reason to take advice from a mortgage broker.

Let-to-buy and consent to let

If you're only planning on letting your property for a short period, for example while you try to sell it, you may not need to switch to a buy-to-let mortgage as some lenders will grant you 'consent to let'.

You can't depend on this, however: it all depends on your reasons for asking and your lender's policy.

If it's that you're moving away for work for a year before returning to your property, your provider may be willing to offer temporary consent to let.

If it's that you're buying a new home to live in yourself, the lender may be less forthcoming and instead insist you switch to a buy-to-let mortgage.

Becoming a landlord with a let-to-buy mortgage

One of the big challenges of let-to-buy is that you'll be becoming a landlord, and will be responsible for everything from finding tenants to property maintenance.

Our guide on becoming a landlord provides full details of the considerations you should make, but as a starting point you'll need to think about the following:

Buy-to-let stamp duty

When buying your new property, you'll need to pay a 3% buy-to-let stamp duty surcharge. This can add thousands to your up-front bill so it's vitally important you budget for this.

The surcharge kicks in because you'll technically be buying a second home (even though it's one you'll be living in yourself).

If you sell your original property (the one you're renting out) within three years, you can claim back the difference between what you paid and the normal home mover rates.

Making the numbers add up

Buy-to-let isn't always as profitable 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 your mortgage payments, you'll need to contend with the costs of managing the tenancy, including employing a letting agent if you don't plan on taking a hands-on approach yourself.

Finding tenants can also be particularly costly for landlords, especially since the introduction of the tenant fees ban in June 2019.

What's more, you'll need to contend with filing tax returns for your rental income through self-assessment. There are additional considerations in this area for landlords, with the government currently reducing how much mortgage interest can be claimed against your tax bill.

What are the alternatives to let-to-buy?

If you're struggling to sell your home but don't need to move soon, one option is to stay put for now and see what happens with the property market if the cost of living crisis eases.

And if let-to-buy seems too expensive, you could instead consider making home improvements to give your home some extra space or increase its value and likelihood of selling in the future.

However, not all improvements will succeed in adding value to your property, so it's important to weigh up the pros and cons and develop an understanding of your local property market before spending extra money on your home.