Part 1: Why Sell-To-Buy, When You Can Let-To-Buy?

With UK property recovering from 07/08 decline, and with most pundits predicting continuing growth over the remainder of this year, it makes one think about delaying any house move to enjoy the revitalized growth. 

But, if a move is delayed now to enjoy more capital growth, you'll just end up paying more for your new property when you eventually do move! What a Dilemma! 

But is there a solution?  Read on ...

The answer that appeals to more and more families wishing to relocate without the hassle of trying to sell before they move and/or sacrificing potential increasing value, is to let out the family house using it's collateral, plus the rental income, in support of a new mortgage on their next home.

As a Cash-Buyer not constrained by having to sell before they are able to buy, the experience can be rather more enjoyable for all involved.

In this first of a two part article, we shall explore the option of renting out your primary residence to allow you to move on to a new home when you want to.  A process known as Let-To-Buy, which falls under Buy-To-Let rules. Assuming this option is not altogether too scary to contemplate, after reading these articles, you will be in an informed position to help you determine whether your current house is let-worthy.

In the second part of this article, we shall explore Who Does What?, to make sure your let property is maintained and managed properly.

Part One ~ Is My Current House Let-worthy?

If you move out of your home and bring in a tenant, you cease to be resident and become a landlord instead. Mortgage lenders view tenanted property differently from owner-occupied or 'residential' property.  In other words, they view a Landlord wanting a mortgage loan (otherwise know as commercial or Buy-To-Let mortgage) in a different light than they do a Resident wanting a mortgage loan (Buy-To-Live). 

Tenanted Property, one where the mortgage holder does not reside, generates rental income.  Lenders in the first instance apply a formula to this rent, rather than ones earned income(s) (see note 2), to determine the maximum loan against the rent i.e. Loan-To-Rent (LTR).

Next, the lender will apply another formula to determine the maximum loan against the property i.e. Loan-To-Value (LTV).  The lower of these two sums is the one used as the basis of the Mortgage Offer. 

Below are two examples of maximum mortgage loan calculations ...

Example 1:
 
Annual Rental Income £5,400 (£450pcm) divided by current commercial interest rate (4.7%) divided again by 125% (see note 3) = £91,914 Max. LTR.

RICS Valuation £100,000 x 80% = £80,000 Max. LTV.

Maximum Loan Allowed £80,000, the lower of the two sums: in this case the Loan-To-Value figure.

Example 2:

Annual Rental Income £7,200 (£600pcm) divided by current commercial interest rate (4.7%) divided again by 125% = £122,553 Max. LTR.

RICS Valuation £200,000 x 80% - £160,000 Max. LTV.

Maximum Loan Allowed £122,553, again the lower of the two sums (61% LTV): in this case the Loan-To-Rent figure.

Next, enlist the guidance of two professionals (see note 1) ...

FIRST, A Letting Agent ~ ask a reputable agent (see www.eazylet.co.uk) to determine what rental income your house will actually attract in today's market AND whether your property type and location will be in demand as a desirable property to rent. Most experienced agents will provide a short rental report for you free of charge in anticipation of managing the let.
 
Remember to always check the credentials and experience of the agent as well as negotiate fees before signing any agreement to manage (see our Blog n News, The Danger To Unwary Landlords , 12th May 2010).
 
Once a re-mortgage offer is granted on your current house (see Independent Mortgage Broker below), you then instruct the Letting Agent to market it, accompanying all viewings. And, whilst s/he is looking for a good tenant for you, you can enjoy looking for your new home as a confident, cash-buyer.

SECOND, An Independent Mortgage Broker ~ armed with your rental report, approach a reputable broker (see www.fsa.gov.uk) to determine what maximum loan you will be allowed against your current house. Most experienced brokers will obtain a decision-in-principle (DIP) for you free of charge in anticipation of placing your mortgage with the lender. The subsequent re-mortgaged funds from your current house will be used to buy your next home either as a cash-buyer, or as a significant deposit towards your new mortgage on your new home, which may also have a mortgage, though this would be at residentail rates.
 
Remember, you will need to budget moving expenses and professional fees, which can be inclusive of this new, LTB re-mortgage of your current house.

Under your instructions, the mortgage broker will apply to an appropriate lender for the Let-To-Buy re-mortgage on your current house.  You will of course, incur survey and lender administration fees up-front (typically £250-450). You will have up to 180-days to accept the Mortgage Offer during which time you won't pay any interest on your re-mortgage.  Interest is only payable after you accept the offer and take the funds, known as 'drawn-down' and, this will not happen until you have secured your next home.

That's the end of Part One. Next week we shall look at sensible Property Management including preparing your current house as a new rental property. 

 For 25% Below Market Value Property, see www.bmvpropertyinvestmentdeals.co.uk  

NOTES

1. Correct timing is crucial to keeping stress levels in check during all this so, we recommend you instruct the Mortgage Broker to co-ordinate everything, agreeing his/her fees up-front too.

2. Your combined earned incomes (i.e. spouses/civil partners) need only be £25,000pa to obtain a commercial/BTL mortgage irrespective of Mortgage Offer.

3. An actuarily arrived at figure used by leading lenders.

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