For homeowners who are planning to move house but want to retain ownership of their current property, a let to buy mortgage may offer a workable route forward. This specialist type of mortgage allows you to let out your existing home and simultaneously purchase a new one to live in. This guide will explain how a let to buy mortgage works, who it’s suitable for, potential benefits, and what you need to consider before moving ahead. 

 

Whether you’re relocating for work, upsizing to accommodate a growing family, or simply looking to make a lifestyle change, understanding how a let to buy mortgage operates can help you make a more informed decision. We’ve structured this article to give a comprehensive overview of the subject, breaking it down into clear and digestible sections.

 

What is a Let to Buy Mortgage?

A let to buy mortgage is a financial arrangement that allows you to rent out your current home and take out a new residential mortgage on a different property that becomes your main residence. This is different from a buy to let mortgage, where the property is purchased outright as an investment and never intended to be a main residence.

 

Essentially, you convert your existing mortgage into a let to buy mortgage, which permits you to legally let out that home. At the same time, you apply for a residential mortgage on the new property you want to live in. This strategy can help you raise capital for the new home by remortgaging your old one and releasing some equity.

 

How Does Let to Buy Work?

Let to buy works by allowing you to have two mortgages at the same time – one buy to let mortgage on your existing property, and one residential mortgage on your new home. Lenders will assess both mortgage applications simultaneously, ensuring that you can afford the repayments on both properties.

 

Typically, you’ll follow these steps:

 

1. Speak to a mortgage advisor to assess your eligibility and circumstances.
2. Remortgage your current home onto a let to buy product, usually releasing equity in the process.
3. Use the released funds as a deposit on the new property and apply for a residential mortgage.
4. Complete both transactions – converting the old mortgage and securing the new one, frequently on the same day.
5. Rent out your existing property and move into your new home.

 

Because both transactions take place simultaneously, it’s essential to work with professionals who can help coordinate the timing and logistics.

 

Who Is Let to Buy Suitable For?

Let to buy can be a viable option for several types of homeowners, including:

 

• Those relocating for job opportunities who may return to their original area in the future.
• Homeowners wanting to retain their existing property as an investment.
• Individuals going through life changes such as relationship breakdowns who are not ready to sell.
• Existing homeowners looking to upsize but who prefer to keep their current property for potential appreciation or rental income.

 

However, it is not the right solution for everyone. Specific lending criteria, rental income expectations, and affordability checks can all impact eligibility. Speaking to a mortgage advisor can help you understand if this route is workable in your particular scenario.

 

Eligibility Criteria for a Let to Buy Mortgage

Mortgage providers have different criteria when assessing a let to buy application. Some of the most common factors they will look at include:

 

Loan-to-Value (LTV) Ratios

Lenders typically offer let to buy mortgages based on a maximum loan-to-value of 75%. This means you’ll need at least 25% equity in your existing home to qualify. For the residential mortgage on your new property, you may be required to provide a deposit of at least 5% to 10% depending on your credit history and lender requirements.

 

Rental Income Assessment

Lenders will want confirmation that your existing property can generate enough rental income to cover the mortgage payments. Many require rental income to be at least 125% to 145% of the mortgage repayments, calculated using a stress-tested interest rate – often higher than your actual mortgage rate.

 

Affordability Checks

You will also need to meet standard residential affordability assessments on the new property. This includes proving your income, debt-to-income ratio, outgoings, credit score, and overall financial health. Lenders assess whether you can afford both mortgages simultaneously, especially during potential periods of rental voids.

 

Credit History

Having a good credit history can improve your chances of being accepted for a let to buy mortgage. Lenders will look for evidence of responsible borrowing and repayment behaviour over a consistent period.

 

Tenancy Agreement

Most lenders will require you to rent your existing home under an Assured Shorthold Tenancy (AST) agreement. Letting to family members is generally prohibited unless specified by the lender.

 

Let to Buy vs Buy to Let: What’s the Difference?

While both let to buy and buy to let involve renting out a property, the primary differences lie in the intent and timing:

 

• Let to Buy: You already own the property and intend to rent it out while purchasing another one to live in. Two mortgages run in parallel – one for letting and one for residential use.
• Buy to Let: You purchase a property explicitly to rent it out, without the intention of living there yourself. Often used by property investors.

