Can I Rent My Home so I Can Afford to Buy Another Property?
Answered on 25 November 2019 by Nick Morrey
I have a mortgage on my home but I’d like to purchase and move into a new property, renting out my current one. Am I able to release equity from my existing property to fund my new purchase while also changing the mortgage to a buy-to-let?
There’s a term given to the process of releasing equity from your home to buy a new one and moving it onto a buy-to-let basis at the same time – let to buy.
As let to buy is a scenario rather than an actual mortgage product, there are very few “let to buy mortgages” on the market.
Typically, when you let your property to buy another, you take out 2 mortgages. A buy-to-let mortgage on your existing property and a residential mortgage on your new home.
You use the funds raised via the buy-to-let mortgage as a deposit for your new residence in addition to any cash savings you may have. You can typically release up to a maximum LTV (loan-to-value) of 75% of your existing property using a buy to let mortgage, subject to a valuation and rental assessment.
One of the real benefits of let to buy is that you don’t need one lender to do both mortgages. You can choose from the whole of the market for each mortgage and use 2 different lenders, meaning you’ll have access to more and better products.
An alternative to remortgaging your current property onto buy-to-let is to approach your current residential lender and ask for “consent to let”. This is where your lender gives you permission to rent out your property to a tenant, without the need to remortgage it onto a buy-to-let basis. However, lenders will sometimes only consider consent to let if you intend on moving back into this property in the foreseeable future. People will often apply for consent to let if they’re currently in the middle of a fixed rate that has early repayment charges.
Nonetheless, it’s still often worth asking your lender what their stance is because your current interest rate will likely be cheaper than you’ll get on a buy-to-let mortgage.
How Much Can I Borrow on a Let to Buy Mortgage?
As you take out 2 types of mortgages when you let to buy – a buy-to-let mortgage on the property you want to let out and a residential mortgage on the property you wish to purchase and move into – you have 2 applications that are assessed differently. This means the lenders don’t rely on the same factors when determining how much you can borrow.
For the Buy-to-Let Mortgage
Most lenders cap the buy-to-let mortgage on your current property at 75% of its value, although there are a few who do go higher. The loan can also sometimes be restricted by the anticipated rental income, with lenders typically looking for the rent to be a minimum of 145% of the monthly payment at a “stress test” rate of around 5%. This, rather than your earned income, will decide how much you can borrow.
Use our buy-to-let rent calculator to find out how much you need in rental income to qualify for a mortgage.
The buy-to-let lenders will still want to check your income to make sure you can afford to cover any periods when there is no rental income and any maintenance or repairs the property may need in the future.
It's important to remember that you also need to factor in any potential lettings agent fees and that the rental income is still a form of income and therefore you may be taxed on it.
For the Residential Mortgage
The residential mortgage on the new property will be assessed against your earned income as usual. However, the lender will still look at the impact of a buy-to-let mortgage in the background when determining how much you can borrow. Lenders have slightly different ways of doing this. They’ll want to know how much you’re borrowing on the buy-to-let mortgage and what your rental income will be to ensure you can afford both mortgages.
It’s also worth noting that, as you are looking to buy your second residential property, you’ll have to pay the Additional Stamp Duty surcharge of 3%.
Can I Release Equity from My Home to Buy Another?
Let to buy is a way of releasing equity in the property you already own to buy a new house. The more equity you release, the bigger a deposit you can put down on a property.
Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.
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