moving house

If there's two words that people looking to move house in the UK dread, they are 'onward chain', yet it's almost inevitable in today's property market. Understandably so, since most people buying a home will also be selling their old home in order to release the equity they need for at least part of their deposit, if not all of it. 

The conventional way to avoid an onward chain, the easiest way to secure your new home and move in quickly, is to opt for a new-build. With no onward chain and fixed purchase prices, new build properties are the ideal option for many property buyers today. These however come with challenges of their own. Whilst the purchase price is fixed, you will likely pay a hefty premium for the privilege of snagging a new build. Comparing the value of new builds in your area against comparable existing properties of the same size, you'll likely notice that new builds are significantly more expensive. 

I word that very carefully, using the word "value" over "price" deliberately. The value of the property depends on the overall property market. The price you're willing to pay over and above that however is entirely up to you. Really it depends on how desperate you are to snag the property.

Say for talking sake you've seen a property for sale, a 3 bedroom converted barn out on a country road near to where you live. You go to view it and you immediately fall in love with it's idillic setting. It's worth around £200k but is on the market for offers over £190k. You sit down with your partner and you reckon that between you both, you could manage a purchase price of £210k. So you make the offer and you wait patiently. 

Behind the scenes however it's a seller's market, and a bidding war has just begun. The phrase "offers over" attracts those who are just as desperate as you but who have the means to simply out-bid you. Another couple may have sold a business recently, or inherited a lump sum, or perhaps they are even downsizing. Whatever the reason is, they have fallen in love with the property too, but they have the extra cash to throw around. Parting with an extra £50k to secure the house of their dreams is nothing to them. They make an offer of £240k and it's accepted on the same day. I mean why wouldn't it be, it's an offer that's £40k more than the property is actually worth. The seller would be crazy to say no.

This is an example of modest families who are just trying to buy a home but whom are being priced out the market by people with more money than sense. The simple fact is that you can't take out a mortgage for more than the property is worth, nor should you ever want to find yourself in negative equity. So if you're bidding higher than the property value, you need to make up that difference in cash. Unfortunately your ordinary young family that's just starting out can't afford to do that. This likely isn't their first time doing this either and slowly they are getting fed up with the endless cycle.

That's how many people these days are being forced into new builds. Yes, the prices are high against comparitive older houses on the market, but at least they are fixed. The sticker price on the website or in the show room is what you pay, no offers over. The UK was rife with this during COVID. Instagram was full with people turning to new build properties because the wider market was just so cut-throat it was nigh impossible to get a foothold; several people in my social circles included. And that's only the start of the problems. All too often now we're seeing news breaking about the frankly atrocious build quality of some of these new houses. I've heard stories of friends of friends having to rip out and replace their bathrooms and kitchens after just a few years because they fell apart so quickly.

For a while there I was stuck between the flanks of "I don't trust new builds" and "I might have no choice but a new build" until I stumbled across a little video on the TikTok page Mansion Mortgages.

I'm hardly an expert but this lot are, and they have introduced me to a concept called Let-To-Buy. You might be thinking "Ah, I've heard of those," but hold your horses the now. Buy-To-Let and Let-To-Buy are different products entirely.

With Buy-To-Let, you take out an interest-only mortgage on a property with the intension of letting it out to private tenants. The lower monthly mortgage payment (because you're only paying the interest) plus some other expenses like landlord insurance, is then covered by the tenant's monthly rent, plus a little profit for your trouble. This property is therefore paying for itself and generating some cash flow for you to live on. There are plenty of people up and down the country who are financially independent owing to their Buy-To-Let property portfolio and it's a solid business strategy. In 20 or 30 years time, they will still have that big mortgage principal to pay. To clear that debt they simply sell the property, plus more often than not they pocket a substantial profit from the sale too, owing to the fact that in general, property prices increase over time. Whilst it's a solid business strategy and a great way to earn a living, it doesn't solve our quandary.

