Let-to-Buy

Let-to-Buy – Are you moving but don’t want to sell? Try let-to-buy where homeowners rent out their home and use cash to buy a new property

Let-to-BuyThe buy-to-let market is thriving and looks set to boom again this year – and let-to-buy, the less well-known, mirror image activity could become more popular too.

With let-to-buy, homeowners rent out their current main home – often raising a new mortgage on the back of it – they then use the cash to buy a new house to live in.

It is predominantly used by those who need to move but are either having trouble selling their property or would prefer not to. The idea is becoming increasingly popular for those who need to relocate for several years for work but hope to return to their original home eventually – and typically they would prefer not to have to rent property while they are away.

All being well, let-to-buy offers several major financial benefits. Here, we explain how to gain – and the drawbacks to keep an eye out for.

HIGH RENTAL DEMAND

Let-to-buy allows you to take advantage of the current climate of high demand for rental properties and high rental fees paid by tenants.

The rise in rent is expected to fall back in 2015 but most experts still predict increases of about six times the current rate of inflation.

Let-to-buy also means you will own two properties rather than one, so if property prices grow you will benefit twice (but on the other hand, if property prices fall, you will suffer twice the pain).

Your mortgage interest payments on the loan for the home you are letting out can be offset against rent to reduce your income tax bill.

Also, let-to-buy offers an additional tax break too. With traditional buy-to-let you are required to pay Capital Gains Tax if you make big profits when you sell your investment property. But if your rental property has ever been your main home – which, in let-to-buy, it will have been – then you can qualify for a big reduction in your CGT bill when you come to sell.

CHECK THE MARKET

Do some research of the local area and decide if your current home would be an attractive rental property and try to determine how much rent your property could earn. Unusual family homes may not always score highly on the rental market.

You should also make a note of how long similar properties have been available so you can get an idea of how long it might take to find tenants.

DO THE SUMS

Figure out how much money you will need to buy the new home, including additional fees and legal costs.

Depending on how much equity you have in your current property, if you are buying somewhere much cheaper, you may be able to re-mortgage your home to raise enough to be a cash buyer. If not, you may be able to raise enough to use as a large deposit, which could give you access to a much better mortgage rate & therefore lower your monthly payments..

Then decide if your current income is enough to obtain a new residential mortgage to let you buy the home in the normal way.

INCREASED LOAN RATES

Bear in mind that how much you can raise on your first property may be limited. When you move out and your tenants move in, the house will automatically become a buy-to-let property, which could mean your lender might charge a hefty fee and increase the interest rate on any existing loan.

If you are re-mortgaging to borrow more, then you will most likely have to pay a high application fee and a higher interest rate.

Most buy-to-let mortgages are not regulated by the financial watchdog the Financial Conduct Authority, whereas residential mortgages are.

STRESS TESTING

Be prepared for strict affordability checks, sometimes called stress tests, if you plan to take out a new mortgage for the property you hope to move into. If it has been several years since you last applied for a mortgage you may be surprised by the detailed questions and how time consuming it can be applying for a new loan.

With your old mortgage turned into a buy-to-let loan, providing the rent you earn will cover the repayments then you should be able to get a good sized new loan based on your current income.

All being well, you should be able to apply to any best-buy lender for the new loan. However, because many lenders only like to deal with straightforward cases they may not want the added hassle of dealing with a let-to-buy scenario, so it may be worthwhile finding an experienced, independent adviser to help arrange the deal for you.

Post courtesy of Thisismoney.