The Let-to-buy Mortgage
Gerry Fitzgerald has built a multi-million pound property portfolio which he manages himself. As a former Independent Financial Adviser he is further qualified to offer insight and guidance on the buy-to-let mortgage market. With long experience, both of using letting agents and of managing properties himself, he can speak with authority on the benefits and pitfalls of both approaches. He also runs a successful holiday letting business.
A little known but very useful product is the let-to-buy mortgage. This is designed for the investor who intends to let out his own home and buy another which will then become his main residence. If the lender is happy that the first property can be successfully let he may ignore the mortgage on that property and offer a let-to-buy mortgage for the new purchase.
The underlying principle here is that the rent from letting the first property should cover the mortgage on that property, thus enabling the new lender to ignore it altogether when calculating the mortgage for the new purchase. Surprisingly, however, there is wide variation among lenders as to their requirements regarding the letting of the first property. You may encounter any of the following:
- No requirement for a separate rental assessment. The lender will settle for a letter from a local letting agent indicating the likely rent level. The borrower can arrange this.
- A requirement for a separate rental assessment to be arranged by the lender (using an independent valuer) and paid for by the borrower.
- The rent should be enough to cover the interest paid on the mortgage.
- The rent should exceed the mortgage interest by 25% or 30%.
- Where the mortgage is on a repayment basis, the rent should cover both capital and interest.
If the lender is happy with the letting arrangements for the first property, the mortgage on the new purchase will be a normal residential mortgage, not linked in any way to the rental potential of that property. Crucially, however, the cost of servicing the first mortgage will be ignored.
The deposit for the new purchase is frequently raised by remortgaging the existing property with a new lender (often the lender providing the mortgage on the new property). If there is no change to the existing mortgage arrangements, the present lender must be notified that the property will no longer be owner occupied and will be let out. A lender can refuse permission for this or charge a higher interest rate when the property is let. It is often simpler to remortgage with the new lender.