In this article I will cover Let to Buy Mortgages and Permission / Consent to Let Mortgages.
Let to Buy Mortgages are recommended when you are retaining your existing property, renting it out and buying a property which will be your new main residence. You are remortgaging to a buy to let mortgage. This is advised where you see this as a longer term arrangement.
The amount the new lender will advance on your retained property is not based on your income but the projected rental income and the equity in the property. The basic rule of thumb is that they require a minimum of 25% equity (some lenders will advance up to 85% loan to value) in the property and the rental income be 25% higher than the interest only payment. The more equity in the property means less risk to the lender and a better rate.
The benefits of a let to buy mortgage are:
1) It is a permanent solution.
2) You can raise additional money to help fund deposit on the next property.
3) The mortgage can be arranged on an interest only basis to reduce monthly mortgage payments.
Permission to Let / Consent to Let Mortgages is where you approach your existing lender informing them that you intend to rent out your existing home. You might want to take this route because of a temporary job move or you want to buy another property quickly without selling yours. In the past most lenders have been very helpful, letting you retain your existing mortgage product /rate and only charging a small administration fee.
The majority of lenders now are far stricter on permission to let mortgages. They will grant permission for 12 months and review annually, increase the rate and may charge a substantial fee. An example of this new criteria is with the C&G. Their current standard variable rate is 3.99% (for mortgages completed after 1/6/2010). The rate will increase to 5.99% if you request for permission to let for a property with equity of 25%.
Another recent example is a client with First Direct mortgage on a permission to let basis that had expired after 12 months. The lender would not renew the permission to let and were insisting that the property be sold or converted to a buy to let mortgage. As the client had only 15% equity and did not meet the buy to let rental criteria he was forced to sell at below market value. First Direct can insist on him selling the property as he no longer meets the terms and conditions of his original mortgage offer.
Not all Buy to Let lenders offer Let to Buy mortgages. The major quirk in the criteria is the 6 month rule.
An example of this is with the Skipton Building Society. They will let you remortgage your property to buy to let basis and raise additional funds to help purchase your new home. However if we approach them to remortgage to a buy to let basis after you have moved out they will require a 6 month track record of the property being rented. BM Solutions and Woolwich do not impose this rule.
The majority of lenders will not include your let to buy mortgage borrowing as a financial commitment as long as it is can be evidenced as a self financing proposition. Accord, Yorkshire Building Society and Nationwide are among a group of lenders who will treat your let to buy mortgage as a commitment and expect that your personal income to support your permission to let and new borrowing until evidence of a track record of rental income.
Lending criteria is very fluid; please contact me for lenders current position.
When you property is being rented out you become a landlord. This means that you will have to make an annual tax return. You can only offset the interest only element of your mortgage payment as a business expense, not the capital part. As the property is no longer your main residence you might have to pay capital gains tax when it is sold.
As the property is no longer your main residence you will have to amend your home insurance to reflect that the property is now being rented.
Converting you mortgage to a buy to let basis does give you the ability to buy a new home and suits some people but at increased risk. The buy to let mortgage still needs to be paid every month even if not tenanted.
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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage
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