They sound similar, don’t they? However, let to buy and buy to let mortgages are very different things.
To clarify, a let to buy mortgage is for homeowners who want to rent out their current property and purchase a new one to live in. This type of mortgage allows borrowers to keep their existing property as an investment while moving to a new home.
Meanwhile, a buy-to-let mortgage is for property investors who want to invest in a property to rent out to tenants, rather than live in it themselves. This type of mortgage is mainly for property investors or landlords.
At Avalon Mortgages, our Hemel Hempstead-based experts can talk you through both.
Let to buy vs standard buy to let
Both options involve letting a property, but they serve different financial aims. Here’s what sets them apart.
Let to buy
• This involves two separate mortgages: a buy-to-let mortgage on the existing property being rented out and a residential mortgage on the new property being purchased.
• Homeowners can use a “let to buy” mortgage to release equity from their existing property to fund the deposit for their new home.
• Some lenders will use the predicted rent of your current home to increase your borrowing power on the new home (you can use rent that’s not even being received yet to get a bigger mortgage on the new house).
• Lenders will assess the borrower’s affordability for both mortgages, however the buy-to-let mortgage is usually calculated on the rent the property can generate. Also, many lenders don’t penalise the client by including their BTL mortgage in the affordability calculation. Assuming the rent they will receive is sufficient, they actually ignore the BTL mortgage when calculating how much they can borrow on the new home.
• Bear in mind that not all lenders will offer let-to-buy so it pays to have an expert who knows which ones do and don’t. (That’s where we come in.)
• The rental income from the leased property may be subject to income tax. However, landlords can receive a tax credit based on 20% of their mortgage interest payments.
Buy to let
• Lenders usually ask for a larger deposit for a buy-to-let mortgage compared to a residential mortgage, typically between 20% and 40% of the property’s value.
• Lenders assess the viability of a buy-to-let mortgage based on the potential rental income the property can generate, ensuring it covers the mortgage repayments and associated costs. The expected rental income usually needs to be 125–145% of the mortgage payment, depending on the lender’s criteria.
• Buy-to-let mortgages tend to have higher interest rates compared to residential mortgages due to the greater risk that comes with rental properties, and the required deposit is usually more substantial.
What is an interest-only buy-to-let mortgage?
Many buy-to-let mortgages offer an interest-only repayment option, enabling landlords to pay only the interest on the loan each month, with the principal amount due at the end of the mortgage term. This means you’ll have lower initial repayments allowing you to boost your rental profit. A repayment mortgage will cost more initially but the balance of your mortgage will reduce over time.
Remortgage to buy another property
Remortgaging to buy another property usually involves increasing your existing mortgage, or switching to a new lender, to release equity from your current home. The released funds can then be used as a deposit or full purchase amount for another property.
Risks, affordability rules and tax considerations
Buying another property increases overall borrowing and risk. Lenders will evaluate these risks carefully. Affordability is also important. Lenders assess your income, existing mortgage repayments, any new mortgage commitments and household expenditure. And don’t forget that the rental income from a leased property may be subject to income tax.
Speak to a let to buy and buy to let specialist
Whether you’re considering buy to let or let to buy, get in touch with Hemel Hempstead-based Avalon Mortgages for expert advice.
