In the dynamic world of property investment, "let to buy" has emerged as a popular strategy in the UK. This approach can provide a viable solution for homeowners looking to move without selling their existing property. If you're considering this route, here's everything you need to know about let to buy.
What is Let to Buy?
Let to buy is a financial arrangement where homeowners rent out their current property and use the rental income to cover the mortgage while securing a new mortgage to purchase another home. Essentially, it allows you to become a landlord of your existing property while moving into a new one.
How Does Let to Buy Work?
Valuing Your Current Property
Determine the market value of your home to understand its rental potential.
Securing a Let to Buy Mortgage
Apply for a let to buy mortgage. The lender will assess your rental income potential to ensure it covers the mortgage payments.
Obtaining a New Residential Mortgage
Simultaneously, you need to apply for a new residential mortgage to purchase your next home.
Four Scenarios where Let to Buy could be suitable
1. Retirees looking to downsize: can use let to buy to move into a smaller, more manageable property while generating rental income from their larger, former home. The rental income can serve as an additional source of income during retirement.
2. First-Time Landlords entering into Property Investment: Let to buy provides a straightforward way for first-time landlords to enter the rental market, using their existing home as the first rental property. They can also benefit from potential capital appreciation on both properties over time.
3. Growing families who need more space: Let to buy allows the families to move into a bigger home without selling the current home. It also provides an additional income stream, which can help cover the costs of the new mortgage.
4. Couples or Individuals Looking for Flexibility: Let to buy offers flexibility. They can rent out their current home and move to a new one, with the option to sell or continue renting the old home later.
Let to Buy Criteria
Age
Applicants to be 21-75 years at the end of the mortgage term. Some lenders might offer flexibility.
Income and Affordability
Ensure you can afford both your existing mortgage and the new residential mortgage, even during potential void periods. Debt-to-income ratio below 40-45% preferred.
Credit History
A strong credit history. Lenders will check your credit score to determine your creditworthiness. Most prefer applicants with no recent adverse credit issues.
Equity in Existing Property
Lenders typically require a certain amount of equity in your existing property. This means your current mortgage balance should be significantly lower than the property’s market value.
Rental Income Potential
Lenders typically require the rental income to exceed the mortgage payments by a certain margin, often around 125-145%. Therefore, it is advantageous if the property is in desirable locations with high rental demand.
Legal and Regulatory Requirements
Consent to Let: If your existing property is currently under a residential mortgage, you will need to obtain "consent to let" from your current lender before switching to a let to buy mortgage. Landlord insurance that covers both the building and landlord liability is required.
Conclusion
Let to buy offers a flexible solution for homeowners looking to move while retaining their existing property as an investment. It provides a pathway to becoming a landlord and potentially benefiting from rental income and property appreciation. However, it also involves financial and managerial responsibilities that require careful consideration and planning.