May 16, 2022

Let to Buy vs Buy to Let: The Mortgage Differences Explained

Let to Buy vs Buy to Let: The Mortgage Differences Explained
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The buy-to-let and let to buy mortgage markets sound very similar – but are actually different products! Revolution Brokers often works with investment landlords, unsure which type of mortgage they need for their next portfolio purchase or whether to apply for one borrowing product or the other to buy their first rental asset.

Understanding how buy-to-let and let-to-buy work is essential since your mortgage choice will dictate the interest costs you pay, and therefore the profit you earn.

Today we explain how these two rental property mortgages differ and what to look out for if you’re looking to apply for a new buy-to-let mortgage.

 

Why Choosing the Correct Rental Property Mortgage Matters

If you’re a first-time landlord, it’s worth clarifying that a rental mortgage isn’t the same as a conventional residential mortgage you’d take out to buy a private home.

For example:

  • Borrowing limits focus on the earning potential of the investment property rather than your annual income.
  • Lenders will offer varying Loan to Value (LTV) caps, often requiring a higher percentage deposit for a buy-to-let loan.
  • Buy to let mortgage are almost always on an interest-only basis, so an exit strategy to show how you’ll repay the debt at the end of the term is vital.

 

However, it’s equally important that you have an appropriate mortgage against any rental property. If you decide to move and retain your home as a rental, you’ll need to switch onto a buy-to-let mortgage to avoid contravening the terms of your loan.

In this scenario, your lender might even recall the debt in full immediately, which could be disastrous if you don’t have the means to pay the entire balance back.

 

Buy-to-Let vs Let-to-Buy Mortgages

So, let’s get back to our original question and explore why these mortgages relate to rental homes but have different applications.

  • Buy-to-Let: this type of mortgage is designed specifically to finance the purchase costs of a property you want to buy solely to rent it out to tenants.
  • Let-to-Buy: the other mortgage product is used to remortgage an existing residential property that you already live in as your main home but wish to change to rental accommodation.

The mortgage refinances your current loan, and you can use the equity in your property as security or release the requisite equity value to finance the new acquisition. The idea is that the new mortgage covers the cost of buying a new residential home to live in, and you rent out your previous property.

Your rental income can then cover the interest costs on your buy-to-let arrangement, paying the mortgage back on your new home through your regular earning streams.

We’ll explain the differences in a little more detail below. Still, it’s important to note that if you decide to take out a buy-to-let mortgage brokers, you’ll need to factor in Stamp Duty and legal costs, which might impact the viability of your planned investment.

Therefore, finding a competitive buy-to-let or let-to-buy mortgage is essential, and lenders will offer an array of terms, interest rates, and maximum mortgage values depending on their lending policies and preferences.

If you’re unsure which mortgage to apply for or how to find the most competitive rates, please contact Revolution Brokers on 0330 304 3040 for further advice.

Comparing Costs and Terms on Buy-to-Let and Let-to-Buy Mortgages

Next, we’ll run through some of the primary things to expect when you apply for a mortgage against a rental property.

 

Residential Mortgage Rental Property Mortgage
Deposit Requirement Deposits can start from as little as 5%, with some lenders even offering 100% LTV residential mortgages. Buy-to-let mortgages require a higher deposit value, typically between 15% and 25% of the property value.
Affordability Lenders assess your annual income and type of employment. The standard is to offer a maximum mortgage of around four times your yearly earnings. The property rental income is the most significant factor, so the lender must calculate the anticipated rent against the mortgage costs.

 

Some buy-to-let lenders will also require applicants to have a separate minimum income, often at least £25,000.

Rental Income N/A Your expected rental income needs to cover the mortgage costs comfortably.

 

The exact coverage ratio depends on your tax bracket, but you might need to show that the earnings are 125% to 160% higher than the mortgage interest payments.

Interest Rates Rates vary depending on your circumstances, but fixed-term mortgages start at 2.5% and variable rate loans at just under 5%. Interest charges on buy-to-let mortgages are typically higher, depending on the property’s value and how much deposit you have available.
Arrangement Fees Many mortgage lenders offer low-cost arrangement fees or even fee-free mortgages.

 

Where there are arrangement fees, they are commonly rolled up into the first payments to avoid the need to make an initial remittance.

Buy-to-let arrangement fees can be a static value or might be a percentage of the amount being borrowed.