If you are a homeowner interested in purchasing another property, then remortgaging to buy another house is definitely an option worth considering.
Read on to find out exactly how to remortgage to buy another property and what to expect.
Yes, using equity in your existing home to buy another property is one of the most common ways people raise capital to buy a new house. In fact, remortgaging is so widespread in the UK that there were 52.600 remortgaging loans approved in February 2020 alone.
However, to get approved for a remortgage you have to meet the lender’s criteria, the biggest of which is the amount of equity you can raise.
Other deciding aspects include your personal financial situation, credit score and affordability.
But before we get to that, here is something to consider first.
If you have enough equity in your first property to buy a second home outright, you will be left with two properties but only one mortgage.
The most common scenario, however, is when you have enough equity in your first property to replace the first mortgage and release funds to cover the deposit for the second property. In this case, you will have a larger mortgage on the initial property and a second mortgage on the new one, i.e. two mortgages.
Finally, you could consider getting a second mortgage to buy another house. So, instead of remortgaging your first property, you could apply for a second charge remortgage or secured loan against your first property and use the money raised as a deposit to buy another house. This way, you will have three home loans to pay off.
Note: You can apply for all mortgages from the same lender, or you could go for different providers.
The remortgage is achieved by substituting the existing mortgage with a new one. If your current property has significant equity, then you can borrow up to 95% of the value of that equity.
Here are the steps to follow:
Equity is just one part of the equation, but it is the biggest deciding factor involved when refinancing your home loan.
To calculate your equity, you first need to determine how much your property is worth. To do this, either get a property valuation or look at recent property sales in your area. Keep in mind the first is costlier but will give you a more accurate idea of how much your home is worth.
Once you know the current value of your property, deduct your outstanding mortgage balance. The remaining amount is your equity.
Let’s say your property is worth £500,000 and you have a mortgage of £250,000. Then you have £250,000 in equity.
One of the main factors determining how much you can borrow is the LTV, or loan-to-value ratio.
LTV ratio is the percentage of your home’s value that you can borrow against. This is how much money the lender will give you in relation to the value of your home. For example, if you have an LTV of 80%, the lender will give you £80 for every £100 you borrow.
When remortgaging to buy another property in the UK, the maximum LTV is typically between 80% to 85%. However, some can go up to 90% depending on your credit history, age and the reason you are buying the second property.
Note: The maximum LTV for a let-to-buy or buy-to-let loan is 85%, while the LTV for holiday-let mortgages is usually up to 75-80%.
Consulting a mortgage broker is one of the best decisions to take when remortgaging to buy a second property.
A mortgage advisor will not only help you determine if you’re eligible for a remortgage and how much you can borrow, but they will also find the best deal for your needs and assist you with paperwork.
Here is a list of all the factors to consider before applying for a second property mortgage.
Although the lender will primarily be concerned with your ability to repay the loan, the type of property you intend to buy is still an important factor in the assessment process.
Here are the main types of property you can buy from a remortgage:
The lender might also be interested in the build type. Most mortgage providers prefer brick and mortar properties. Anything else is considered ‘non-standard’ construction, and you would have to apply with specialist lenders who can offer bespoke deals on any type of property you wish to purchase.
In order to be eligible for a remortgage, you must meet the following criteria:
Mortgage providers must ensure that you are able to repay the loan so they would want to see strong affordability before approving your mortgage. In other words, if you can’t show that you can handle the extra cost, your loan will not get approved.
The amount you earn will determine how much money you can borrow when remortgaging to buy a second property.
If you’re self-employed or receive state benefits, bonuses or overtime, your lender might ask for evidence of income and recent accounts. If you have multiple income streams from investments or savings accounts, you will need to evidence them all in your application. Some lenders will consider 100% of additional sources of income, although most cap additional revenue at 50 to 75%.
Mortgage providers usually cap the amount you can borrow at 4.5 times your income. You might find some who might go as high as 5 or 6 times your income, although these are very rare.
Note: If you want to remortgage to buy a second property that you will let, you will need to show expected rental income as well. This should cover a certain percentage of the mortgage repayments, typically around 125 to 145%.
Mortgage providers will take your credit status and history into account when reviewing your application. If you have a good credit rating, there will be no issues. However, if you have a history of bad credit, you might not be approved for a remortgage, or you may have to pay a higher interest rate.
If you have a poor credit rating, you might want to consider talking to specialist bad credit lenders, who help people with a low credit score remortgage to buy a second home.
Finally, you need to consider extra fees when taking out a remortgage for a second home:
If you’re thinking of buying another home or looking at rental opportunities, it might be worth considering releasing equity to buy another property. Of course, this is a big decision that should not be taken lightly, especially when considering the number of people living with property debt in the UK. So make sure you do your research and get expert advice before making the final call.
At the end of the day, only you can decide whether or not remortgaging is the right move—but we hope this article has given you a good overview of what’s involved.
You can remortgage an inherited property provided probate has taken place, and the property is in your name. Mortgage providers will typically ask you to wait for 6 to 12 months before remortgaging, although there are some that are willing to approve a loan earlier than six months.
At least 10% is required, although the more you can deposit, the lower your mortgage rates will be.
If you are a landlord, you could leverage an existing portfolio to buy more property, although bear in mind that equity will be lower than with residential homes, and lenders will only offer 85% loans.
Yes, some lenders will consider your application even though you have just started a new position. That said, requirements vary from one lender to the next, so some might require you to have at least a year of employment history, while others will accept your application even if you started a job six months ago.
Yes, known as an unencumbered mortgage, you could use an inherited property or a home with no mortgage as collateral to buy a second property. This is the cheapest way to borrow money to buy a second property. Even so, anyone interested in learning how to remortgage to buy another property should consult a mortgage expert who will explain the procedure in detail and help you find the best deal.