Ever considered whether you could keep your existing property and rent it out when you move home? This process is called a Let to Buy and it is a genuine possibility for many homeowners.
A let to buy transaction involves remortgaging your current property onto a Buy to Let mortgage, to rent out the property, at the same time as purchasing a new residential property. Now how is this done? Well, for most people, the remortgage of the current property is required to raise capital to go towards the deposit for the new property. On Buy to Let mortgages of this nature, lenders allow borrowing up to a maximum of 80% of the current properties value, often 75%. This means if you have less than 20% or 25% equity in your current property, you wouldn’t be able to raise any capital to go towards the deposit for the onward residential purchase.
For example, take a couple owning a £300k property with a £200k mortgage remaining. As part of remortgaging their current property onto a Buy to Let mortgage, they could raise £40k leaving them with a £240k mortgage on the property. This additional £40k could then be used towards the deposit on a new property. If the couple had savings of which they could allocate £10k towards the deposit, this provides them with a £50k total deposit. This could be used as a 10% deposit on a purchase price of £500k. Now there are additional costs to consider of course. Solicitors’ costs are involved on both transactions, as well as stamp duty on the onward purchase which we’ll discuss.
Let to Buy can be a great idea! If there is sufficient rental demand for your current property, turning into a Buy to Let could be a good investment. You can benefit from the rental profit and the continued capital growth of the property. Let to Buy also allows buyers to be chain free as they’re not dependent on the sale of their existing property. This can make them more attractive to sellers as well as their being less risk of complications given their will be a smaller chain. This also means there are no estate agency fees as you’re not needing to sell any property.
Now, a downside of doing Let to Buy is the stamp duty implications. As mortgage brokers, we aren’t tax advisors, we’re not going to advise on tax matters but what we can do is detail how stamp duty is charged. Second property purchases incur the additional 3% stamp duty charge on top of standard rates. On a Let to Buy transaction, the extra 3% is paid on the onward residential purchase. If moving to a larger, more expensive property, this means the extra 3% is charged on a higher purchase price. However, this can be refunded if the existing property is sold within 36 months. It’s important to understand the stamp duty charges when considering a Let to Buy.
If you’re thinking about Let to Buy, you want to know more about it or want to know if it would be a possibility for you, please get in touch! Let to Buy is a very common type of transaction and can provide homeowners with an additional source they hadn’t previously considered. As always, for any other mortgage or life insurance queries, we’re here to help with free, professional advice.