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What is a Let-to-Buy Mortgage?

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3rd Jun 2020 (Last updated on 20th Nov 2020) 8 minute read

Let-to-buy mortgages are for those looking to let out their current property and buy a new one at the same time. You will need to take out two different mortgages, a residential one so you can buy a new home and a buy-to-let mortgage to rent out your former home. 

Whilst this type of mortgage comes with its own risks to consider, a let-to-buy deal can really help if you have to move house for a new job and you’re struggling to sell your home. The criteria differs slightly to traditional mortgages and you’ll need to come up with a bigger deposit.

Compare My Move work with a team of property industry experts to bring you the most up to date and accurate advice on moving house. This guide explains what a let-to-buy mortgage is, the required criteria and the advantages and disadvantages.

This article will cover the following:
  1. How Does A Let-to-buy Mortgage Work?
  2. Let-to-buy Criteria
  3. Why Would I Need A Let-to-buy Mortgage?
  4. How Much Can I Borrow on a Let-to-buy Mortgage?
  5. What Are The Advantages And Disadvantages Of Let-to-buy Mortgages?
  6. What’s the Difference Between Buy-to-let and Let-to-buy?
  7. Let-to-buy Mortgages and Stamp Duty
  8. Let-to-buy Mortgage Rates
  9. Is There an Alternative to a Let-to-Buy Mortgage?
  10. Save Money On Your Move With Compare My Move

How Does A Let-to-buy Mortgage Work?

A let-to-buy mortgage means you will be applying for two different mortgages simultaneously. The idea is that the rental income you make from letting out your current property will cover your mortgage repayments on that property. This will allow you to take out a mortgage on your new property if you can afford it.

You will first need to remortgage your current home with a buy-to-let mortgage so you can rent out that property. You might face difficulty doing this as buy-to-let mortgages tend to be interest-only instead of repayment which means the rates are higher for a residential deal. This will allow you to release some equity from your current home to use as a deposit for your new home.  

Your lender will assess your finances based on the criteria for a buy-to-let mortgage to see if you’re eligible to switch mortgages. If not, you can look into remortgaging to a buy-to-let deal with another lender. 

Next, you will need to apply for a traditional residential mortgage for the property you’re moving to. This part should be pretty straightforward providing you meet the criteria and can afford to take out a mortgage.

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Let-to-buy Criteria

To apply for a let-to-buy mortgage, your eligibility will be based on how much income you can make on letting out your property, instead of your salary. Below we have listed the criteria for a let-to-buy mortgage.

  1. Minimum age is usually 25.
  2. Maximum age limit is 70-75.
  3. Requires a 20%-25% deposit or equity.
  4. Borrow limit of 75%-80% of the value of your current property.
  5. Rental income must be around 125% of mortgage interest.
  6. Some lenders will require a letter from your letting agent to prove expected income from letting out the house.
  7. Evidence that you will be earning higher on rent than your mortgage payments.
  8. Evidence of your new property purchase.
  9. A good credit score.

Why Would I Need A Let-to-buy Mortgage?

Let-to-buy mortgages are ideal if you don’t want to or are struggling to sell your home before buying a new one. They’re also popular with couples who both own a property and want to live together.

If you think you can’t afford the costs of selling a house, then this type of mortgage deal might help keep the costs down as well as earning an income from renting your house out. Below we’ve listed some other reasons you may need a let-to-buy mortgage.

  1. You urgently need to move house but can’t wait to sell your current house.
  2. Poor market conditions are making it difficult to sell your house.
  3. You have to move house for a job but plan to move back to your current house.
  4. You and your partner want to buy a house together but also want to both keep your current properties.
  5. You want to buy a new house but want to keep your current property as an investment.
  6. You want to become a landlord.

How Much Can I Borrow on a Let-to-buy Mortgage?

For a let-to-buy mortgage, you can typically borrow 75%-80% of the value of your current home you plan to let out. This means you can use some equity from your current property to pay towards the 20%-25% deposit for your new home.

