Let to Buy Mortgage in the UK | Guide with Cost Calculations

In the ever-changing UK property market, homeowners often face a situation where they need to make a move but selling their current property may not be the best option.

This is where the Let to Buy mortgage comes into play, providing a flexible solution for those who want to move without giving up their existing home. In this blog, we will explore the details of Let to Buy mortgages in the UK, explaining the process and providing a real-world example of cost calculations.

Understanding Let to Buy Mortgages

A Let to Buy mortgage is a financial arrangement that allows homeowners to let out their existing property while simultaneously purchasing a new one.

This unique setup enables individuals to retain ownership of their current home, potentially benefitting from its future appreciation, while also facilitating the acquisition of a new property that better suits their evolving needs.

Distinguishing Let to Buy and Buy to Let Mortgages

Let to Buy mortgages differ from Buy to Let mortgages in their purpose and application. While Buy to Let mortgages are sought by individuals actively seeking a property for rental purposes or seeking to remortgage an existing rental property, Let to Buy mortgages come into play when the homeowner currently resides in the property but intends to move elsewhere.

Key Components of Let to Buy Mortgages

Renting Out Your Existing Property

• Rental Income: The rent from your existing property can contribute to covering the mortgage costs.
• Market Assessment: Conduct a thorough analysis of rental values in your area to determine a competitive yet lucrative rental rate.

Securing a Let to Buy Mortgage

• Criteria: When it comes to Let to Buy mortgages, lenders have specific criteria that need to be met. These criteria often include requirements for minimum equity and rental income. Lenders vary in their requirements, but a typical set of criteria may include:

  • Minimum age requirement, often set at 25 by most lenders.
  • Maximum age limit, usually up to 75 years.
  • Substantial deposit or equity, typically around 20-25%.
  • Monthly rental income that is at least 125-145% of the mortgage interest.
  • Satisfactory credit rating.
  • Successful completion of the individual lender's affordability assessment.
  • Adequate net disposable income and allowable income.

• Interest Rates: It's important to note that the interest rates for Let to Buy mortgages may vary from those of standard residential mortgages. Therefore, it is crucial to explore different lenders to understand the range of interest rates available.

Purchasing a New Property

Deposit: One advantage of Let to Buy mortgages is that the rental income from your existing property can be used to contribute towards the deposit for your new home. This can help make the process of buying a new property more affordable.

Affordability: Lenders will carefully assess your overall affordability when considering a Let to Buy mortgage. This assessment takes into account the mortgage on your existing property as well as the potential mortgage for the new property.

Costs Involved

Mortgage Fees: It's important to consider the various fees associated with Let to Buy mortgages. These fees may include application fees, arrangement fees, and valuation fees. Understanding these costs upfront can help you plan your budget effectively.

Stamp Duty: Another cost to consider when purchasing a new property is stamp duty. This applies to both the existing property and the new property. It's essential to factor in these costs to avoid any surprises.

Legal Fees: Lastly, don't forget about the legal fees involved in both transactions. Conveyancing and legal fees are necessary when buying and selling properties. Taking these fees into account will help you budget accordingly.

Income Tax Implications: Understand the tax implications of rental income and potential capital gains tax.

Advantages of Let to Buy

• Eliminates the need to sell your current home when purchasing a new one.
• Useful if facing challenges selling your property or considering future relocation.
• Ownership of two properties allows potential benefits from future house price increases.
• Generates rental income from the property you let out.

Disadvantages of Let to Buy

• Requires managing responsibilities and costs for maintaining two properties.
• Involves handling two mortgages concurrently.
• Possible 'void periods' with no tenants in the rented property.
• Let to Buy mortgage rates are less competitive than residential mortgage rates.
• Higher Stamp Duty charges for the purchase of the next property, due to additional costs for second-home buyers.

Example Cost Calculation

In our Let to Buy scenario, it's crucial to dissect the associated costs for a comprehensive view. Starting with an existing property valued at £250,000 and an outstanding mortgage of £150,000, the new property purchase is set at £300,000, necessitating a £60,000 (20%) deposit.

For the Let to Buy Mortgage of £190,000 on the new property, estimated monthly rental income stands at £1,200. Now, let's delve into the specific costs:

• Mortgage Fees (2%): £3,800
• Stamp Duty on New Property: £5,000
• Legal Fees (including conveyancing): £2,500
• Income Tax Provision (20% on rental income): £2,880 annually

This breakdown aids in understanding the financial intricacies involved, providing clarity on each component contributing to the total estimated costs of £13,180 .

It serves as a valuable guide for those considering the path of Let to Buy mortgages.

Conclusion

Embarking on the Let to Buy mortgage journey involves meticulous planning and a keen understanding of the associated costs. While the example provided gives a snapshot of potential costs, it's crucial to tailor the calculation to your specific circumstances and consult with mortgage advisors to ensure a seamless process.

Let to Buy mortgages offer a pragmatic solution for those navigating a property transition, providing the flexibility to adapt to changing life situations while maximizing the potential of your existing property.