It’s a phenomenon that might not be familiar to those who’ve never considered it, but it’s established enough to have its own type of mortgage. And in some cases, it can become a very sound financial move.
Aaron Strutt of Trinity Financial has some insight. He explains: ’Let-to-buy is the industry term for releasing cash from your home while turning it into a buy-to-let, and then getting another mortgage to fund your onward purchase. Let-to-buy mortgages have increased in popularity in recent years as more borrowers look to keep their homes as long-term investments.”
Essentially, instead of the traditional system whereby you sell your house to buy another one, you remortgage your existing house and let it out to fund the next purchase. You end up owning two properties, and if you’re lucky, the rental income from the first might even cover the mortgage payments for both. Strutt says: ”Let-to-buy mortgages enable homeowners who have built up equity in their properties to remortgage them onto a buy-to-let. As part of the process, they then release equity to use as a deposit for their new home and then arrange a new residential mortgage to fund the onward purchase.
Like residential lenders, buy-to-let mortgage providers are offering super cheap mortgage rates. They enable borrowers seeking let-to-buys to maximise their returns while receiving the rental income.”
So is it a win-win situation? It all depends on how much equity you have, because you need a lot. You also need enough income to maintain two mortgages, and to weather any potential tenant-free phases. Strutt points out that “not all lenders provide let-to-buy mortgages, and they are not available to everyone. To qualify you will need to have sufficient equity in your home to secure a minimum 25% deposit buy-to-let mortgage. You will also need good affordability.”
Carl Burgess of Winkworth Shepherds Bush advises to proceed with caution. “Remember that these things can affect the stamp duty you pay in the future or could render you liable for capital gains tax, which is averaged over the period of ownership rather than just the increase in value from when you began to let it.” You might want to make changes to a property to make it more appealing for the rental market, he says, but everything requires very careful consideration. “Changing the layout to improve the rent you might get might detract from its sales value,” for instance. “Sometimes it is more efficient to sell that property and buy another for rental.”
Ultimately, whether or not this could be a sound move depends on your situation. Burgess says: I guess my advice is to ask yourself why you are doing it. Sometimes when people leave London they want to keep their London property as they don’t want to be priced out of London in case they return in the future. If you are moving to a new area and will initially be renting, you might not want to sell until you have decided to buy – or you might just want to keep a rental investment for their long term financial planning.”
Ultimately, if you’re considering a let-to buy situation, the best advice is to call in a local agent with many years experience to give you the best advice and then see if that is going to work for you. A good broker will help borrowers keen on let-to-buys to research the market to understand which lenders provide the most competitive rental stress test calculations to release the most amount of money. They also help secure great onward purchase mortgages. With such strong demand for housing and increasing prices, let-to-buy is likely to be a popular option for the foreseeable future.