Many people have struggled to sell their houses in the recent property market, and as a result, we’ve seen an increase in enquiries about ‘Let to Buy’... but what is it and how can it help? Director of Sales, Jeni Browne, explains.
Let to Buy Mortgages: What are they?
If you want/need to move house, but are unable to sell it (whether due to the slow property market or because you can’t get an offer amount you’re happy to accept), you may be able to take a let to buy mortgage out on it, rent it out and purchase a new residence.
Let to buy mortgages are technically buy to let mortgages, offered by buy to let lenders. Rather than a specific type of mortgage, you’ll find that let to buy is included in mortgage criteria as an additional piece of lending policy.
How does a let to buy mortgage work?
Similar to a buy to let mortgage deposit, you will need a minimum of 20% equity in your existing property, meaning your Loan to Value (LTV) can be 80%, maximum. Ideally, this level of deposit will allow you to use any additional equity within the house (and any savings) for the deposit on your new purchase.
Just as with a regular buy to let, the lender will complete a valuation on the property, checking that the value is correct, that the predicted rental income is achievable and the rent will cover the mortgage repayments and more. This review is to reassure the lender that the property will be “self-funding”, meaning that none of your own income will be needed to cover mortgage repayments and upkeep.
Will a let to buy mortgage decrease how much I can borrow against my new property?
As the let to buy mortgaged property is self-funding, it should have no impact on how much you can borrow to make your new purchase. It can be kept purely as an investment property, which will hopefully earn you some extra income, and you can move home as you originally intended!
Tax
We always recommend speaking to a qualified tax adviser or your accountant before taking on any buy to let property. While they can be a very lucrative second income, rental income is taxable. So, depending on your existing tax situation, it may just not be a cost-effective investment for you.
Stamp Duty
Stamp duty is a significant factor to consider. Under let to buy, the purchase of your new home will incur the standard stamp duty rate, PLUS a surcharge of 5%, as it qualifies as a second property. For example:
Your new property costs £500,000. Without an additional property, the stamp duty would be £12,500. With the 5% second home surcharge, the total more than doubles to £37,500
When the new property value is significantly higher than the existing property, some of our clients sell their existing property to their Limited Company (which can be set up relatively quickly). While you still pay a 5% surcharge on selling your existing home to the Ltd Company, the stamp duty is lower. This method means that you don’t need to pay the 5% surcharge on your new property, as this is the only home that you own in your personal name. For example:
Your existing property is valued at £250,000; you can sell that to your own Limited Company and pay £12,500 in stamp duty (including 5% surcharge). Now, when you purchase your new property valued at £500,000, you’ll only pay £12,500 stamp duty (rather than £37,500), which, in total, is a £25,000 difference.
As you can see, this is only really worth it if the new property is of significantly higher value. If you want to check your stamp duty charges, you can use our online stamp duty calculator which will give you the standard stamp duty cost and the cost if you’re purchasing a second property.
Should You Be A Landlord?
Lucrative as it can be, becoming a landlord isn’t a commitment to take lightly. There are regulations and rules that you will need to be aware of, as well as knowing how you’re going to manage the property (either yourself or through an agency). We would always recommend doing your research on what’s required and where “set-up” costs may appear.
Although you may want to use the let to buy option as a short-term solution until you can sell, there’s no way to be sure when the property market will start moving again. Keep in mind that selling a buy to let property with a tenancy in place (which runs beyond the sale date) will restrict you to the buy to let property market, rather than the whole market. Although this is an active market, it reduces the number of potential buyers.
You don’t need to be tied into a tenancy agreement for the long term (unless you want to be), however, becoming a landlord isn’t something you can do for a couple of months until the housing market picks up and you’re able to sell for an acceptable price.
Don’t be disheartened by this, having been a buy to let landlord for many years myself, I’ve found it to be a fantastic and worthwhile investment... just not without bumps in the road. As I’ve said, if your tax situation allows, it can be an excellent way to earn an additional income without too much work. As a long-term investment, being a landlord can bring great financial returns and it can be a great way to boost your pension in retirement.
If you want to discuss what a let to buy mortgage entails in further detail, please do not hesitate to contact me, Jeni Browne, on 01732 471647 or email jenib@mfbrokers.co.uk, and I will be happy to help.
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