Let-to-buyers are canny investors who hold on to their homes while buying bigger and better ones.
Let-to-buy is a financial arrangement where a homeowner decides to let out their existing property and use the rental income to cover the mortgage payments, while simultaneously purchasing a new property to live in. In essence, it involves renting out your current property and becoming a landlord, while also securing a new mortgage for your next home.
This strategy is typically used by homeowners who want to move into a new property but do not want to sell their current property. It allows them to retain ownership of their existing property and benefit from rental income, while also obtaining a new property to live in.
The process involves several steps. First, the homeowner needs to assess the rental potential of their current property and ensure that it will generate enough income to cover the mortgage payments. They may need to make necessary repairs or renovations to attract tenants.
Once the rental income is secured, the homeowner can then apply for a new mortgage to purchase their desired property. Lenders will consider the rental income from the current property as part of the affordability assessment for the new mortgage.
Let-to-buy can have several advantages. It allows homeowners to move into a new property without the pressure of selling their existing property quickly. It can provide a source of rental income, which can contribute to the mortgage payments of the current property. Additionally, homeowners may benefit from potential property price appreciation over time.
However, there are also potential risks and considerations with let-to-buy. It requires careful financial planning to ensure that the rental income covers the mortgage payments and other associated costs. Landlord responsibilities, such as managing tenants and property maintenance, should also be taken into account. Furthermore, it’s important to be aware of any tax implications and seek professional advice.
In summary, let-to-buy is a strategy that allows homeowners to retain ownership of their current property and generate rental income while purchasing a new property to live in. It can provide flexibility and financial benefits, but it requires careful evaluation of the rental potential, financial considerations, and responsibilities associated with being a landlord.
Ask David and Maggie Constance. When Maggie had a little boy, the Hereford-based couple realised they needed more living space. After scouring the area, they found a four- bedroom detached house only two miles from their current address. But instead of calling in the estate agents or going online to sell their home, the couple contacted a local valuer. And his verdict was an exciting one. The home that they’d bought from the council for £36,000 was now worth £96,000.
They decided to remortgage their old home and raise enough cash to pay the deposit and moving costs on a new one, plus they needed to move their possessions only a few roads away and did not have to endure that agonising wait for a new buyer; it ’s always easier to find and install a tenant than wait for a buyer to bite and then complete. Further, they saved agent ’s fees of over £2,000. So, in their new roles as let-to-buy landlords, the Constance’s have let out their old home and make a healthy profit into the bargain.
The interest on the remortgage (the cheapest way to borrow money known to man) is deductible against rental income for tax assessment purposes, so effectively the tenants pay the mortgage off on their new property, courtesy of the government (bless ‘em).
They’re delighted with concept. Who wouldn’t be? They’re now using their original house as an extra source of income as well as a capital asset. It ’s an excellent way to move forward. And you don’t have to stop at one property; you can just keep on going up the ladder, renting out a series of ever-larger homes until you find the right one that you want to stay and live in. Theoretically, later in life, when all mortgages have been paid off and kids have grown and flown, you can move back down the ladder, passing through the properties again and sell them off one by one, over a series of years, taking advantage of the government ’s (bless ‘em) principle private residence relief, and pay no tax whatsoever on the capital gains!
Letting should not be taken lightly, however. Not everyone cherishes late-night calls about faulty boilers or having to remind tenants about the rent, and you will need to vet them closely to make sure they are the paying guests you want. If you have any lingering doubts, contact a lettings agency to do it all for you. It will cost you a small set-up fee, about 10% of your annual rental income for finding and signing up tenants and about 12-15% for running the show, or you do this yourself; just do it properly.
The important thing to remember is that your old property(ies) is/are no longer your home. It is an investment, which means you can’t just swan in and out at your leisure. And you can’t be precious about them anymore. You must give your tenants at least 24 hours’ written notice whenever you go there and follow all the other usual rules when letting.
Nice idea, though, isn’t it? We all dream of living a tax-free existence. Well, this may be one way to achieve just that.
Pros and Cons of Let-to-Buy Strategy for Homeowners
Pros:
- Financial Flexibility: Let-to-Buy allows homeowners to retain their existing property and generate rental income while purchasing a new home. This can provide financial stability and flexibility by diversifying income streams.
