When I’m out and about in the City seeing clients, one of the most frequent questions I hear is:
“Can I turn my current home into a rental property and still buy a new main residence”.
This is known in the trade as a Let-to-Buy mortgage and it makes up about a quarter of the mortgage business that LIFT-Mortgages advise on.
A Let-to-Buy (LTB) is not to be confused with a Buy-to-Let (BTL). A LTB is simply letting out your current property with the intention of buying a new home whereas a BTL is buying a property that you have no intention of living in, solely for investment purposes. Whilst the basic criteria for both these types of mortgage is very similar, the way in which a lender views and underwrites them is very different.
The LTB mortgage market is smaller than the BTL market and many lenders perceive it as riskier. There are two elements of risk:
Can you find a tenant for the home that you plan to vacate?
How does the LTB lender know that you are not overstretching yourself with the new main residence purchase mortgage?
Therefore a number of high street lenders simply will not lend on a LTB basis. However there are plenty of good lenders with strong rates that are happy to lend and the skill in my job is picking the right lender and product to meet the needs of my clients. At LIFT we’re fortunate enough to deal with a bank that only works with a limited number of partners and offers a fantastic LTB solution and bespoke underwriting.
So what are the basics for Let-to-Buy?
As a rule you need to keep at least 25% equity in the property that you plan to let. Most lenders like to see a minimum level of income for one of the applicants which does vary but is typically £25k per annum basic salary or salary and dividends if you are self-employed. The lender reserves the right to ask to see a mortgage offer on the home you plan to live in, so they can be sure you are moving.
Assuming you can satisfy that criteria a lender also runs a calculation based upon the rent you are likely to receive vs the mortgage payments and costs of maintaining a property. As long as the rent covers the mortgage and costs by a certain amount, which varies from lender to lender, then typically they'll be happy to lend on a LTB basis subject to survey.
Clients tend to hold on to their LTB property long term if they can due to the potential for capital growth over an extended period of time. There are other factors that need to be considered too such as income tax and potential capital gain tax issues in the future.
The recent budget changes will soon make owning rental property less attractive to both higher and additional rate tax payers and there is also the “hassle factor” of being a landlord to be considered. As a landlord of a number of properties myself, I can assure you the phone never stops ringing and all these factors mean this is not something you should go into lightly.
Overall LTB can offer you the potential to create both an income in the short term and the potential for capital growth long term. However, it’s important to make sure you get advice before making a decision. If you’d like to discuss this in more detail why not get in contact with us.