What is a Let to Buy mortgage?
If you wish to buy a property and let out your existing home, you will need a let to buy mortgage. You essentially let out your property, so you can buy another.
If you are struggling to sell your current home as quickly as you need to, or you want to rent it out for a period of time rather than sell it, a let to buy mortgage is what you need.
If the value of your property has decreased since you bought it, a let to buy mortgage could help you to avoid making a loss, as you can let it out, with the hope its value will increase in the future.
How do let to buy mortgages work?
Let to buy involves holding two mortgages simultaneously:
- A let to buy mortgage on your existing property
- A residential mortgage on the new property you wish to buy
A let-to-buy mortgage lender allows you to raise a deposit for your next property by borrowing additional funds against your existing mortgage, without taking your current mortgage into account as a financial commitment.
The projected rental income of your current property will have to be high enough to cover the necessary repayments once it is remortgaged as a let to buy property. You will also have to have sufficient equity in the property to meet your mortgage lender’s minimum loan to value ratio (LTV).
Are there any risks associated with let to buy mortgages?
Property investing is often a winner in both capital gains and income, but you need to go into it with your eyes wide open, acknowledging any risks.
If you know someone who has invested in buy-to-let or let a property before, ask them about their experiences – both pros and cons!
While owning two properties may seem ideal, if house prices fall you will suffer from a loss on both.
You will also need to ensure you have sufficient finances available to you to cover the monthly repayments of two mortgages if you’re unable to let your first property promptly.
Let to buy mortgage rates are typically competitive compared to buy to let mortgages, but they are not as low as residential mortgage rates. Also, only a select few mortgage lenders provide let to buy deals, so you will have less choice, meaning the mortgage could be more expensive overall.
You also need to think about stamp duty with two mortgages, as you are liable to pay an additional 3% on an additional property. If you sell your previous home within three years, you would receive a refund for the 3%, but if you need to release equity from your property to fund the deposit for the second property, this could significantly reduce your available funds.