- Property Investment: Renting out the existing property can be a long-term investment strategy, as it can potentially generate rental income and property appreciation over time.
- Timing Advantage: Let-to-Buy enables homeowners to avoid the stress and pressure of selling their property quickly, as they can rent it out while searching for a new home at their own pace.
- Potential Capital Growth: By retaining the existing property, homeowners have the opportunity to benefit from potential future capital growth in the property market.
- Tax Benefits: Renting out a property can offer tax advantages, such as deducting mortgage interest, property maintenance costs, and other allowable expenses from rental income.
Cons:
- Financial Responsibility: Owning multiple properties comes with financial responsibilities, including mortgage payments, property maintenance, insurance, and potential vacancies. Homeowners must ensure they can manage the financial obligations associated with both properties.
- Rental Market Risk: The success of the Let-to-Buy strategy relies on the rental market’s demand and rental rates. Fluctuations in the rental market can impact the rental income and overall profitability of the strategy.
- Increased Complexity: Managing multiple properties requires additional time and effort. Homeowners need to consider the responsibilities of being a landlord, such as finding and screening tenants, handling maintenance requests, and adhering to landlord obligations and regulations.
- Capital Tied Up: Homeowners who choose the Let-to-Buy strategy may have a significant portion of their capital tied up in their existing property. This can limit their ability to invest in other opportunities or access the equity for personal financial needs.
- Mortgage Approval Challenges: Securing a new mortgage for the purchase of a new home while retaining the existing property as a rental may present challenges in terms of mortgage approval criteria, affordability assessments, and potential additional costs, such as higher interest rates or larger deposit requirements.
It’s important for homeowners considering the Let-to-Buy strategy to carefully evaluate their financial situation, market conditions, and their ability to manage the responsibilities of being a landlord. Consulting with a financial advisor or mortgage specialist can provide valuable insights and guidance tailored to individual circumstances.
Q1: What is Let-to-Buy?
A1: Let-to-Buy is a property strategy where homeowners rent out their existing property while purchasing a new home. It allows homeowners to retain ownership of their current property and generate rental income.
Q2: How does Let-to-Buy work?
A2: With Let-to-Buy, homeowners secure a buy-to-let mortgage on their current property and use the rental income to cover the mortgage payments. They can then use a new residential mortgage to purchase their new home.
Q3: What are the benefits of Let-to-Buy?
A3: Let-to-Buy offers several advantages, including financial flexibility, property investment opportunities, timing convenience, and the potential for long-term rental income.
Q4: Can anyone use the Let-to-Buy strategy?
A4: Let-to-Buy is typically available to homeowners who meet certain criteria, such as having enough equity in their current property and meeting the affordability requirements of a buy-to-let mortgage.
Q5: Are there any risks associated with Let-to-Buy?
A5: Yes, there are risks involved in Let-to-Buy, such as rental property vacancies, potential difficulty in securing tenants, and the responsibility of managing two properties simultaneously.
Q6: What factors should homeowners consider before pursuing Let-to-Buy?
A6: Homeowners should consider factors such as rental market conditions, the financial viability of renting out their property, their ability to manage two properties, and the potential impact on their creditworthiness.
Q7: Can homeowners use Let-to-Buy for any type of property?
A7: Let-to-Buy is commonly used for residential properties, but it may not be suitable for certain property types, such as leasehold flats or properties with restrictive covenants. It’s important to consult with a mortgage advisor to determine eligibility.
Q8: How does Let-to-Buy differ from Buy-to-Let?
A8: Let-to-Buy involves homeowners renting out their current property to finance the purchase of a new home, while Buy-to-Let is an investment strategy where individuals buy properties specifically for rental income and capital appreciation.
Q9: Can Let-to-Buy be a good investment strategy?
A9: Let-to-Buy can be a viable investment strategy, as it allows homeowners to generate rental income and potentially benefit from property value appreciation. However, it’s essential to carefully assess the financial implications and market conditions before pursuing this strategy.
Q10: Is it necessary to consult with professionals when considering Let-to-Buy?
A10: Yes, it’s recommended to consult with mortgage advisors, tax professionals, and property experts when considering Let-to-Buy. They can provide guidance on mortgage options, tax implications, rental market analysis, and other important considerations.