Sometimes you can solve a tricky problem by turning it the other way round. If you have your eye on a new home but are struggling to sell your old one, let-to-buy can offer a potential lifeline. Find out how it works and whether it might suit you – and make yourself aware of the risks.
Bob and Sally have never met. For one thing, Bob is 61 and lives in Peterborough. Sally is a lifelong Londoner in her early 30s. But both have a similar issue preying on their minds.
Bob and his wife want to downsize. A perfect seaside bungalow has just become available, and Bob has been warned it will be snapped up very soon. However, his large family home is proving hard to shift, and if he drops the price, he’ll have less money in retirement.
Meanwhile, down in north London, Sally has realised that her two-bed flat no longer has enough space for a growing family. She wants to move to a house in the suburbs – but husband Bryce would rather hang on to the London flat, as property in the capital is such a good investment.
Both of these dilemmas could potentially be solved by the same means: letting to buy.
Why would you let-to-buy?
Let-to-buy is exactly what it sounds like: you keep ownership of your current home, rent it out, and use the rental income to secure a second mortgage on a new home. You could then keep the first property indefinitely, or just for as long as it take to sell at the price you want for it.
This means that Bob can secure the bungalow he wants without having to wait for his big house to sell. And Sally can afford a new family home while keeping her London flat as a valuable asset.
However, in practice the process can be quite complicated, so both will need to think carefully before making this decision.
Do you need a different type of mortgage?
The first thing Sally discovers is that she will need a whole new mortgage on her flat. As she’s going to be letting it out permanently, she will need a buy-to-let mortgage rather than a residential mortgage. These typically have higher repayment rates, and also require bigger deposits – 25 per cent or more. Sally also realises she will need money for a deposit on her new home.
Fortunately, she and her husband have about 40 per cent equity on their flat. This means they can remortgage and use some of the equity as a deposit on the flat, and the rest as a deposit on their new home.
By contrast, Bob is confident that his original home will only take a few more months to sell. His mortgage lender agrees, and so is willing to let him keep a residential mortgage on that property. However, he still has to remortgage in order to free up some equity for a deposit on the bungalow. Also, if his house takes longer than expected to sell, his mortgage lender may insist that he moves to a buy-to-let mortgage.
Can you really afford it?
To secure their additional mortgages, both Bob and Sally have to prove to their lenders that they will receive enough rental income to make the repayments. They also need to show that they could keep up repayments even in the even of the property being unoccupied for a period of time.
They will also need to factor in the other costs of buying to let, such as the extra 3 per cent stamp duty on rental properties, and the flat rate of 20 per cent tax relief even for higher-rate taxpayers.
In addition, the responsibilities of being a landlord need to be factored in. These can be stressful as well as costly, and Bob (who is retiring soon) hopes he won’t be burdened with them for very long. Sally, on the other hand, will discover there’s a lot more to it than just waiting for the rent to roll in.
What else could go wrong?
Conveyancing is always a complex and costly process (with buyers’ and sellers’ purchases all having to complete on the same day) and in a let-to-buy situation there is yet another layer of complexity. Someone in Bob or Sally’s situation is apply for two mortgages at once – one residential, one buy-to-let – and it needs to be managed as a single transaction to ensure that everything goes smoothly. You can’t continue to live in a property that is bought with a buy-to-let mortgage, so both mortgages need to complete on the same day (unless the lender is willing to make an exception).
One hazard in particular to avoid is mortgage deadlock – where each mortgage lender is waiting for the other mortgage to complete first. To prevent this stalemate situation from developing, both Bob and Sally engage an independent mortgage broker to handle both mortgage applications all the way to completion.
Getting professional help
Let-to-buy is not for everyone, but if you have a substantial amount of equity on your current home, and are in a situation like that of Bob or Sally, then it’s something you could consider. Just be aware that there can be some very complex calculations and transactions involved, as well as several unknown quantities (such as, will you be able to get tenants for the rental property straight away?).
For these reasons, it’s strongly recommended that you consult an independent mortgage broker – both to confirm that this decision is the right one, and to source the mortgages you need and manage the simultaneous application processes. It’s certainly not an easy option – but with the right help, it can help you secure the home you want.
This article was first published by unbiased on the 3rd May 2016.