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I am looking to purchase a new home but would like to keep my existing one as an investment for the future.
I have heard about let-to-buy mortgages. How do these loans work and what would my partner and I, with a joint salary of £65,000 per year, be able to buy?
FH, via email
Let-to-buy mortgages are growing in popularity. As Telegraph Money reported last week, sales of these loans have risen by 15pc in the last six months.
These deals allow homeowners to purchase a new home without having to sell their existing property first, which is ideal for people struggling to sell in the current sluggish market. Instead, two loans are taken out at the same time, a residential mortgage for the new property and a let-to-buy loan on the existing home.
But for this strategy to work, there will need to be enough equity in the current property. This will need to be freed up to cover the deposit needed for the new home, otherwise a cash injection from the borrowers’ savings will be required.
Chris Sykes, of mortgage broker Private Finance, said: “Typically, the larger that income is, the more flexibility there will be both on the let-to-buy and residential mortgage, as customers could borrow up to 90pc on the new property if they have large salaries.”
In this case you and your partner, a 35-year-old couple with a combined household income of £65,000, have a property worth £325,000 with a remaining mortgage of £150,000. The new property you would like to buy is worth £425,000 and you have saved up £50,000 to help towards the move.
Mr Sykes said: “Properties in your area have a typical rental yield of 5pc, which would provide £1,350 per month in rent. A couple like you can raise 75pc of a property’s £325,000 value through a let-to-buy mortgage, which is £243,750.
“On an interest-only basis, this would cost £446.88 per month, leaving a small profit after taxes, management and maintenance fees are taken into account. Once the existing £150,000 mortgage is redeemed, this let-to-buy mortgage leaves you with £93,750 to fund the new purchase.”
You have £50,000 in savings but should set aside around £27,000 of this to cover costs such as stamp duty and legal fees. In your case, £24,000 will be needed for stamp duty as second home purchases are liable for a 3pc surcharge above the going rate.
Mr Sykes added: “The remaining £23,000 plus the £93,750 released from the existing home provides a deposit of £116,750 to buy the new home. With your dream home priced at £425,000, you will need a mortgage of £308,250 – 72pc loan-to-value – which a joint income of £65,000 should support.”
With the equivalent of a 28pc deposit, you will comfortably be able to get a mortgage on the new property. Even for those not as well off, borrowers can usually get a loan with just a 5pc deposit, as long as their income is sufficiently high.
However, there is more to consider. Although you can typically get the same rates as a normal buy-to-let and residential mortgage, there are only 20 banks and building societies currently offering these deals.
As well as the extra stamp duty costs, you must also consider the potential capital gains tax liability, as you could face a hefty tax bill if your property original property rises in value between the time you start renting it out and any eventual sale. The home would be exempt if it had remained your primary residence throughout, but you forfeit some of this tax relief when you rent the property out.
Mr Sykes added: “The existing property that is being converted from a home into a rental will also need to be taken off the market before you apply for a let-to-buy deal, as lenders don’t want people taking out a let-to-buy before selling the property shortly afterwards.”
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