What is a let-to-buy mortgage?

Full answer

Let-to-buy describes a specific sequence of mortgage transactions used by homeowners who want to move house without selling their existing property -- instead they convert their current home into a rental property and buy a new one to live in. **How it works step by step** 1. You currently own a home with a residential mortgage and want to move but keep the existing property as an investment (perhaps because you cannot sell easily, want to hold onto it for future capital growth, or plan to return to the area). 2. You either remortgage your existing home onto a buy-to-let mortgage, or ask your current lender for "consent to let" (permission to rent out a property that has a standard residential mortgage, sometimes for a limited period and often with a fee or a small interest rate increase). 3. You then apply for a new residential mortgage on the property you are moving into, based on your own income and affordability (rather than rental income, since that is now a separate consideration for the buy-to-let side). **Consent to let vs remortgaging to a buy-to-let deal** Consent to let is usually meant as a short-term or temporary arrangement -- many lenders will grant it for six to twelve months, sometimes renewable, but it is not designed as a permanent solution and the rate may not be as competitive as a purpose-built buy-to-let mortgage. If you intend to rent the property out long-term, most brokers recommend remortgaging onto an actual buy-to-let mortgage, which is underwritten on rental income (lenders typically want rental income to cover at least 125%-145% of the mortgage interest payment, known as the interest coverage ratio) rather than your personal income. **Affordability for the new residential mortgage** When you apply for the new mortgage on the property you are moving into, lenders generally will not count the future rental income from your old home in full, though many will allow some contribution once the let-to-buy arrangement on the first property is confirmed. You typically need to demonstrate that you can afford both mortgages, or that the rental income on the first covers its own mortgage sufficiently that lenders effectively 'ring-fence' it and assess the new mortgage mainly on your income. **Additional property Stamp Duty surcharge** Because you will, at completion, own two residential properties (your former home, now let out, and your new home), the purchase of the new property is treated as an additional dwelling for SDLT purposes, meaning the 3% surcharge on top of standard rates generally applies, even though you are moving rather than simply adding an investment property. Unlike buying a second home outright, there is no automatic refund mechanism here, because you are not selling your original main residence -- you are retaining it, which is precisely what triggers the surcharge. **Tax treatment once let** Once your original home is let out, rental profits are taxable in the normal way for individual landlords: mortgage interest on the buy-to-let mortgage only gets a 20% tax credit (not full deduction) against rental profits, under the Section 24 restriction, and profits are taxed at your marginal Income Tax rate. **Worked example** A couple owns a £280,000 home with a £150,000 mortgage and want to move to a £400,000 property without selling. They remortgage the original home onto a buy-to-let deal, get consent to rent it out, and use some of the released equity plus savings as a deposit for the new home. They pay the 3% SDLT surcharge on the £400,000 purchase because they retain the first property, but avoid the disruption and cost of selling and buying simultaneously.

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More answers

• What is consent to let and how is it different from a buy-to-let mortgage?