Let-To-Buy is slightly different. This is for people who already own a property and want to move, but for one reason or another they don't want to sell their current property. This is ideal for couples who have their own homes but want to move in together, or someone who want's to move on but wants to keep a downsizing option in their back pocket, or maybe it simply isn't a sellers market and they don't want to wait. Keep that in mind as I'll come back to that. So what you do is you remortgage your current property onto an interest-only plan. Just as some people remortgage their houses to release cash for renovations, so to can you release cash to put towards a down-payment for your next property. So whilst remortgaging, you borrow your mortgage principal (your outstanding debt) plus a little extra on top. This remortgages the property and releases some cash from the equity in your home. You then take out a second residential repayment mortgage on your new property, putting down the cash you released plus any other savings you want to put towards the deposit. You then move into your new property and you let out your old one.

There's quite a lot here so let's unpack it, starting with disadvantages first. The main one is that, in order to qualify for this option, you need to already be on the property market - that's a given. First time buyers needn't read any further to be honest. The good news though is that there are more home owners out there than there are first time buyers, so this option likely applies to a lot more people. The next restriction is that in order to remortgage your original property on Let-To-Buy, you need to have a maximum LTV of 75%. Or in other words, you must have at least a 25% equity in your current property; 25% of the value of the property belongs to you outright, with the remaining 75% outstanding on the mortgage. The good news here though is that if you've had your property for quite a while, you probably have a lower LTV than you think. The trick is to make sure you're measuring your LTV against the current value of your home - not your purchase price. If you bought your house 10 years ago, there's a good chance that it's now worth more than you paid for it. Lastly, if at any point your rental property is unoccupied, you'll need to find the money to make the payments on that second mortgage yourself. Depending on how much the monthly repayment is, that could be a real sting. But if you're clever about it, you will only go for this kind of purchasing option if you reckon there's a high demand for rental properties of your type in the local area. If there is, chances are that it won't be unoccupied for long. And the good news of course is, if you can't rent it out, you can always just sell it.

So now let's talk advantages of Let-To-Buy. First off, you get to move house without selling your current property. Many people hold off on selling their property until it's a seller's market, but that big win on the sale then turns into a burn on the other side when they end up paying more for their new house, or even worse can't then afford to move at all. With Let-To-Buy, you can move house during a buyers market without worrying about loosing money on the sale of your existing house. 

Secondly, it eliminates the onward chain. The person you are buying the new property from probably needs this property to sell so that they can move on. Typically, as soon as you agree the terms of your purchase, you'd then need to wait until your current home sells before you can move. This is known as the onward chain which at best causes delays for everyone involved and at worst results in the sale falling through and everyone ending up back at square one. But with LTB, you have no property to sell, so the onward chain becomes a non-issue.

Thirdly, As a landlord, you then have the luxury of time. You can effectively take as long as you like to evacuate your old home, move into your new one and get settled before you even think about finding a tenant. The longer you leave if course, the longer you need to make that second mortgage payment yourself, rather than the revenue from your tenant footing that bill for you. But the option is ultimately yours to take your time with your move or get it done as quickly as possible. 

Fourthly, it increases your monthly cash flow. Okay, depending on the type and size of property you're letting out, your monthly profit might not be massive. Ultimately though, that property is sitting there on the back burner, paying for itself and generating a little extra income for you. That again gives you options in the future, which is a big win in my books.

Fifthly, you have a second asset to your name. When the time comes, you can either decide to downsize and move back into your very first flat to ride out your retirement in. Or you can choose to sell that property, clear your mortgage principal and most likely pocket a tidy little bonus to add to your pension pot for your trouble.

Sixthly, and finally, with Let-To-Buy, you can repeat this process over and over and over again, using it to establish your own property portfolio if you so wish. 

Again, I'm no expert, but I see Let-To-Buy as a perfect solution to a troublesome property market. By 2029, six years from now, if I'm still living in my current flat, I'll have enough equity in the property to do exactly this. God knows what the future holds, so we'll see what happens, but the notion itself is something that excites me. 

~ Aedan.