Have you heard of let to buy?
Let to buy is a phenomenon that is on the rise - and, curiously, it's an option available to both the most privileged of homeowners and those who find themselves stuck.
So what is it?
Let to buy is when you let out your existing home and buy a second property to live in. For some, it means becoming an 'accidental' landlord. If your existing home won't sell, has dropped in value and/or has left you in negative equity - as half a million households in the UK currently are - let to buy enables you to move on without having to sell at a loss.
You may also turn to let to buy to break an impenetrable chain. Rather than depend on selling your property to buy a new one, you let it out instead and use the income to fund a mortgage for a second property. However, it's worth checking via a broker if a bridging loan may be a better option in this short-term scenario, while you wait for your property sale to go through, than making a commitment to becoming a landlord.
For homeowners who own their home outright, or, as a result of a new relationship in which both parties own properties, have a surplus asset - let to buy is a way to start building a property portfolio. It can be a more sensible financial option to hold on to that second property and rent it out rather than sell - particularly if it's in London, where house prices are rocketing, rents are strong and the percentage of borrowers in negative equity stands at just 1% (compared with 41% of those in Northern Ireland and 16% in the north of England, according to the mortgage company HML).
There is much talk of a housing bubble but that is mostly being driven by cash buyers and high deposits in London. For some homeowners elsewhere in the country, the reality is, according to HML, there are still 500,000 homeowners in negative equity (where sale proceeds wouldn't pay off the outstanding mortgage) and if they need to move elsewhere for work, or changing personal circumstances, they are stuck.
How to finance your let to buy
If you have no or little mortgage and spare cash to put down as a deposit for a new property, you could simply take out a residential mortgage on that second property. But this may not be the most financially savvy route. "It's in landlords' interest to get the mortgage – or the higher mortgage, if there are two involved - on the property you plan to let out as the interest can be offset against rental income," says Marc von Grundherr, lettings director of Benham & Reeves.
Also, if the property is located in an area where prices are rising, you will benefit from gearing. "Leverage is a good thing in property investment and you always want to have your highest interest rate on the investment property. So, typically, if you have a homeowner's mortgage on the existing property, you would transfer that to the new property and get a buy-to-let mortgage on your current home," says Von Grundherr.
If you have a large amount of equity in your existing property, you could remortgage and release a large chunk of that equity as a deposit for a new home. The rental income on your new home would then cover your mortgage repayments on the old one. This leaves you free to take out a mortgage on the new home and cover repayments with your salary.
Bear in mind that buy-to-let mortgage rates tend to be higher than residential loans and, for the best rates, will have higher arrangement fees and require deposits of around 40%. The lender will also want evidence - often in the form of a guarantee from a lettings company – that the rental income will cover your mortgage repayments.
The main one is that when people hold on to a property expecting it to always rise in value and rents to cover costs, unfortunately this doesn't always work. As we have seen over the past few years, property prices can fall, as can rents and if you can't cover your property's running costs, then you'll have to put more money in each month.
Also remember it's a big commitment to become a landlord – though letting out what was once your own home can be far easier than letting out a pure investment property that you have never lived in.
You will have an intimate knowledge of the property and the local neighbourhood - and hence the potential rental market. "Should your tenant call to say the boiler is making funny noises, you'll probably know what the problem is. Just make sure you leave thorough notes about how everything works," says Von Grundherr.
Before you leap into let to buy, consider whether the decision meets your lifetime objectives and suits your current finances. Seek a full financial review. Don't just get a mortgage and keep your fingers crossed.
Let to let
If let to buy doesn't work for you at present but you still want or need to move on from your existing property, then there is another option to consider: let to let, where you let out your home and rent a property to live in. It's a great way to explore a new area and its property market before you make the financial commitment of investing in it.
Top five tips for letting your home
1. Make sure your property is legally up to scratch (especially electrics or gas), has an Energy Performance Certificate and is safe to let.
2. Provide peace of mind for your tenants by becoming a member of Arla or Nals and/or a local council landlord accreditation scheme. They have a code of conduct and operate redress schemes.
3. Make sure you have specialist landlord insurance.
4. Ideally remove furniture - as lots of rules apply regarding fire safety.
5. Make sure you have a smoke alarm and carbon monoxide detector fitted.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
People who have bought a property before they’re able sell their existing property often have to take out a bridging loan, a temporary short-term loan to “bridge” a gap in finances. Because bridging loans are made available very quickly, and because they are short-term loans, borrowers are charged higher rates of interest by the lenders.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.