For example, if your current property is valued at £200,000 with a mortgage of £130,000, this means you can borrow £150,000 and use the extra £20,000 towards a deposit for your new property.

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What Are The Advantages And Disadvantages Of Let-to-buy Mortgages?

Let-to-buy mortgages will be more suited to certain situations. Many people take out this type of mortgage so they don’t have to rush for a quick sale.

However, you will own two properties with this type of mortgage, making the risk of house prices falling more daunting.

We’ve listed some advantages and disadvantages of let-to-buy mortgages to help you weigh up your options.

Advantages of LTB MortgageDisadvantages of LTB Mortgage

If you’re in a property chain and need to sell your house before you can buy your new home, a let-to-buy mortgage will ease some time pressure. 

You will essentially be paying two mortgages, so staying on top of your finances is important.

This type of mortgage allows you to benefit from earning rental income as well as building equity in both properties.

As you will be owning two properties, if house values fall you will be worse off.

If house prices increase on both properties in the future then you have a chance of selling both homes for a profit.

Let-to-buy mortgage interest rates typically aren’t as low as traditional mortgage rates.

If you want or need to buy a new house but you also want to keep your current house as an investment, a let-to-buy mortgage can solve this.

As it’s classed as high risk to lend two mortgages, not many lenders offer a let-to-buy mortgage so you may find it difficult to arrange one.

When you buy your second property, you will be required to pay an additional 3% Stamp Duty.

What’s the Difference Between Buy-to-let and Let-to-buy?

Let-to-buy and buy-to-let are both mortgages for those looking to let out property, but they differ slightly. 

With let-to-buy mortgages, you are looking to let out your current property and buy a new home for you to live in at the same time. 

With buy-to-let mortgages, you will already have somewhere to live, whether you’re renting or have paid off your mortgage, but are looking to buy a new house with the intent to let it out.

Let-to-buy Mortgages and Stamp Duty

You will have to pay Stamp Duty when you purchase your second property with a let-to-buy mortgage, as you will own two homes. As of 2016, you will be required to pay an additional 3% Stamp Duty when you purchase a second property.

However, if you sell your first property within 36 months of completing on your second property, HMRC will issue a refund on the Stamp Duty that you paid. You can complete the Stamp Duty refund form here.

It’s important you budget your Stamp Duty Costs into the total cost of buying a house to ensure you can afford it. To work out how much Stamp Duty you’ll have to pay when you take out this type of mortgage deal, use our handy Stamp Duty calculator.

With the temporary change in Stamp Duty threshold across the UK due to Covid-19, it’s important to check how much you owe on the government website. 

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Let-to-buy Mortgage Rates

Let-to-buy mortgage rates and deals change regularly to match competition in the market. As these types of mortgage still aren’t offered by many lenders, it could be worth getting professional advice and guidance from an expert mortgage adviser or broker.

The Mortgage Works, a specialist lender of Nationwide Building Society, currently offer let-to-buy mortgage deals with a maximum LTV of 80%. As part of their criteria, applicants must have owned and lived in their current property for at least 6 months.

Once you’ve found a lender that can offer you a good deal, it’s important that you then hire a licensed conveyancer to help with your new property purchase. They will be able to provide expert legal advice throughout and will have experience in this sort of mortgage. 

Is There an Alternative to a Let-to-Buy Mortgage?

If you find yourself in a position where you have found a home to purchase before the sale completion of your existing property, you could consider a Bridging Loan.

A Bridging Loan, also known as a “Bridge Loan”, is a short-term, high-interest rate loan designed to help those looking to complete on a property purchase prior to selling their existing home. These loans offer short-term finance for those in need of quick funds for a house purchase before the longer-term funding comes through.

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Martha Lott

Written by Martha Lott

Having written for Huffington Post and Film Criticism Journal, Martha now regularly researches and writes advice articles for everything moving house related.

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