You've heard of buy-to-let; now meet its younger sibling, let-to-buy. As the rental market continues to produce high yields and consistent income for landlords, many other homeowners are wondering if renting instead of selling may be the most effective means of raising the capital needed to buy a new home.
Let-to-buy: how does it work?
The normal procedure before buying a new home is to sell your current one so that the equity can go towards the new mortgage. However, let-to-buy presents home owners with an interesting alternative: renting out their current home and purchasing a new mortgage off the back of the rental income.
You may be wondering how the income earned from monthly rent can possibly measure up against the amount you'd gain from selling property, but there are a number of reasons why let-to-buy may be the better option. Here are just a few examples of situations where let-to-buy may be better suited to your needs:
• You are temporarily relocating for work purposes and may need your current home in the future.
• You are having difficulty selling your current home, or you feel that the current state of the market in your area will make it difficult to offload the property.
• You believe the property will continue to rise in value over the coming years, and would prefer to remain invested in it in hopes of significant capital appreciation.
The buy-to-let boom, a result of the exorbitant housing prices currently plaguing the UK property market that make purchasing a property a daunting preposition, shows no sign of slowing. The Telegraph reports that mortgage lending has risen 20 per cent per year over the last few years, and the number of available landlord loans has risen to over 700.
Figures released by the Council of Mortgage Lenders show that lending for buy-to-let increased by 26 per cent during the last three months of 2014, significantly higher than the growth in lending to first-time home buyers.
Preparing for let-to-buy
If selling your home is too difficult or doesn't fit in with your long-term plans, it helps to know that the thriving rental market presents you with another option. However, there are some potential complications you should be aware of.
Once you move out and tenants move in, your home effectively becomes a buy-to-let property instead of a residential mortgage. This means it is subject to the laws and lending regulations that govern that type of property. For example, Neil Simpson points out that the lender may be able to charge you a higher fee and raise the interest rate on the current loan.
If selling your home is an option, it would be best to research market rates in your area to determine whether you will be able to sell the property at a price higher than what you need to pay on the mortgage for your new home. It would also be best to seek professional advice as many lenders might look to make things difficult for you when it comes to obtaining a let-to-buy mortgage.
Disclaimer The information and data provided are for general information purposes. They do not constitute investment advice nor can they take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser.
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