Let to buy - wondering how it works in practice.

Teleri

Hello,

I am considering moving house to something with more space, but before I do, I’d like to explore options for making our money work better for us. I came across let to buy and wonder how it works. If anyone could give some advice, that would be great (even if it is just a ‘don’t do it!’)

Our home is worth around £140k and we currently owe 55k on the mortgage. I earn 41k and my husband earns 24k. We have savings of around 29k. I think we could get about £725 per month rent on our present home.

 

From what I gather, you can rent out your current home and use equity built up to then pay a deposit for the new home. My questions are:

Do you need to have people renting the home before making the new purchase, or can you get permission to rent and then a valuation on the rent that could be achieved? (if we could afford both mortgages and costs).

Could my husband have the rental in his name and cover that mortgage, and I buy the new one in my name? Would this get around paying the additional second property stamp duty? Or could we leave the equity in the rental property, but my husband borrow further toward the new house up to the max he can borrow (along with me borrowing what I’m allowed).

How is rental income and mortgage debt on the rental home used to calculate how much we could borrow for a new home? (I can’t find a mortgage calculator that seems to take rental income and debt into consideration).

If we were to sell the rental, would the capital gains be based on the change in value from when it started to be a rental, or from when it was purchased (as we had to spend 55k to bring it up to a standard we could live in - new roof and roof structures, new central heating, new kitchen, new bathroom, windows, doors, wiring, flooring, sorting the damp etc.)

 I'd like to work out how much we could borrow, are there any good online calculators or would we need to speak to a professional to get an idea of it all?

 

This is just something that has come to mind I’m not sure if it can work logistically so appreciate any advice!

 

SDLT_Geek

Teleri said:

Hello,

I am considering moving house to something with more space, but before I do, I’d like to explore options for making our money work better for us. I came across let to buy and wonder how it works. If anyone could give some advice, that would be great (even if it is just a ‘don’t do it!’)

Our home is worth around £140k and we currently owe 55k on the mortgage. I earn 41k and my husband earns 24k. We have savings of around 29k. I think we could get about £725 per month rent on our present home. 

From what I gather, you can rent out your current home and use equity built up to then pay a deposit for the new home. My questions are:

Do you need to have people renting the home before making the new purchase, or can you get permission to rent and then a valuation on the rent that could be achieved? (if we could afford both mortgages and costs).

Could my husband have the rental in his name and cover that mortgage, and I buy the new one in my name? Would this get around paying the additional second property stamp duty? Or could we leave the equity in the rental property, but my husband borrow further toward the new house up to the max he can borrow (along with me borrowing what I’m allowed).

How is rental income and mortgage debt on the rental home used to calculate how much we could borrow for a new home? (I can’t find a mortgage calculator that seems to take rental income and debt into consideration).

If we were to sell the rental, would the capital gains be based on the change in value from when it started to be a rental, or from when it was purchased (as we had to spend 55k to bring it up to a standard we could live in - new roof and roof structures, new central heating, new kitchen, new bathroom, windows, doors, wiring, flooring, sorting the damp etc.)

 I'd like to work out how much we could borrow, are there any good online calculators or would we need to speak to a professional to get an idea of it all? 

This is just something that has come to mind I’m not sure if it can work logistically so appreciate any advice!

 

On the stamp duty point (stamp duty land tax if you are buying in England) you will need to budget for the higher rate (another 3% in England).  It would not help if one spouse owns one and the other spouse the other property. 

ProDave

When letting a property that was formerly your main residence you are liable for the capital gains on the period it was let less 9 months.

HMRC take the gain as a straight line from the time you bought it to the time it is eventually sold and assume the gain was linear throughout the total period of ownership so no trying to say "but prices did not rise while it was let"

Jointly owned you have both of your capital gain allowances to use up, so if it was only let for a short period the capital gain tax might not be very much.

Snookie12cat

Teleri said:

Hello,

I am considering moving house to something with more space, but before I do, I’d like to explore options for making our money work better for us. I came across let to buy and wonder how it works. If anyone could give some advice, that would be great (even if it is just a ‘don’t do it!’)

Our home is worth around £140k and we currently owe 55k on the mortgage. I earn 41k and my husband earns 24k. We have savings of around 29k. I think we could get about £725 per month rent on our present home.

 

From what I gather, you can rent out your current home and use equity built up to then pay a deposit for the new home. My questions are:

Do you need to have people renting the home before making the new purchase, or can you get permission to rent and then a valuation on the rent that could be achieved? (if we could afford both mortgages and costs). No, you do not. You would change your current mortgage to a buy to let with your current lender, or remortgage to another. They will expect an onward purchase which you will be able to provide. You will need to leave enough equity to qualify, so 20% or 25% deposit normally. Your new resi lender is likely to want to see a mortgage key facts to show how much your rental will be a month.

Could my husband have the rental in his name and cover that mortgage, and I buy the new one in my name? Would this get around paying the additional second property stamp duty? Or could we leave the equity in the rental property, but my husband borrow further toward the new house up to the max he can borrow (along with me borrowing what I’m allowed). Yes, the rental can be in your husbands name only, but you will not get around the extra stamp duty - this loophole is well and truly covered. You can borrow whatever you can afford and the lender will lend you for the resi.

How is rental income and mortgage debt on the rental home used to calculate how much we could borrow for a new home? (I can’t find a mortgage calculator that seems to take rental income and debt into consideration). You take out two separate mortgages. The BTL is generally based on an ICR and do not take your salary into account - just the rental value. Get it on interest only. Then you get a resi mortgage for your new purchase as normal, but explain to your lender the deposit is coming from releasing equity via Let to Buy mortgage on current house. It does not normally affect borrowing on the new home negatively. 

If we were to sell the rental, would the capital gains be based on the change in value from when it started to be a rental, or from when it was purchased (as we had to spend 55k to bring it up to a standard we could live in - new roof and roof structures, new central heating, new kitchen, new bathroom, windows, doors, wiring, flooring, sorting the damp etc.) It would be from when it became a rental. 

 I'd like to work out how much we could borrow, are there any good online calculators or would we need to speak to a professional to get an idea of it all? If you go onto lenders websites they have affordability calcs which can give you a borrowing amount or speak to a broker.

 

This is just something that has come to mind I’m not sure if it can work logistically so appreciate any advice! Lots of people do this all the time - easy enough to do. 

 

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