Have you heard of let to buy?

Published by Kate Faulkner on 09 June 2014.
Last updated on 09 June 2014

House and coins

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.

Releasing equity

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 downsides

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.

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