Let to Buy
The traditional way is to sell your property and use the proceeds as the deposit for your new home.
But what happens if you have not been able to sell your property and you have seen a property that you absolutely don’t want to lose. Are you in a position to proceed with the purchase of a new residential home when all your money (equity) is in your existing home?
Subject to a number of factors – yes, it’s possible to move without selling your new home.
The golden rule: The number one rule on doing a let to buy is this: get mortgage advice from an independent mortgage specialist from the outset, as to whether you can do a let to buy or not. This buys you time in the long run, presents you as a no-chain buyer to estate agents, and ensures your stress levels (and everyone else’s) remain low at all times. Most importantly, it gives you options: You can decide come rain or shine if you will sell, but just in case you do find that dream property that ticks all your boxes, then you can resort to plan B if your current property has not sold.
Many times clients are under pressure by estate agents/vendors to complete as soon as possible and are forced to default to a let to buy at the last minute, but then it’s too late; they lose the property.
So how can a let to buy work?
A let to buy will only work if you are able to pull out sufficient cash from your existing residence for your deposit and obtain a sufficient mortgage based on your current income. This is the simple explanation, but in practice there are other factors like rental income, open market value, and overall affordability that can determine whether it can be done or not.
The following example best explains a let to buy:
Couple: Harry and Sally
Joint income: £110,000
Available savings to contribute for new residence: £20,000
Current residence: £320,000
Mortgage: £130,000 with Lender Red
Monthly mortgage cost on Capital & Interest: £846 pm
Term left on mortgage: 18 years
Monthly rental income for this type of property: £1500 pm
They have been looking at properties, but any time they enquire with the agent, they are advised that the property is under offer. The bottom line: They need to act fast if they are looking to purchase a new residence for £470,000 – £490,000. They identify a property and their offer is accepted at £480,000. They decide on a let to buy.
They convert their existing residence to a BTL mortgage.
Property is valued at £320,000 and surveyor confirms rent at £1500 per month.
They remortgage and capital raise up to 75% LTV with Lender Blue.
BTL mortgage is now £130,000 + £110,000 = £240,000
Product: 75% LTV, 2 year fixed rate at 3.19%
Repayment method: Interest only
Monthly cost: £638 per month
Term: 20 years
Their solicitor pays off the £130,000 owed to Lender Red. Lender Blue now has a charge on the property and £110,000 is remitted to Harry & Sally’s joint account.
New residential purchase of £480,000
They decide to put down a 20% deposit (£96,000)
80% LTV mortgage required for new purchase: £384,000
Lender Yellow is satisfied with overall indebtedness
Lender Yellow agrees to lend the couple £384,000
They proceed on a 5 year fixed rate at 2.99%
Over payments: up to 10% per annum without early redemption charges
Term: 25 years
Monthly cost on capital & interest: £1819
In speaking with their mortgage adviser, Harry and Sally decided on a 2 year deal on their BTL, as they may decide to sell the property at the end of the two years. The proceeds will be used to reduce up to 10% of their mortgage on their current residence. However, if they enjoy their landlord experience, the couple may decide to hold onto the property as a long term investment.
Let to Buy allows you to move quickly, but you need to ask yourself whether you have the mindset to become a landlord, building more debt, etc. The strategy is not everyone’s cup of tea.
As a result of a mortgage market review that kicked in last year, lenders have tightened their lending criteria. Some lenders are not let to buy friendly, and you will need to ensure you have access to the widest choice of lenders.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans and commercial loans.
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