How to Change Your Mortgage to a Buy-to-Let
If you’re thinking about turning your current home into a rental property, you’re not alone. Many people in your position consider changing their residential mortgage to a buy-to-let mortgage, whether they’re relocating, moving in with a partner or simply exploring new investment opportunities.
This process involves either obtaining consent to let from your current lender or remortgaging to a buy to let product with new terms and conditions allowing you to do this.
As you will imagine, remortgaging your home to turn it in to a buy to let is a big decision so make sure you speak with the relevant professionals before doing so to understand your obligations as the decision is not for everyone.
Why You Might Consider Changing to a Buy-to-Let Mortgage
There are lots of reasons why you might want to change your existing residential mortgage to a buy-to-let. Perhaps you’re relocating for work or moving in with a partner but want to keep your property as an investment. Maybe you’ve tried selling your home but haven’t had the right offer and would prefer to rent it out until the market improves.
Or perhaps you’ve realised that the property could generate decent rental income and help with future plans. Whatever your reasons, switching to a buy-to-let mortgage could help you unlock financial potential from a home you no longer live in.
Reasons to Convert to a Buy to let Mortgage
Financial Flexibility and Investment
- Generating Income: Renting out your property can provide a steady income stream with somebody else paying towards your mortgage.
- Investment Opportunity: Converting allows you to invest in additional properties or other opportunities. Professional advice should always be taken if doing this.
Personal Circumstances
- Moving Elsewhere: If you’re moving but want to keep your current property. This will allow you to rent your property out whilst you get familiar with the new area and decide if it’s for the long term, with the flexibility to return to the property in the future.
- Change in Lifestyle: Adjusting to new living arrangements or employment. For instance, a new job or relationship may result in the need or desire to relocate.
Mortgage Strategy
- Interest-Only Payments: Switching to interest-only payments may reduce monthly expenses allowing you to potentially make a profit from the rent.
- Equity Release: Accessing equity from your property for other investments or expenses.
When to Consider Converting
Transition Periods
- End of Mortgage Deal: Typically when your current mortgage term or fixed rate ends so you do not need to pay a penalty if you move to a new lender.
- Change in Circumstances: Such as moving to a new property or needing rental income.
Financial Stability
- Income Generation: Using rental income to cover mortgage costs. If there is excess income, this could be used to fund your lifestyle or pay down the mortgage balance.
- Tax Planning: Understanding capital gains tax implications from selling an investment property and income tax implications for the rental income received. Professional advice from a qualified tax accountant should always be taken.
Find out Your Options
Your Two Main Options
When it comes to letting out a property you currently live in, you’ve got two main choices:
Consent to Let
This is where you ask your current lender for permission to rent out your home while keeping your existing mortgage deal. It’s usually a short-term solution, ideal if you plan to move back into the property later. Lenders typically offer consent to let for 6 to 12 months. The lender may charge you a fee for allowing this or even a premium on the rate, and acceptance is often on a case-by-case basis.
- Consent to Let: Permission from your current lender to rent out the property temporarily.
- Usually for 6-12 months.
- Minimal changes to existing mortgage terms.
- They may charge an admin fee or an uplift on the rate.
Remortgaging to a Buy-to-Let Product
If you’re planning to rent the property for the long term, this is the more appropriate route. A buy-to-let mortgage is specifically designed for properties being let to tenants and comes with different terms and conditions compared to a residential mortgage.
- Remortgaging: Switching to a buy to let mortgage with a new lender or existing lender.
- Requires assessment of rental income and affordability to ensure you meet criteria for the proposed loan.
- Involves new mortgage terms, a valuation of the property and a legal process in changing lenders.
- This is not designed to be a short term solution for 6-12 months, more so a long term plan with no plan to return to the property whilst this mortgage is in place.
What Lenders Will Look For
When switching to a buy-to-let mortgage, lenders have a different set of requirements compared to a residential mortgage. Here’s what they’ll typically assess:
- Your equity or deposit: Usually at least 25% equity is needed, though some lenders may accept less depending on rental yield.
- Rental income: Lenders want expected rent to cover around 125%–145% of the monthly mortgage payment.
- Your income: If the rent doesn’t meet criteria, some lenders will consider your personal income to top it up (‘top slicing’).
- Credit history: Good credit helps, but there are options for people with adverse credit.
- Property condition: The home must be mortgageable and suitable for letting.
Process Steps
- Assessment of Intentions: Discuss with your lender about your plans to rent out the property.
- Financial Evaluation: Determine rental income potential and affordability.
- Consultation: Seek advice from a mortgage broker for best available deals and talk with a qualified tax accountant to understand your obligations.
- Application: Apply for consent to let or remortgage based on lender approval and the best individual route for you.
Considerations and Challenges
Financial and Legal Aspects
- Affordability Criteria: Assessing rental income vs. mortgage payments making sure that they pass the lender’s stress test.
- Tax Implications: Capital gains tax on property appreciation and income tax on the rental income.
- Insurance Requirements: Switching from residential building insurance to landlord insurance.
- Regulatory Compliance: Understanding local laws and regulations for landlords, for instance Houses of Multiple Occupancy (HMOs).
The Importance of Timing
Timing your switch carefully can help you avoid penalties and make the process smoother. If your current mortgage deal is about to end, you may be in the perfect position to remortgage. If not, consent to let could be a good temporary option until your fixed period ends.
The process of switching can take a few weeks, especially if you’re remortgaging to a new lender. It’s best to plan ahead and take professional advice to work out what route is right for you.
Do You Pay Stamp Duty?
You don’t have to pay stamp duty again simply for changing your mortgage from residential to buy-to-let. However, if you’re buying a new main residence and keeping your current property to let, you may need to pay the additional property surcharge on the new home.
If you move your buy-to-let into a limited company, this would trigger stamp duty as it counts as a change of ownership. You should also consider future tax implications such as capital gains tax when you eventually sell the property. This is another reason to seek advice from a mortgage broker and a tax professional.
Conclusion
Converting a residential mortgage to a buy to let mortgage is a strategic financial decision that requires careful planning, understanding of mortgage terms, and compliance with legal requirements.
Whether seeking short-term rental income or long-term investment, consulting with mortgage advisors to understand lender policies and tax advisers to understand tax implications, are crucial steps towards successful conversion.
If you would like bespoke advice on how this would work for you, contact Kerr & Watson today.
