The mortgage option of let to buy ‘ or rent and buy as it is also known ‘ is currently overshadowed by its alter ego, buy to let. One can hardly pick up a newspaper these days without reading warnings about the buy-to-let market overheating, or causing a slump in rental values in certain areas of the UK.
However, putting aside the pros and cons of buy to let as an investment option for private landlords, let to buy still retains its original role as a trouble shooting option. As such, it should always be part of the successful mortgage adviser’s range of options to offer to clients whose needs are a little out of the ordinary.
Returning to the roots of the product, let to buy was first introduced when the property-price crash of the early 1990s saw thousands of borrowers suffering negative equity. There was a perceived need to keep the housing market moving, and to give those in negative equity a breathing space for their properties to recover at least some of their purchase-price value.
In response to this need, some specialist lenders set up let-to-buy schemes, whereby borrowers could buy a new residential property and still retain the original ‘ negative equity ‘ property, renting it out to cover the mortgage repayments while property values recovered.
Although it has strong similarities with buy to let (for example, the rental value of the let property must exceed the mortgage repayment by, typically, a 25% safety factor) few let-to-buy borrowers approach this product with the primary idea of investing in rental property.
Let to buy is still principally a product that enables borrowers to find a solution to tricky housing situations that cannot be accommodated by mainstream products. The most common of these is where a job relocation means a borrower has to move to a different part of the country, but does not want to give up their original property for whatever reason.
For example, they may be tied into a low rate by early redemption charges, or they may prefer to keep a longer-term foothold in the property market in, for example the prosperous South East, while buying another property to live in which is nearer to their new workplace.
The usefulness of a let-to-buy mortgage is by no means restricted to those who are moving with their job. Let to buy could also be a viable solution in other niche circumstances, where homeowners have an overwhelming need to secure another property, even when they cannot sell their original home. For example, people may need to increase their living space for a variety of reasons: a new baby is on the way, or a growing family needs extra bedrooms, or elderly grandparents may need to move in. In this situation, if borrowers find it difficult to sell quickly to secure their desired new home, a let-to-buy mortgage can enable them to rent out the original property until the right buyer comes along.
Similarly, the splitting up, or scaling down, of a household may benefit from a rent and buy solution. A divorce or marriage breakdown may leave the original occupants wanting to move out to separate accommodation very quickly ‘ a rent and buy arrangement would provide a breathing space while the financial affairs are sorted out.
Similarly a couple whose children have left home may wish to swap their family home for something more suited to their lifestyle, perhaps a smaller property with some land or, anticipating future needs, a bungalow. In this case, the dream home may not come on the market frequently and a rent and buy mortgage could help to secure the desired home quickly, leaving plenty of time to sell the old one.
Finally, whatever other special circumstances prevail, the breakdown of a chain of sellers and buyers inevitably causes extra disruption, cost, administrative work and stress to everyone involved. Prudent use of a let-to-buy solution ‘ where the breakdown of the selling or buying sequence is threatened by one link collapsing ‘ could often save the chain without anyone suffering financial or other disadvantage.
Becoming a landlord
Of course, the implications of borrowing the capital to buy two properties, one of which is to be rented out, cannot be ignored, even if the rental element was a secondary consideration.Although advisers are, strictly speaking, only advising their clients on the best mortgage products to suit their individual requirements and not on the purchase decision, they still have a duty to remind borrowers about all the points they should be weighing up before taking the final decision to become private landlords.
Here are a few pointers for those clients looking at a let-to-buy solution:
• Check with the existing lender on the original property that they are happy for the property to be rented out. Most lenders will expect assurance on levels of rental values being more than adequate to cover the monthly repayment commitment, and will stipulate minimum six-month tenancies. They are also likely to raise the cost of borrowing by half a per cent or more to compensate themselves for the incremental risk.
• Remember the income from the rental property is subject to income tax ‘ and any profits from the eventual sale will also be subject to Capital Gains Tax ‘ as it is not the primary residence of the owner.
• Provision should be made for periods where the property is empty, or in the event that rental values start to fall.
• If you are letting a property , you must make sure it conforms to legal safety regulations.
• Take account of agency fees, if you want an agent to manage the lettings for you.
• Lenders are not likely to offer high LTVs for this sort of borrowing.
Let to buy has traditionally been a very niche product, for example, MoneyFacts and BusinessMoneyFacts do not have a separate listing for this category. But there is a good choice of lenders in this market, including The Mortgage Business and UCB Home Loans. In addition, mainstream lenders such as Halifax, Nationwide and Skipton Building Society are offering let-to-buy products.
Regarding rates, as let-to-buy mortgages are secured on the borrower’s primary place of residence, rates are likely to be as competitive as their mainstream product equivalents.
With a proper degree of caution and prudence being exercised, many borrowers have found that this route has not only enabled them to overcome an initial housing-finance problem, but it has also created an opportunity to build up a portfolio of rental properties to provide regular income as well as capital growth ‘ as the case study shows.
Eddie Smith is director of business development at Verso
Let to buy allows borrowers to use rental payments to cover their existing mortgage, freeing cash to invest in a new home.
Job relocation, divorce, or having a family are common reasons why borrowers opt for a let-to-buy mortgage.
Lenders such as Halifax and Nationwide have joined niche players such as Verso and TMB in the let-to-buy market.