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Switching to Let to Buy
- Maximise Your Borrowing
- Minimise Your Repayments
- Manage Your Mortgage Down
- Handled With Humanity
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The content contained within was correct at the time of publication but is subject to change 08/12/2023.
Switching to Let to Buy
We talk about switching to a Let to Buy mortgage with Richard Campo.
What is Let to Buy and how does it differ from traditional Buy to Let?
The Buy to Let market is insanely complicated. I’m only going to touch on some topics; I’m not going to go into great detail. There are other resources on this website on general Buy to Let and limited company Buy to Let which go into the specifics.
But the main difference around Let to Buy versus traditional Buy to Let is around regulation, which is quite a boring answer. If you’ve lived in a property, it’s called consumer Buy to Let because it’s deemed there are different risks if it’s been your home previously. Whereas if you buy a property fresh, as a pure investment, it’s Buy to Let for business.
Not all Buy to Let providers do consumer Buy to Let. If you did your own research and went to a Buy to Let provider, they might not do consumer Buy To Let – but that might not come out till the end. So be really careful around that regulatory piece.
Otherwise, the assessment is pretty much the same. Look at the Buy to Let article on our website because that will give you a lot of detail around it. Something we’ll come back to is the Interest Cover Ratio (ICR), which is how banks assess what you can borrow. It’s slightly different on consumer Buy to Let in that it can be a bit more conservative.
But we can equally factor your income in, depending on what you’re doing. I’ll go through some scenarios later. So the main thing is regulatory difference, which does spin out into how complicated Buy to Let is as a whole.
What are the main reasons people consider switching to Let to Buy?
This is quite intensely personal. Traditionally, where Let to Buy comes up is you’re living in a property, and you’re going to rent it out, and there’s a reason why you’re moving out. Are you buying a bigger property? Are you moving in with a partner? Are you moving for work? There could be all sorts of reasons.
You might want to retain the property you’re living in as an investment. Property, in the main, goes up over time and over the rate of inflation. There are lots of stats on that.
But for a fun game, visit nationwide.co.uk/hpi and then put in property details, either your own property or one you’re looking at buying – then look at how much it’s been valued over time. So property does rise above inflation, which makes it a good long-term investment.
One of the other primary reasons why people Buy to Let is for income into retirement, like a pension plan. If you end up paying the mortgage off at the end, you’ve got a nice income-producing asset there. Rental also goes up at least in line with inflation or more – so it can be a really good boost to your pension.
Or it could just be a straight income play – it’s going to increase in value over time; you could then sell it and invest the money later.
Can you explain the process of switching from a residential mortgage to a Let to Buy mortgage?
The process is simple. The complication is the assessment. If you’re looking at doing this, first do some research about what the rental income is in your area, or better still, get an estate agent to give you a rental figure per month.
I mentioned ICR coverage. What banks do is look at the rental income you can achieve to calculate how much you can borrow. They do tests in the background around what happens if interest rates were to rise and the tax you’d need to pay. Again, the Buy to Let page includes some worked examples.
Once you’ve got a grasp of that, you’d need to then figure out how much you want to borrow and why. For example, are you just swapping mortgages? Are you looking to raise money? What are your forward plans? Are you buying a property? All these things have an impact on what we’re doing.
Once we understand what you can borrow and what the rental income is we can then finally approach a lender. How much you can borrow is driven by the rental income, so once you have that information we can do those complicated calculations on your behalf and tell you how much you can borrow and how much it’s going to cost.
What are the eligibility criteria for switching to Let to Buy?
I’ve already mentioned ICR – that’s probably a new phrase for a lot of people because it’s only come in during the last few years. In days gone by it was simple – if your rental income covered the mortgage by 125% the bank gave you the mortgage.
As is life, things become more complicated and the rules change. Banks now assume a higher interest rate and then apply a multiple of 125% to 145% on top. You also need to make sure the bank offers consumer Buy to Let – that’s a key criterion.
Your forward plans are also important. If you are buying another property, how much are you borrowing? What impact does it have on this mortgage? If you’re not moving to another property, what are you doing? Certain banks allow you to raise money for certain purposes.
Be really clear in your plans and we can make sure we talk to the right bank.
The last part is around Loan to Value. How much do you want to borrow, what percentage of the property is that? That then drives the pricing. So figure out what you want to do and why, then we’ll work backwards to give you the answers.
