Q. What is the difference between buy to let and let to buy?
Buy to let is when an individual buys a property with the sole intention of using the property as an investment and letting it out. Let to buy, or rent and buy, as it is sometimes known, is the process whereby an individual who owns a property and currently has a mortgage on it takes out a further mortgage to buy another property. The borrowers will then rent out the first property and move into the one that has just been purchased.
Q. What is the current state of the let to buy market?
Unlike the buy to let market, there are no figures that clearly identify the size of this market. But anecdotal information suggests the market is steadily growing. On average at The Mortgage Operation (TMO), two out of every 10 enquiries received are about let to buy a figure which only a few years ago would have been around one in every 20.
Q.Which lenders specialise in let to buy?
Traditionally, this mortgage type was available through facility-driven lenders such as TMB, Bank of Scotland and Verso. However, with the increases in the size of this market, most mainstream lenders will now consider cases. As with all products certain lenders offer more flexibility on criteria such as affordability.
Examples of these lenders include, Bristol & West, Birmingham Midshires, Leeds & Holbeck and Chelsea which all disregard borrowings on the let property if rent exceeds the mortgage payment. Other lenders will insist on income multiples covering the combined mortgage balances.
Q. Do let to buy mortgages differ from standard products and can you still get special rates and terms?
Let and buy is not treated as a niche product by lenders so borrowers are still able to obtain competitive rates and terms on most products. For example, Leeds & Holbeck currently offers 5.19% fixed to 1/9/2003 with no redemption tie in.
Q. Where did let and buy originate and what purpose does it serve in today’s mortgage market?
Let to buy was originally designed as a short-term fix to assist those in nominal or negative equity. This was particularly the case after the property recession in the early 90s. Borrowers needed to move, but did not want to sell the property they lived in as they would have faced huge losses.
It made sense, therefore, to rent property out while the market recovered and buy a new property at a reasonable price. With the decline of negative equity other reasons took over for borrowers requiring buy to let mortgages. These now include job relocation, moving in with a partner, separation and divorce. Lenders now accept investment as a suitable underwriting reason and as a result the let to buy market has grown rapidly over the last few years.
For those borrowers who view let to buy as an investment it is not a short term option. However, for borrowers whose reasons are more personal let to buy can be an appropriate short term choice. As borrowers are able to obtain let to buy mortgages without overhanging redemptions it is easy for individuals to do without being penalised.
Q. What sector of the public does buy to let appeal to?
Because of the limited coverage in the media, the majority of the applicants who choose let to buy do so through a financial adviser. As a result, there is a good opportunity for brokers to be proactive in this sector of the market. Because the client profile varies considerably for let to buy mortgages, brokers should examine the reasons for a client’s desire to move and buy property ‘ is there potential for a let to buy mortgage rather than a straight buy and sell? Are the clients only planning to move for a short time? Are they moving in with a partner, or are they looking for an investment opportunity but want to move out of their current property?
Many of these borrowers may not be aware of the benefits or existence of let to buy and brokers should take the opportunity to advise them of this sector of the market.
Q. Should brokers take precautions when advising borrowers on the let to buy market?
Brokers should view the let to buy market in a similar vein to the buy to let market. As well as ascertaining if the client is interested in a let to buy mortgage it is also important to assess the suitability of a property. The home that the borrower is intending to let should be viewed in a similar light to any rental property.
For example; is there a buoyant rental market in the area? Is the property type a popular one for renting e.g. a flat or small house? It is important that the property can be rented in order to meet the mortgage repayments and it is equally important that borrowers understand the risks and responsibilities associated with becoming a landlord.