 

If your main goal is to generate rental income from a new investment property, a buy to let mortgage may be more appropriate. If you’re moving and wish to keep your current home as a rental, let to buy could be more suitable.

 

Advantages of Let to Buy Mortgages

There are several potential benefits to using a let to buy mortgage arrangement:

 

• Retain Property Ownership: You maintain ownership of your existing home, potentially benefitting from future property price appreciation.
• Generate Rental Income: Renting out your current property can provide a second income stream that may help support your finances.
• Purchase with More Flexibility: Releasing equity from your current home can help provide a deposit for your new property.
• Time to Sell: You avoid having to sell quickly, which may be useful in a slow market or uncertain economy.

 

Challenges and Risks to Consider

While let to buy can offer a range of advantages, it’s important to consider the potential risks and responsibilities involved:

 

• Rental Voids and Arrears: Not all tenancies go smoothly. Periods with no tenant or rent arrears can strain your cash flow.
• Increased Financial Commitments: Managing two mortgages can be a serious financial commitment, especially if interest rates rise.
• Landlord Responsibilities: Becoming a landlord involves legal duties, including gas safety checks, deposit protection, and meeting regulatory requirements.
• Capital Gains Tax (CGT): If you sell the let property in future, CGT may apply on any increase in value from the time it ceased being your main residence.

 

Tax Considerations

A let to buy scenario can have several tax implications:

 

Income Tax

Rental income is subject to income tax, and you must report it via Self-Assessment. Allowable costs such as letting agent fees, repairs, and mortgage interest (partially, under the current rules) may reduce your tax liability.

 

Stamp Duty Land Tax (SDLT)

When purchasing a second property, an additional 3% stamp duty surcharge applies on top of regular rates. If you sell your original property within 36 months, you may be eligible for a refund, depending on specific criteria.

 

Capital Gains Tax

As mentioned, if you eventually sell your old home that has been let out, CGT may be payable on the profit. However, certain reliefs, such as private residence relief or lettings relief, may apply depending on your circumstances and the period it was your main home.

 

Let to Buy Mortgage Rates and Deals

The interest rates on let to buy mortgages are often higher than standard residential mortgages, reflecting the added risk for lenders. Terms can vary widely between providers, and factors such as your credit score, rental yield, and loan-to-value ratio can impact the rates available to you.

 

It’s also worth noting that not all mainstream lenders offer let to buy products, which can make it more complex to find appropriate deals. A mortgage advisor can help you review options and understand what deals might be suitable for your situation.

 

Insurance and Legal Considerations

When letting a property, buildings insurance must be updated to reflect your new status as a landlord. Standard home insurance policies won’t usually provide sufficient cover. Landlord insurance can include protection against tenant damage, loss of rent, and legal expenses.

 

You’ll also need to ensure full compliance with landlord legislation in the UK, including:

 

• Gas and electrical safety certificates
• Energy Performance Certificates (EPCs)
• Deposit protection through a government-backed scheme
• Right-to-rent checks on tenants

 

Can You Convert a Residential Mortgage into a Let to Buy?

Yes, subject to lender approval. You must inform your current mortgage provider of your intention to let the property. Some may allow a “consent to let,” while others may require migrating to a formal let to buy product. Failing to inform your lender can breach the terms of your mortgage agreement.

 

Common Let to Buy Pitfalls and How to Avoid Them

Purchasing a second property while converting your existing one to a rental is a complex process. Here are common pitfalls to be aware of:

 

• Underestimating costs: Budgeting only for mortgage payments overlooks maintenance, insurance, and void periods.
• Rental market assumptions: A property may not yield the expected rent. Always get a qualified letting agent to assess market rent.
• Legal and compliance issues: Failing to meet landlord regulations can lead to penalties.
• Poor tenant vetting: Inadequate referencing checks can lead to unreliable tenants and financial strain.

 

 

A let to buy mortgage can offer a flexible housing and investment solution for homeowners seeking to move while retaining their current property. However, the process involves holding two mortgages, managing rental responsibilities, and complying with relevant financial and legal regulations.

 

As mortgage criteria, tax implications, and rental market conditions can be complex, many individuals choose to speak with a mortgage advisor for support and guidance tailored to their circumstances. This route can potentially help you save as much time and effort as possible when evaluating let to buy suitability.