MortgagesJan 2 2014

Let-to-buy growing in popularity

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However, in a slow market let-to-buy can provide a flexible option, especially as the private rental market is booming. So how does it work?

Provided a homeowner has sufficient equity he can convert the mortgage on his main residence to let-to-buy and rent it out, covering the mortgage payments using the rental income from the property. Meanwhile, equity may also be put towards the purchase of a new main residential property. See Box 1 for an explanation.

While it sounds complicated, it can be useful in many situations. It may be that the borrower needs to move because of a new job or an expanding family, but is struggling to sell the original property. Letting it out can provide some breathing space until the market begins to rise.

Alison Gibson of independent mortgage brokers Ascot Mortgages says that let-to-buy has become increasingly popular in the past couple of years for that reason. She says people who may have bought at “the wrong time” are wanting to hold on to their properties until prices pick up again so that they won’t make a loss.

Mortgage broker John Charcol also charts a rise in sales of the product, reporting that the number of let-to-buy deals it handled rose 45 per cent in 2010, 10 per cent in 2011 and 40 per cent in 2012.

Buy-to-let

Alternatively, let-to-buy could potentially enable a homeowner to set foot on the buy-to-let ladder, with a fledgling property portfolio. It almost sounds like a panacea for the ills of the housing market, but it is not an option open to everyone and there are all the potential downsides of becoming a property landlord.

They take ultimate responsibility for the property and must be prepared to cover void periods and major repairs in the event that something goes wrong, for example. It may be that the property is not suitable for renting out or that there are leasehold conditions that prevent it.

Where it is an option, it will require the homeowner to detach themselves emotionally from the property that was once their home sweet home. They now need to think of it as an investment.

However, things have come a long way since the early days of buy-to-let and the rise of the accidental landlord. Ms Gibson suggests that nowadays borrowers are much more aware of the availability of let-to-buy and/or the need to obtain consent to let, whereby the current mortgage lender gives permission for the property to be rented out.

Many lenders will give consent to let provided the borrower has a valid reason. However, it is usually a short-term arrangement, for a maximum of two or three years. Some lenders give permission in exchange for a small administrative fee, while others insist that the borrower must swap their residential mortgage for a buy-to-let product which is likely to be at a higher rate.

One advantage of consent to let is that it is usually available up to 80 per cent loan to value (LTV). Also, where it is granted without requiring the borrower to remortgage, the rate is likely to be better than a let-to-buy deal as lenders consider residential mortgages less risky. Effectively, if the borrower goes on to buy another property, they could end up with two residential mortgages.

In the let-to-buy scenario some lenders are willing and able to provide both mortgages, but others are not. Still others may refuse permission to let the property altogether, in which case the borrower will have to find another mortgage lender willing to take on his let-to-buy.

Not on the high street

Some lenders specify they offer let-to-buy, while others simply offer a choice of their buy-to-let products to serve let-to-buy borrowers. Ms Gibson says most buy-to-let lenders will offer their products on a let-to-buy basis, but simply do not advertise this. Ultimately, it is primarily an intermediary-led product as with all its complications, it may not be readily available on the high street.

So what are typical rates and fees? BM Solutions launched a range of let-to-buy trackers and fixed rates in November. Its two-year fixed rate deals range from 3.29 per cent at a maximum of 60 per cent LTV with a £1,295 fee to 4.29 per cent at 75 per cent LTV with a £995 arrangement fee. There are also three- and five-year fixed rates and one- and two-year tracker deals available.

The Mortgage Works let-to-buy deals range from 4.19 per cent fixed for two years with a 3.5 per cent fee, 75 per cent LTV to 5.99 per cent with a £995 arrangement fee at 75 per cent LTV. In between are some products with a maximum LTV of 65 per cent and others with fees of 2.5 per cent while one has no fee at all. It also offers two-year tracker deals.

In launching its new let-to-buy range BM Solutions clearly believes that the product is growing in popularity. It may be that now the government is attempting to turn down the heat under the housing market, withdrawing the funding for lending scheme from mortgage lending, let-to-buy could become a serious consideration.