Let to Buy
Posted on 3rd August 2022 at 15:29
Let to Buy, what is it and how can you use it?
In a nutshell it’s the method you can use to move house, whilst keeping your current home as an
investment to rent out.
Rather than sell your house and buy your next one, you would remortgage your current home switching
your mortgage from a residential mortgage onto a Buy to Let mortgage, freeing you up to buy your next
residential home. This would allow you to buy your next home and keep your current home as an
investment. There are many benefits to doing this, such as
Freeing up residential affordability
Having multiple residential mortgages or a 2nd mortgage on your credit file will reduce your affordability.
This is because you are responsible for paying both mortgages and also the running costs associated
with running 2 homes e.g. council tax and utilities. But if one of the mortgages is a BTL mortgage for a
property that you rent out, lenders know that the rent you receive will cover the payments on that
mortgage and the bills associated with that property are the responsibility of your tenant. With this in
mind all of your affordability can be used for your onward purchase as you wouldn’t be responsible for
any other mortgages, allowing you to buy a more expensive home.
An additional source of income
The surplus rent you receive from the property you have now let out can be used towards paying your
new residential mortgage, therefore reducing your own outgoings. If you were to opt for an interest only
mortgage the cashflow from that property will be much greater, providing you with much more income.
You now hold an asset
As data shows property is a sound investment over time, beating inflation year on year whilst providing
steady cashflow through surplus rent. So besides owning your new residential property you now own
another property which will continue to increase in value over time and provide you with an income. You
could hold the property for the long term to enjoy the cashflow with an interest only mortgage or pay off
the mortgage with a repayment mortgage and sell the property in the future.
Releasing equity to find your new purchase
If your current property has enough equity in, you can release equity to cover your deposit, moving costs,
legal costs and stamp duty. All of which helps to reduce your moving costs. You can remortgage your
current home to a maximum of 80% of the property value, any money over and above your current
mortgage value can be used for the costs above.
If your home is valued at £100,000 and you have £50,000 left to pay on your current residential
mrotgage you would remortgage up to a maximum of £80,000 (80% of the house value).
You would repay the £50,000 you currently owe to your current lender
The additional £30,000 can be used towards your moving cost
If you onward purchase price is £200,000, your costs could look like this:
£20,000 deposit (10%)
£7,500 stamp duty
£2,000 legal costs
£500 mortgage broker fee
You have moved home without using any of your own money, only the equity in your current home.
There are a few things to consider when doing this:
You will pay additional rate stamp duty on your onward purchase as this is classed as an additional
property. You should consult your solicitor when doing this, but for a rough guide you can use a stamp
duty calculator online.
The property you rent out will need to pass the rental stress test. The mortgage amount you can achieve
must pass lenders stress tests. In simple terms the amount you can borrow is determined by the amount
of rent you receive and your personal income and tax circumstances.
Both your remortgage and onward purchase will need to complete simultaneously. This is so that the
money released from your home that’s being used as your deposit moving forward, can be transferred on
completion to the vendor of the property you are buying.
You should use the same solicitor to handle the remortgage and the purchase. This will make the
remortgage and purchase simpler if its being handled by the same person.
Tagged as: broker, buy, home, house, invest, investing, let, let to buy, mortgage, mortgage broker, rental
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