Yes, you can remortgage to buy another property. You may wish to purchase a holiday home somewhere or a property to fix up and then resell for a profit. Perhaps you’d like to have a buy-to-let property as an investment. Whatever your motivation, there’s no reason why some of the equity that you’ve built up in your current home can’t be used to put towards purchasing another property.
So, how can you remortgage to buy another property? In this article, we’ll explain how it works, the reasons why you might want to do it and whether it is a good idea.
How to remortgage to buy another property
Depending on your circumstances, you can remortgage your current home with a larger mortgage and use the extra funds released from this process to help you buy another property. During the time that you have owned your home, it’s quite likely that the equity available in the property has built up. This is due to a combination of your mortgage borrowing reducing each month as you make monthly mortgage repayments and also as a result of the value of your property increasing due to general house price rises. You could borrow against this equity and use the funds for another purpose, such as putting towards another property purchase.
People often remortgage to release some of their property’s equity. They sometimes use the cash released to help purchase another property. They may use it to cover home improvements, a wedding or to pay off credit cards and other personal debts.
It’s important to remember that when you remortgage to release equity, you will be repaying your existing mortgage and replacing it with a larger mortgage. This will normally have higher monthly repayments. Depending on your age, you may be able to mitigate some of this increase by extending the mortgage loan term.
You’re unlikely to be able to release enough equity to buy a second property outright. In most cases, the cash released will form your cash deposit and you will need to use savings or take out another mortgage on the second property to fund the rest of the purchase price. You need to make sure that you can afford both mortgages if you do this.
How do I know how much equity I have in my home?
So, how do you know how much equity you have tied up in your home? You can work it out by taking the current value of your property and deducting the amount outstanding on your mortgage. The difference between these two figures represents your equity.
Let’s say for instance that your home is worth £350,000 and you have £100,000 left on your mortgage. The difference between these two amounts is £250,000. This is your equity. You’re unlikely to be able to release all of this cash from your property, however. Lenders will usually restrict mortgages to a maximum of 80% of your property’s value. In this case, that’s 80% of £350,000 which is £280,000. After repaying the existing mortgage of £100,000, this could release £180,000 towards a second property.
Why buy another property?
Here are a few of the most common reasons why you might buy another property:
- To rent it out and become a landlord
- Holiday home
- Second residence in another location if you work away from home a lot
- As a gift for a family member, such as a grown-up child or retired parents
- Business use, such as an office, shop or warehouse
- A project to renovate and sell for a profit
If you are planning on remortgaging to buy another property, you need to let your mortgage advisor know so they can find the right mortgage for you. Mortgage lenders will want to know what the funds will be used for.
If it is for a second property purchase, this will naturally raise additional questions. Will you be taking out a second mortgage somewhere to help fund the remainder of the property purchase price? Will you need additional funds to renovate or convert the new property for your purposes? Are you going to be relying on any income generated from the second property to help service your new borrowing?
Taking out a second mortgage on another property
So, what are the implications of taking out a second mortgage or an additional mortgage on another property? Well, there are definitely a few important things to note as it’s likely to be quite different from when you borrowed money to finance your current property.
Type of mortgage
Depending on why you are purchasing another property, your second mortgage will probably be a different type of facility from your first. If you are planning on renting out the property, then you’ll need a buy-to-let mortgage. This is because you will have a third party living in the property as tenants. These tenants will have legal rights which may impact the mortgage lender. This needs to be taken into account in the lender’s risk assessment and the legal documentation used. If you are buying as a fixer-upper to sell, then this might be considered more of a commercial arrangement and require funding via a commercial loan, particularly if you are doing this on a regular basis.
If you are buying a holiday home which will be rented out for some or all of the year, then you may need a specialist holiday home mortgage. However, if your intention is to simply use the property for personal family use, then you may be able to use a regular residential mortgage. A good mortgage advisor, such as us here at Mortgage Light, will be able to advise you on the type of facility you need and the most appropriate lenders to approach.
Tougher affordability criteria
Lenders will generally apply stricter criteria when assessing applications for second mortgages. Not only are you likely to be substantially increasing your current level of borrowing, but you are also taking on the costs of maintaining a second property.
You may well be relying on income generated by this second property and lenders will want to fully understand the reliability of this income before committing to lend to you. Will you still be able to service all your commitments if you get into a dispute with, or lose your tenants for any reason? If you are renovating a second property to sell on, how will you manage any unforeseen costs or building delays?
For this reason, you may have to work harder to prove that you can afford the mortgage repayments on both mortgages. You may also need to put down a higher deposit on the second property purchase.
Stamp Duty Land Tax
When purchasing another property, you’ll also have to pay higher Stamp Duty Land Tax charges. Stamp Duty is the tax you have to pay when buying any property valued at over £125,000. It is calculated as a percentage of the property purchase price and can be a considerable amount of money. When purchasing a second property, you’ll usually have to pay 3% on top of the standard amount of stamp duty paid.
You can use the Gov.UK Stamp Duty Land Tax calculator to get an idea of how much Stamp Duty you can expect to pay, or speak to your mortgage advisor and broker.
Should I remortgage to buy another property?
If you are considering buying a second property, then it may make sense to borrow against the equity you have available in your current home. After all, domestic mortgage borrowing is one of the cheapest forms of borrowing. It’s almost certainly cheaper than any loans you might be able to take out.
It’s important to remember that the equity in your home is not the same as savings. It isn’t free for you to access and spend. It is an asset that you can borrow against. Releasing equity is achieved by increasing your mortgage and this could significantly change your financial situation. Not only will your monthly mortgage repayments increase, but quite possibly so will the term of your mortgage, meaning you will be borrowing for longer. This could be a major consideration, especially if you are approaching retirement age.
Curious as to how much equity you have in your home and whether you’ll be able to afford the new monthly repayments if you remortgage to buy another property? Speak to our friendly team at Mortgage Light. We’re passionate about helping people reach their financial goals and would love to help you on your journey to second homeownership!