If you’re thinking about expanding your property portfolio or acquiring a second home for personal use, you’ll be wondering if remortgaging your current property is a viable option to fund the purchase.
Remortgaging to buy another property is a practical solution, including cashback remortgages, but you need to understand the complexities involved, so to help you navigate this process, we’ve created this guide which outlines the key factors to consider. This way, you’ll have the knowledge to determine whether this approach aligns with your goals and circumstances, as well as what to expect if you decide to go ahead.
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How Does Remortgaging to Buy a Second House Work?
Remortgaging your current home to buy another property is a common approach for many homeowners in that by refinancing your existing mortgage, you unlock a portion of the equity you’ve gained over time, with this released equity then being used to help fund the purchase of a second property.
What Are Common Second Property Purchases?
Understanding your purpose for purchasing a second property is vital when considering remortgaging. Here are some of the most common reasons for buying a second property and how remortgaging helps:
Buy-to-let
If you’re looking to invest in property to generate rental income, remortgaging your current home provides the funds needed to purchase a buy-to-let property. These properties are rented out to tenants, offering long-term returns if managed well.
Let-to-buy
A let-to-buy strategy involves renting out your current home and using that rental income to support the purchase of a new primary residence. This requires two separate mortgage products: a let-to-buy mortgage for your existing property and a residential mortgage for your new home.
Holiday home
Whether for work commitments or regular leisure trips to a favourite destination, purchasing a second property for personal use is another common option. This property would be used alongside your current home, offering flexibility and convenience.
Supporting a family member
You could choose to buy a home for a family member or dependent, such as an elderly parent or a child leaving university. Bear in mind that with your name on the mortgage, you’ll hold full legal responsibility for the repayments, even if the property is not occupied by you.
How Do I Remortgage One Property to Buy Another?
If the equity you release from remortgaging your current home isn’t enough to both repay the existing mortgage and purchase a second property outright, you’ll likely end up with two mortgages. In this case, the equity released would be used as a deposit for the second property.
There are three main scenarios:
- Single remortgage: If your current property has sizeable equity, you’ll be able to remortgage it for an amount that clears the existing mortgage and provides enough additional funds to buy a second property outright. This leaves you with one mortgage, a remortgage secured solely against your first property.
- Two mortgages: This is the most common route. You remortgage your existing property to pay off the original mortgage and release extra funds to use as a deposit on a second home. You’ll then have a new, larger mortgage on your first property, along with a second mortgage secured against the new property.
- Second charge and new mortgage: In rare cases, rather than replacing the original mortgage, you could take out a second charge mortgage on your current home. This sits alongside your existing mortgage and releases funds to use as a deposit. You’d then take out a third mortgage to finance the second property, resulting in three mortgages overall.
Can I Remortgage to Buy a Second Property?
If you’re planning to remortgage your home to purchase another property, there are specific requirements you’ll need to meet, and understanding these criteria will help you prepare and improve your chances of approval.
Deposit
Lenders expect a larger deposit when purchasing a second property, requiring at least 20% of the property’s value. This means you’ll need to confirm that the equity you release through remortgaging is sufficient to cover this deposit.
Income
How much you can borrow is closely tied to your earnings, i.e., most mortgage lenders will cap the amount at around 4.5 times your annual income. Although, it’s worth noting that some lenders will take additional sources of income into account, such as bonuses, overtime, or investment earnings. It’s essential to review your income and expenses carefully to understand what you can afford.
Affordability and credit checks
Just like applying for any mortgage, remortgaging to fund a second property involves rigorous affordability assessments and credit checks. Lenders will evaluate your financial position to verify you can comfortably manage repayments on both properties.
If you have a bad credit score or high levels of existing debt, it’s worth taking steps to improve your financial situation before applying. Paying down debt, reducing unnecessary outgoings, and ensuring your bills are paid on time strengthens your credit profile and makes you eligible for better mortgage deals.
What are the Risks When Remortgaging to Buy Another Home?
Remortgaging your current home to purchase a second property is a major financial decision which demands distinctive thought. Here are some important considerations to keep in mind before proceeding:
1. Affordability of repayments
Taking on an additional mortgage means your monthly repayments are likely to increase, and that the commitment will extend over a longer period, therefore it’s essential to make sure that you’re financially comfortable with these new obligations.
2. Employment and income stability
Lenders will assess your financial stability when reviewing your application. Recent changes to your employment (such as starting a new job or becoming self-employed) could affect your eligibility. Make sure you can demonstrate consistent, reliable income to minimise any potential risks in the lender’s eyes.
3. Costs involved in remortgaging
Remortgaging comes with additional costs which need to be factored into your budget. These expenses add up quickly, so it’s crucial to include them in your affordability calculations:
- Legal fees: Solicitor costs for arranging the new mortgage.
- Valuation fees: Charges for a valuation either on your existing property or the new one.
- Early repayment charges: Penalties for ending your current mortgage deal early.
- Stamp duty surcharge: An extra 5% surcharge applies when buying a second residential property.
- Capital gains tax: If you sell your first property down the line and it is no longer your main residence, you will be liable for CGT on any profit.
4. Loan-to-value (LTV) ratio
Lenders will assess how much equity you have in your current property relative to its value. A higher LTV ratio will limit your borrowing options or lead to less favourable interest rates. In general, the maximum LTV allowed on a second mortgage is lower than what you’ll have been offered on your first mortgage.
5. Age restrictions
Your age affects the term and availability of mortgage products. For example, if you plan to retire soon, lenders will be cautious about approving a long-term loan unless you can prove your retirement income will be sufficient to cover the repayments.
Speak to a Remortgage Expert for Advice
Navigating the complexities of remortgaging to buy a second property is overwhelming, with so many options and factors to consider. That’s why expert guidance makes all the difference. Our user-friendly online platform allows you to compare a wide range of remortgage deals tailored to the UK market. Updated daily, it gives you access to thousands of quotes, ensuring you’re always aware of the most competitive offers available.
Once you’ve identified a deal which matches your needs, our team of experienced advisors is ready to provide personalised support. We’ll take the time to understand your financial situation and goals, offering advice that’s specifically tailored to help you make the best decision for your unique circumstances.
If you have questions or concerns at any point, don’t hesitate to reach out – our goal is to make the process as straightforward and stress-free as possible. Let us help you find the perfect remortgage solution and guarantee your decision is informed, confident, and aligned with your future plans.
Not in a literal sense. You can’t offer your current home itself as a deposit, but what you can do is unlock the equity tied up in your property by remortgaging. This released equity can then be used as a deposit towards the purchase of a second house.
No, stamp duty does not apply when you simply remortgage your existing property. However, if you’re releasing equity through a remortgage to help fund the purchase of an additional property, you will need to pay stamp duty on that new purchase. And, buying a second home attracts an additional 5% surcharge on top of the standard rates.
Yes, if you have substantial equity in your current home, you’ll be able to remortgage it to release funds for buying a property abroad. The process works in much the same way as remortgaging to buy a second home in the UK.
About the Author:
Matt is a top contributor at Speedy Remortgage and has worked in the financial services industry for over a decade now. Through his expertise on mortgage and remortgage has helped hundreds of customers to achieve their property goals.