What Is a Let to Buy Mortgage?

If you’re on the lookout for a mortgage or properties to rent, then you have probably heard about a buy-to-let mortgage – but have you heard about let-to-buy?

“What’s a let-to-buy mortgage?” I hear you ask…

This lesser known mortgage options allows you to rent out your current home and use the equity to fund the mortgage payments on your next property purchase.

However, let-to-buy mortgages can be more complex than a standard lending arrangements, as you will need to be able to manage two separate mortgage products simultaneously. In effect, this mortgage structure switches your current home into a buy-to-let, while taking out a new residential mortgage for your next property.

Let’s take a deep dive into everything you need to know about let-to-buy mortgages, from how they work to their potential risks and rewards. Let’s jump in.

How Does a Let to Buy Mortgage Work?

As we touched upon in the introduction, with a let-to-buy mortgage, you are essentially converting your current residential mortgage to a buy-to-let and then purchasing a new home on a residential mortgage.

Let-to-buy mortgages can be extremely advantageous for several reasons:

• Your current home may no longer suit your needs – perhaps due to space or location – prompting the move to a larger or more suitable second property.
• You may want to upgrade to a more valuable home or property while keeping your existing one to generate rental income.
• Since you’re already familiar with your existing property, managing it as a landlord can feel more straightforward and less risky compared to buying an unfamiliar buy-to-let.

Ultimately, whether you decide on a buy-to-let or a let-to-buy will depend on your personal situation.

There are of course situations where a let-to-buy mortgage will be unsuitable for you specific circumstances, and so it is always best to seek advice from a trusted mortgage broker – like Boon Brokers – when considering this product.

Lending Criteria

The lending criteria for a let-to-buy mortgage is very similar to buy-to-let mortgages.

You will need to pass a lender’s rental threshold, or stress test, in order to ensure you would be able to comfortably generate in rent an amount that covers (and generally outweighs) your required mortgage payments.

You will also need to ensure there is enough equity in the property to meet the lender’s Loan-to-Value criteria. Typically, lenders will expect a minimum of 25% of the property value as equity on completion.

Unlike standard residential mortgages, which typically require a minimum deposit of 5%, let-to-buy mortgages allow you to leverage the equity already built up in your current property. This can be especially beneficial if you’ve held your residential mortgage for many years and accumulated a significant equity sum – reducing the need for a large cash deposit on your onward purchase.

The Residential Mortgage Aspect

While a buy-to-let mortgage can be a standalone product for purchasing a rental property, a let-to-buy mortgage involves a more complex dual arrangement.

In a let-to-buy scenario, your current mortgage is converted into a buy-to-let remortgage, allowing you to rent out your current home, while you simultaneously apply for a new residential mortgage to fund your onward purchase.

As such, lenders will require you to meet a new lender’s affordability criteria – just as you would with any residential application.

Most mortgage lenders allow borrowing up to 4.5 times your annual income, however, this can vary depending on the strength of your financial profile, including initial deposits and credit score.

It is important to note that while some will consider rental income or investment income toward your overall affordability, others may assess your application based on earned income alone.

What Are the Differences Between Let to Buy and Buy to Let?

If you want to rent out your residential property – and do not need to buy a new home – then you can convert your mortgage to a buy-to-let mortgage. This is most common in cases where homeowners have another home elsewhere, such as moving back into a parent’s property or deciding to rent in a cheaper area elsewhere.

In most cases, however, people will need to secure a new home in order to rent out their existing property – and this is where let-to-buy mortgages shine.

One of the main reasons let-to-buy exists is down to the typical homeownership criteria set by most mortgage lenders. Many lenders require applicants to already own a residential property before approving a buy-to-let mortgage. With a let-to-buy arrangement, both a buy-to-let and a new residential mortgage are secured simultaneously – ensuring you meet the eligibility requirements for both products at completion.

In short: You can convert your existing mortgage to a buy-to-let and take a residential mortgage product on your new home.

The only material difference between a buy-to-let mortgage and a let-to-buy is the necessity for an additional residential mortgage.

Benefits of Let to Buy

One of the biggest benefits of a Let-to-Buy mortgage is the ability to retain your existing residential property while generating rental income from it. This can provide financial flexibility and open up new mortgage options for your onward purchase.

Additionally, there are many other scenarios where let-to-buy mortgages are an ideal solution. For instance, you might have bought a one-bedroom flat as a couple and now need more space to start a family. Rather than selling, let-to-buy allows you to keep the flat as a rental asset while upgrading to a larger home or property.

Alternatively, if mortgage lending criteria make it difficult to secure a new buy-to-let in your desired location, your existing home might be better positioned as a rental property.

Drawbacks of Let to Buy

It’s true – let-to-buy mortgages can be slightly more complicated than a straightforward residential or buy-to-let mortgage.

This is largely because borrowers face a higher risk of financial overextension when managing two mortgage products simultaneously. As a result, mortgage lenders tend to apply stricter affordability assessments to ensure applicants can comfortably meet their combined monthly repayments.

As such, if you are purchasing a larger or more expensive property, you may find it difficult to pass the affordability assessment on your residential mortgage. This can be compounded further if your chosen lender does not accept all forms of income.

While most borrowers expect rental and investment income to be taken into account on affordability calculations, it’s important to note that this is not always the case.

Let-to-buy mortgages are also rarer than buy-to-let and residential mortgages. It is important that you seek mortgage advice from a broker with experience in let-to-buy mortgages to best understand the products available and source the cheapest products.

Speak to a Mortgage Broker to Know Your Options

Navigating the complexities of let-to-buy mortgages can be challenging, but don’t worry – we’re here to help you.

Boon Brokers is a Whole-of-Market Mortgage, Insurance, and Equity Release brokerage with dedicated expert advisers in let-to-buy mortgages. Whether you’re moving to a new home, looking to unlock rental income from your current property, or exploring the right mortgage strategy for your next step, our expert advisors are here to help you.

We offer clear, unbiased, and fee-free mortgage advice, tailored to your circumstances and financial goals.

Contact Boon Brokers today and arrange your free, no-obligation consultation at a time that best suits your needs.