Buy to Let or Let to Buy

Posted on 17 April 2011 by Sophie


Let to Buy - any advantage because I've paid off my mortgage?

I've almost paid off my mortgage (£5k, covered by savings), and would like to rent out my flat (recently valued at £350k) and buy a house for £720k. My thoughts are to take out a 60% BTL (£210k) mortgage, which will be more than covered by the rental income (and offset the interest against the income for tax purposes) as deposit, plus then get a residential mortgage for £350k (my husband and I also have ~£200k in cash savings). Is there any way to avoid getting the BTL mortgage or any advantage because the original flat is mortgage free? I've read about Let to buy mortgages, but these seem to benefit people who still have existing mortgages and seem the same as BTL mortgages anyway. I assume that if I took out the whole mortgage on the new house I couldn't offset any of the interest against the rental income for tax purposes?

Sophie,

You are right when you say that Let to Buy (LTB) mortgages seem the same as Buy to Let (BTL) mortgages because they are.  LTB describes the transaction whereby instead of selling your existing property you elect to keep it and let it out instead.  As most peoples deposit is tied up in their existing property it becomes necessary to release capital by arranging a mortgage and as the property is to be let this invariably means a BTL mortgage.

Where someone has a mortgage on the existing property this can sometimes be switched to a BTL mortgage or some Lenders will allow you to keep your existing residential mortgage and grant consent for the property to be let.  When it comes to the new residential purchase most Lender's will want to see either a copy of the consent or a copy of a BTL mortgage offer and then they will ignore the debt for affordability purposes.

The only real advantage of having a mortgage free property is that at 60% loan to value you will have pretty much the choice of the BTL mortgage market and competition in this area has recently been hotting up with the introduction by several Lenders of products with flat fees, i.e. £995, instead of % fees.  This can make a vast difference to the cost of setting up a Buy to Let mortgage, although your tax adviser may be able to find a way of offsetting the set up fees as well as the interest against your rental income.  Whilst it is not impossible to prove that a mortgage taken out on a residential property was actually for buying a different BTL property this is certainly unusual and you would need to seek specialist tax advice about this.

I believe you would benefit from speaking to one of our independent mortgage advisers. Please call on 0344 346 3672 and tell the consultant the date and title of your question. They will be able to look at your situation and advise you accordingly.

Peter

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