If you need to move, perhaps for a new job, but you’re struggling to sell your home, let-to-buy mortgage products can offer a solution.
Let-to-buy actually involves having two mortgages, a residential mortgage on a property you’re moving to and a buy-to-let mortgage on your previous home so you can rent it out.
That’s where the name comes from: you let out your previous home so that you can buy your next one.
However, there are lots of factors to take into account before opting to go the let-to-buy route and since changes to stamp duty on second homes in April 2016, let-to-buy has become more costly.
Who might want a let-to-buy mortgage?
Let-to-buy products are for anyone who can’t, or doesn’t want to, sell their previous home before buying the next one.
This might be because you’re working elsewhere for a few years and plan to move back eventually, or simply because you’re finding it difficult to sell your home quickly enough.
If the value of your property has fallen since you bought it, it could help you to avoid making a loss as you can let it out in the hope its value will go up in the future.
How does let-to-buy work?
With a let-to-buy mortgage, you’ll actually be applying for two mortgages with the same lender – a buy-to-let one for your current property and a residential product for the one you want to move to.
With a let-to-buy deal, the lender allows you to raise a deposit for your next property by taking out extra borrowing without taking your current mortgage into account as a commitment.
However, the projected rental income will have to cover the repayments once it’s remortgaged as a buy-to-let property and you’ll still need to have enough equity left in your property to meet your lender’s minimum buy-to-let loan to value (LTV) ratio.
For example, if your home is worth £200,000 and you still have £100,000 to pay on the mortgage, you might want to borrow some of your equity for a deposit on your next home.
A let-to-buy lender with a minimum buy-to-let LTV of 75% might let you borrow £50,000 from the property as a deposit to purchase your next home and convert your previous home to buy-to-let.
Stamp duty and let-to-buy mortgages
On 1 April, 2016, changes to stamp duty on second properties made let-to-buy deals far less attractive for home movers.
That’s because rules came in charging an additional 3% stamp duty on additional properties, meaning an extra bill of £6,000 on a £200,000 house.
If you sell your previous home within three years, the government would refund the extra 3% you paid, but that’s probably cold comfort to the average let-to-buy home mover.
If you’re already taking out equity from your home to fund a deposit for your next move, the additional 3% could make a big dent in your moving funds, even if you plan to sell the old property in a year or two and recover the 3% from the government.