Do I need a deposit for a Let to Buy mortgage?
Typically, the deposit will be within the property itself. By the nature of a Let to Buy, you already own the property. If you’re looking to borrow less than 75% of the property value, you should be okay.
The ICR cover can make it difficult to get above 50% of the property value these days, so just be aware of that, but we can bolster with your income and other bits and pieces.
If you’ve got a 90% mortgage but you want to rent the property out and you can pay down a chunk, that’s fine. We just need to do the maths.
The key brackets on Buy to Let are borrowing are 75% of the property, 60% of the property, and 50% of the property. As you move through those brackets, the rate goes down. If you’re at 51%, you might choose to pay a little bit and get a better rate. We’ll identify those points, and if you want to put a bit of extra cash in, you’re very welcome to do so.
How does the rental income factor into the Let to Buy mortgage application?
I’m not going to give numbers, because they change in time depending on where the base rate is and what’s happening in the market. As we’re talking now in late September 2023, fingers crossed, we’re at the top of this rate cycle.
We might find these calculations become easier to fulfil in time. Speak to a broker – we can do those calculations and let you know where we can get to. If that doesn’t work, there’s a piece of criteria we use a lot called Top Slicing.
Let’s say we run this ICR calculation, and our calculator says that you’re £500 a month short of rental income. As long as we can evidence you have £500 a month of surplus personal income, that’s ‘top sliced’ into the calculation, and the bank will grant the loan.
This does favour higher earners for obvious reasons. Even if you fall short of the assessment, we can use your income with some banks. So how much you can borrow is driven by the rental income plus those complicated calculations in the background.
Are there any tax implications when switching to Let to Buy?
Buy to Let does butt into some complicated aspects with tax so we always advise clients to talk to their accountant before making any decisions.
It changes in time. And as we sit today the tax treatment on Buy to Let is not good at all because you can’t offset the interest – who’s to say whether that might change in future? But just be really aware of the tax rules because that will determine how much you borrow, what your ultimate profit is and whether it’s worthwhile you doing it or not.
What are the key advantages and disadvantages of switching to Let to Buy?
In terms of the advantages, I’ve mentioned that it’s a long term investment or a potential boost to your income. That’s number one by a country mile. It’s another asset you can play with. You might have a pension, you might have shares and savings, but it’s always good to have a blend of risks in your portfolio – different assets perform differently at different times.
Let’s say for example, you might have lived in a property for a good length of time. You’ve got a small mortgage but you hold onto It. You might want some money in the future to do up a property or to buy another one. It’s very easy to borrow against a rental property.
In terms of downsides – like I said, the tax treatment isn’t great. But this changes in time. The complexity of the lending is also a disadvantage. That’s why I’ve danced around some of these answers – if I went into detail I think people would be asleep.
It’s just really complicated – there’s so many things you can trip up on around your personal mortgage, how many properties you own. There are just so many rules.
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Can you provide some insights on the current market conditions and Let to Buy mortgages as of September 2023?
We’re pretty much at the top of this current rate cycle. Due to the way that Buy to Let is assessed, the higher interest rates are the less you can borrow. we’re probably at the top of the period now.
Buy to Let used to be quite easy – it’s not so easy right now. But as I touched on, higher earners win in that they can use their personal income to boost the borrowing.
The tax treatment is really the issue around Buy to Let at the moment because it’s hard to leverage properties, plus the tax treatment isn’t great. That’s why we’re seeing a lot of landlords selling property. There’s this perverse spinout, because there’s less rental property and rents are going up massively.
If there were 10 properties on the market before, and now five landlords get out, there’s stil the same number of potential tenants looking for homes, pushing up the rent… It’s economics 101. But that trend isn’t likely to change until the tax treatment changes on Buy to Let. It’s a big political one.
It’s out of kilter with other business practices and I think if the government is serious about making rent more affordable and keeping a good private rental sector – which we’ve always relied on in this country – they’ve got to review the tax treatment.
If you can’t offset the interest as a business running cost it just doesn’t work for a lot of people. We’re a classic example – when I met my wife we both had one-bed flats in London and we hung onto them. We borrowed a bit more money to buy a house together. But you don’t see that much anymore.
It’s a real shame, because that’s two properties that aren’t being rented out to first-time renters or people who need to be in the area. I could talk for hours about this – but that’s a snapshot of the current situation.
