What Is Let To Buy And How Does It Work

Not every homeowner decides to sell their current property before moving into a new one. While moving to a new home can be exciting, it can also present a financial challenge when owning multiple properties. This is where a let-to-buy mortgage can offer a solution. In the, a let-to-buy mortgage is a specialised financial arrangement that allows owners to let out their current residence while they purchase a new one to live in. This way, the current home can fund the purchase of a new one.

So, what is rent-to-buy and how does it work? Let’s know in this detailed guide.

What Exactly Is Let-to-Buy?

A let-to-buy mortgage usually involves two separate mortgages:

Let-to-Buy on Current Home – Suitable for those who intend to rent out their current home to tenants.

Standard residential mortgage – Ideal for those who want to take a mortgage on the new property they plan to occupy.

A let-to-buy mortgage is a specialised financial solution designed for property investment purposes. The lender primarily takes into account the expected rental income, rather than relying on the personal income of the borrower. It is mandatory that the rental income is enough to cover the let-to-buy mortgage repayments.

How Does the Two-Mortgage Structure Work?

Remortgaging Your Current Home

To let out the current property, it is important to convert the current residential mortgage into a buy-to-let mortgage. Lender approval is required here, and in some cases, sufficient equity in the property, which can be around 20–25% or more.
For the lenders, rental income is more important than your personal earnings. The borrower may be required to provide documents such as the rental appraisal from an independent agent to demonstrate realistic rental values.

Residential Mortgage on the New Home

You apply for a standard residential mortgage to buy a new home that you plan to live in. For this type of mortgage, lenders may consider the borrower’s income, outgoings and credit profile, similar to a typical home-buyer application.

Important Considerations for Let-to-Buy Mortgage 

Stamp Duty Land Tax (SDLT)

When you plan to buy a new property (second home), you are likely to be charged a higher rate of Stamp Duty, which includes a 5% surcharge plus 2%, if the applicant is not a UK resident. This is mostly applied in England and Northern Ireland. The tax is payable over and above the standard SDLT rates. However, this additional amount can be reclaimed if you sell your original home within three years.

Note: Stamp duty rules may be different in Scotland and Wales, where LBTT and LTT apply.

Rental Income and Taxation

Rental property owners must pay rental income tax and ensure compliance with landlord obligations. Make sure to understand how rental profits are taxed and what expenses can be offset.

Landlord Responsibilities

Landlords are required to take care of their legal responsibilities, which may include:

• Gas Safety Certificates

• Electrical Safety Reports

• Energy Performance Certificate Compliance

• Property Maintenance

• Compliance with Tenancy Regulations

• Landlord Insurance

• Right-to-Rent Checks
  

Affordability and Risk

Managing two or more mortgages simultaneously can put an additional burden on your pockets, particularly if rental income is volatile or void periods occur. Lenders will often assess rental income for loan repayment, instead of relying solely on rental income.