What happens when you put the words let-to-buy in a search engine? The chances are you’ll get little or nothing on the subject with, predictably, pages and pages on the more widely-known buy-to-let product. Why should this be when, arguably, let-to-buy could actually be the more attractive approach for many prospective investors?
Part of the reason for let-to-buy’s relatively low profile may be historical. At the beginning of the 1990s, with interest rates well into double figures and ranks of ‘For Sale’ boards along many streets across the UK, a few enterprising lenders created the let-to-buy concept to deal with the twin evils of negative equity and lack of housing mobility. Suddenly, beleaguered homeowners were given a way of moving on – to house an expanding family, for example, or to take up employment elsewhere in the UK – without having to sell their existing home. If that home was in negative equity, the owner had the added benefit of knowing that the value of their home would hopefully rise and eventually be worth more than the mortgage on it.
A simple idea
Like all the best ideas the concept of buy-to-let is a simple one – and it worked. Perhaps because of its success, let-to-buy became synonymous in many people’s minds with tough markets and desperate homeowners. So, when the recovery began and the feelgood factor returned as the 1990s progressed, let-to-buy was to an extent confined to the drawer marked ‘memories of recession’.
Today, housing market conditions are mercifully different. Sales are slower, yes, but the much-expected soft landing has been a reality. Recently the Council of Mortgage Lenders (CML) revised its earlier prediction of a broadly flat period through 2006 and 2007 and is now predicting a modest rise of 2 per cent annually. A high level of remortgaging is expected to keep gross lending buoyant, although annual property sales are expected to fall from their 2004 level of 1.23 million to something like 920,000 annually in 2006 and 2007.
Problem solving
So, with properties taking longer to sell and fewer sales overall, is it now time for let-to-buy to step up to its rightful place as a mainstream, problem-solving product? “In my experience there is little or no awareness of the let-to-buy option among the public,” says Phil Burke of packager’s SMS. “The product is certainly on the rise however, and that’s down to switched-on brokers using it in a variety of situations to help clients achieve their goals.”
Dave Gould of packagers The Select Partnership agrees: “Brokers are now bringing us a regular stream of let-to-buy cases – in fact I’ve done two this afternoon,” he says. “In many instances, brokers are advising let-to-buy either because their clients’ properties aren’t selling fast enough or there’s a chain holding them back. A typical reason for the urgency would be someone who is moving to a different part of the country for a year or two through work. let-to-buy allows them to move right away, keeping an existing home they’re happy with while buying elsewhere in the country. Then, when their period of working away is over, they can move back into their original property.”
It’s also worth remembering that a growing proportion of those clients who are moving with their employment may be contract workers who, as a result of frequent address changes, may have problems getting a full-status mortgage. So true self-cert is a valuable option in a let-to-buy mortgage, solving problems for frequent movers and also for those self-employed people who minimise their incomes for tax reasons or haven’t been in business long enough to provide the conventional three years’ accounts.
Easing them in
Because of its nature let-to-buy eases homeowners into the idea of property investment in the gentlest possible way, as Burke explains: “We’ve done let-to-buy mortgages for brokers’ clients who would never have taken the perceived ‘riskier’ route of buy-to-let. Because they already own the property they’ll be letting out, they have a comfort factor. This means that people who never saw themselves as a landlord are suddenly finding themselves becoming one. By solving the problem of a slow moving property, brokers are actually creating opportunities their clients didn’t even know existed.”
This doesn’t mean that let-to-buy provides a magic wand for brokers to wave, as David Booth of Clear Mortgage Administration, points out: “When advising on the suitability of let-to-buy, brokers need to encourage their clients to take a long hard look at the letting potential of their property. For example, they may love their one-bed apartment but if it’s in an area where the rental demand is for family homes, then let-to-buy may not be right for them. Let-to-buy puts people into business and so they must view the investment side of the deal with commercial eyes. With this in mind, prospective landlords with no previous experience may well benefit from a chat with their friendly neighbourhood residential letting agent before making any final decisions.”
‘Staircasing’
If your let-to-buy clients also choose their new property with an equally critical eye for rental viability then a whole new opportunity presents itself – the concept of ‘staircasing’.
“Staircasing is effectively the reverse of multiple buy-to-let,” says Booth. “A broker’s client takes out a mortgage on a new property and lets out their existing one in the normal way. Then, when conditions are right, they move on again leaving two properties behind them both bringing in rental income. Gradually they climb up the ‘staircase’, building a growing portfolio of rental properties as they go.”
Assuming these investors make sound business decisions along the way then they stand to create a strong potential income to supplement their other retirement income planning – something more and more people are keen to do as future returns from conventional pension arrangements continue to present a lacklustre picture.
“Let-to-buy is arguably the most useful and lucrative investment mortgage approach,” says Dave Gould. “Deposits on subsequent properties can be low with LTVs of up to 95 per cent available – 10 per cent higher than the equivalent buy-to-let. Assuming the current lender agrees to the arrangement and the proper insurances are in place, the whole process is straightforward.”
Empty-nesters may be able to use let-to-buy to boost their retirement income in a different way. Rather than selling their large family home to downsize they can simply rent it out, assuming once again that the rental demand is there. This gives them extra income to enjoy when living in their new, smaller home while still taking advantage of possible capital appreciation on the larger property. With an eye on the future they could even gift the income to their children, although if the existing home is let for more than three years Capital Gains Tax becomes payable on any rise in value after the house was let out – so professional advice should be sought.
Added value
As a packager, Burke is naturally enthusiastic about the added value firms like his can bring to the let-to-buy table. “With our expertise we can save brokers a huge amount of time,” he says. “That starts with our decision-in-principle (DIP) over the phone – we know lenders’ criteria and we can give brokers an instant steer on whether an individual let-to-buy proposition is likely to be accepted or not. Then, assuming a positive DIP from the lender, we become an extension of the broker’s back-office and take over all the admin. Everything is done to make the broker’s life easier, down to details like generic application forms to save brokers carrying individual stocks. It all adds up to more selling time for brokers, yet we don’t charge them a penny for our support. We can even offer reduced valuation fees so brokers actually save money into the bargain.”
Driven by a relatively slow market, a steady demand for rental properties and the growing need for alternative retirement income provision, let-to-buy is set to become the versatile mainstream solution it always deserved to be – and brokers will almost certainly be in the front line when it comes to selling it.
Peter Charge is director of sales and marketing at The Mortgage Business (TMB)