We’re due a general election next year, and if the party wins that we suspect will win, they’re not big on tax breaks. We’ll have to suck it and see, but unfortunately lack of foresight and planning has led to quite poor market conditions for Buy to Let. Perversely, it’s never been needed so much.
What are the typical interest rates and fees associated with Let to Buy mortgages?
It changes in time, so I’m not going to give you actual numbers. But as a rule Buy to Let has always been priced about 0.5% to 1% above the Bank of England base rate.
As we’ve seen interest rates rise, a lot of banks have been lowering the interest rate but then loading the fees quite heavily. As we speak today there is one bank that charges a 7% arrangement fee on the mortgage to make it work.
Is it possible to switch to Let to Buy if you still have an outstanding mortgage on your current property?
Absolutely, and just to clarify, if you want good terms you will need to replace that mortgage. Banks need something called First Charge – they need to be the first lender on the property.
So that means getting rid of your current mortgage and finding a new one.
You can also do something called ‘second charge lending’ – that’s a loan that sits on top of your current mortgage. That is also completely workable.
With the second lender the interest rates are higher but, weirdly, the lending is more flexible because it works on slightly different models. In this environment, second charge lending is becoming bigger and bigger.
For example, if you’re two years into a three year fixed rate right now, you don’t want to touch that mortgage as your rate probably starts with a one or a two. Putting a second charge loan on top of your current loan could work out more favourable than going to a new lender and paying a penalty.
Are there any specific challenges or considerations that individuals should be aware of when switching to Let to Buy? And what are the potential risks involved?
In terms of specific challenges it’s the ICR coverage and its relationship to the rental income. It’s also the tax treatment.
The risks are very simple. With Let to Buy you’re letting your property out to buy another one, so you then have two mortgages. If your tenant moves out you’ve then got two mortgages to pay.
Rental voids and tax liability become very relevant. We always advise people to have three to six months worth of cash before you go down this path, or we can raise a bit on the mortgage to give you a buffer.
The ultimate risk is if you stop paying the mortgage, the bank takes the property. It’s always the same with mortgages. So let’s plan for it properly.
Can you explain the potential financial implications of switching to Let to Buy such as rental income, rental yield and capital growth?
A lot of our clients work in financial markets or are certainly quite financially astute. So they tend to look at things in terms of yield, return and growth.
You need to look at the ‘compounded return’ – the rental yield plus the capital growth is your total return. Even with all the challenges I’ve talked about, that makes Buy to Let a great asset class. You get both the rental income plus the capital growth of the property.
There’s a very good leverage argument here. For example, if you get £100,000 worth of shares, you only get a return on £100,000 worth of shares. If you buy a £200,000 property by borrowing £100,000 you get the growth on the £200,000 property, not just the £100,000 you’ve invested – so your money stretches further.
So take that into consideration and look at the total return that you get.
Speak To An Expert
Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.
Are there any specific timeframes or deadlines that borrowers should be aware of when switching to Let to Buy?
It’s often around the product end date. If you’re on a fixed rate product, you need to be mindful not to trigger penalties unless you have to.
Let’s say for example, you’re two years into a five-year fixed rate. We can often port your current mortgage onto the new property. You take your product with you, which is almost always favourable. Then you replace that mortgage with a Buy to Let.
Otherwise it’s personal timelines – are you getting a bonus? Are you moving home? Is there a baby on the way? Just make us aware and we’ll plan accordingly.
How can someone determine if switching to Let to Buy is the right financial decision for them?
First, talk to a mortgage broker. Second, talk to a tax advisor, then we can decide where we go from there. You need to do both. It’s not as straightforward as it used to be.
Nine times out of 10 our clients do progress with it – although it sounds a bit doom and gloom in this podcast. If it all makes sense for you there are just a few more considerations. It’s a complex area, but brokers always get preferential treatment from banks and exclusive deals. Most of all, we can save you a lot of time.
Believe it or not, I’ve actually tried to keep this brief today, as it’s very complicated. Let’s take you through it. We’ll flag issues as we go – very few aren’t resolvable. We’ll navigate that, because there’s nothing worse than going to a bank and spending loads of time and effort producing documents and going through meetings, just to hear a no at the end, or not getting the loan amount that you want. We can do that at the front end and save you a hell of a lot of time.
Your property may be repossessed if you do not keep up with your mortgage repayments.
Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.