Let to buy mortgages: keeping your old home when you move

Let to buy means keeping your current home, switching it onto a buy-to-let mortgage and letting it out, while buying a new home with a residential mortgage. The two transactions usually complete on the same day. Most people do it to release equity from the old property for the new deposit, or because they want to keep a home they cannot sell for the price they want. You will pay the stamp duty surcharge on additional dwellings, because you will own two homes at the end of the day of purchase.

It is two mortgages arranged together, not a single product.

The first is a buy-to-let remortgage on the home you are leaving. That new loan is assessed on the rent the property will achieve, not on your salary, and it typically allows borrowing up to 75 per cent of the value.

The second is an ordinary residential mortgage on the property you are moving to. Here your income does the work, but the lender will take account of the buy-to-let commitment you are taking on.

They are linked because the money released by the first usually funds the deposit for the second, and because the residential lender needs to know the old mortgage will be dealt with. Solicitors normally complete both on the same day, so the timing has to be coordinated. This is more moving parts than a straight purchase, and it is the main reason let to buy cases benefit from a broker running both sides.

Say your current home is worth 300,000 pounds with 120,000 pounds outstanding.

At 75 per cent loan to value, a buy-to-let remortgage could in principle be 225,000 pounds. Repaying the existing 120,000 pounds would leave 105,000 pounds, less fees, for the deposit on the new house.

That is the theory. The rent has to support it. Buy-to-let borrowing is set by an interest cover ratio, commonly 125 per cent of the mortgage interest for basic-rate taxpayers and 145 per cent for higher-rate taxpayers, tested at a stressed rate that is usually higher than the pay rate.

Assume an illustrative 5.5 per cent stress rate and a higher-rate taxpayer. Interest on 225,000 pounds at 5.5 per cent is 12,375 pounds a year, or 1,031 pounds a month. At 145 per cent cover the lender needs rent of about 1,495 pounds a month.

If a local agent says the house will let for 1,200 pounds, the sum runs the other way. Rent of 1,200 divided by 1.45 gives 828 pounds of monthly interest capacity, or 9,931 pounds a year. Divide by 5.5 per cent and the maximum loan is about 180,500 pounds. After repaying the existing 120,000 pounds, you release around 60,500 pounds, not 105,000 pounds.

That difference decides whether the move works. Get a realistic rental figure early, in writing, from a letting agent who actually lets in that street. Some lenders will consider top slicing, using surplus personal income to bridge an interest cover shortfall, which can help, but it is not universal and it also uses up income the residential lender wants to see.

Your new lender will assess your income and outgoings as usual, and will want to know about the let property. In most cases a self-financing let, where the rent covers the buy-to-let payment, is treated as neutral rather than as a debt against your affordability. That is not guaranteed, and lenders differ on how they treat a background let, particularly if the mortgage is on interest only or the rental cover is thin.

Be straightforward about the plan from the first conversation. A residential application that fails to disclose a same-day buy-to-let remortgage on the departing property will unravel.

If you only want to let the old home for a while, ask your existing lender for consent to let before arranging anything else.

Consent to let is permission to let a property on your current residential mortgage, usually for a limited period, sometimes with a small fee or a rate uplift. It avoids a full remortgage, legal fees and a new arrangement fee, and it can be arranged in weeks rather than months.

The catch is that consent releases no money. If you need the equity from the old home for your new deposit, consent to let does not help you. It also tends to be temporary, and lenders can decline or attach conditions. The rule of thumb is simple: if you need equity, look at let to buy, and if you only need permission, ask about consent to let first.

Because you keep the old home, you will own two dwellings at the end of the day you complete on the new one. That means the surcharge on additional dwellings applies to the new purchase.

In England and Northern Ireland this is a surcharge within Stamp Duty Land Tax. Scotland charges Land and Buildings Transaction Tax with its own additional dwelling supplement, and Wales charges Land Transaction Tax with its own higher residential rates. They are separate taxes with separate rules, so never assume the English figures apply elsewhere.

The replacement of main residence rules are the point people get wrong. Those rules can remove the surcharge, or allow a refund, where you are replacing your only or main residence and you sell the former one. If you are genuinely keeping the old property as a let, you are not replacing it, so the surcharge stands. If you later change your mind and sell the former home within the relevant time limit, a refund may be claimable. Rates, thresholds and time limits all change, so check GOV.UK, Revenue Scotland or the Welsh Revenue Authority, and mention it to your conveyancer early.

Let to buy can fall inside Financial Conduct Authority regulation, because the property being let was your home. Consumer buy-to-let covers borrowers who did not set out to be landlords, and the buy-to-let side of a let to buy frequently sits there rather than in the unregulated business space. Tell your broker at the outset that the property is your current home, because it changes which lenders can help.

On tax, once you let the property you have rental income to declare. As an individual you cannot deduct mortgage interest from rental profit and instead receive a basic-rate tax credit. There are also capital gains tax consequences when you eventually sell a property that has been part home and part rental, and the reliefs available depend on the periods involved. Speak to an accountant before you let, not in the January after.

Also do the practical work: tell your insurer, because a residential buildings policy will not cover a let property, and make sure the arrangement complies with any lease if the property is leasehold.

Let to buy involves a regulated residential mortgage and a buy-to-let that may itself be regulated, running to the same deadline. The MortgageMatch directory lists FCA-authorised brokers who handle both halves of a case like this, which is usually easier than arranging two mortgages with two separate advisers.