How does remortgaging work to buy another property
In this brief guide, we answer the question “how does remortgaging work to buy another property”.
How does remortgage work to buy another property?
Remortgaging to buy another property works by releasing the equity you have in a mortgaged property to buy another property. You could remortgage to buy another residential property or buy to let property.
You could remortgage to:
Buy an investment buy to let
Geta a let to buy mortgage
Buy a holiday home
Buy property abroad
Buy another residential home
Invest in commercial property
When looking to see if you can afford to remortgage to buy another property, the mortgage lender will usually look at the below things:
- Your mortgage affordability
- The equity you have in your property
- What you wish to do with the funds
- The loan to value
- Your credit score
Based on the factors above the mortgage lender will determine if they want to lend to you. You may have various mortgage lenders who may be suitable to you based on the above.
An example of a remortgage:
Property value: £800,000
Outstanding mortgage balance: £400,000
Current LTV: 50%
Borrow up to: £760,000 (95% loan to value)
Funds to buy another property: £180,000
Why you need equity to remortgage?
When looking to remortgage your property to buy another property, having sufficient equity in your existing property is key and without this, you will find it very hard to find any mortgage lenders who can offer you a remortgage.
Equity in your property could be built by paying your mortgage, by the mortgage deposit you initially put down or by capital appreciation when your house price rises.
To calculate how much equity you have in your property you will usually need to get a home valuation.
To do this you can use a local estate agent or do an online home valuation.
Before offering you a remortgage the mortgage lender will also carry out their own valuation of your property. This could be through a desktop valuation or an in-person valuation.
Once you have figured out how much your home is worth you can then deduct your existing mortgage balance from this to get the value of equity you have in your home.
If you own your home outright then you own 100% of the equity in your home and you can get an unencumbered remortgage.
Having sufficient equity in your property is very important as the equity in your property is what the mortgage lender lends against. It is the security on which the mortgage lender lends.
There are mortgage lenders that may consider lending to you even with no equity or with little equity but these are specialist mortgage lenders who look at remortgage applications on a case by case basis and then decide if to lend or not.
What loan to value do you need fo remortgaging to buy another property?
Loan to value is very important when remortgaging to buy another property as it essentially determines the risk to the mortgage lender.
Just as with any mortgage, mortgage lenders typically prefer a much smaller loan to value and this usually attracts the better remortgage rates.
A high loan to value on the other hand means the mortgage lender is lending more on the property and therefore taking on more risk.
If you were to default on the mortgage, the mortgage lender will have to get at least the mortgage balance back when selling the property and this presents a higher risk if the mortgage balance is a high percentile of the property value.
When remortgaging to buy another residential property you may be able to get up to a 95% loan to value.
When remortgaging buy a buy to let property, the maximum loan to value you may find with most mortgage lenders is around 85%.
If you are remortgaging to buy a property which is abroad then you can expect the loan to value rates to be below 75%.
How much can you borrow to remortgage to buy another property?
As discussed above the amount you will be able to borrow will depend heavily on the equity you have in your property but the mortgage lender must also satisfy other mortgage affordability criteria and ensure that you can afford to borrow and pay back the mortgage.
Mortgage lenders typically use income multiple to work out what the maximum amount they could lend to a borrower is.
In your case, as you intend on borrowing to buy another property the mortgage lender will have to consider your current monthly mortgage repayments (if you have any) and the new prospective monthly mortgage repayments.
You will need to be able to show to the mortgage lender that you can afford both of this monthly mortgage repayments.
The income multiple most mortgage lenders will apply when gauging your mortgage affordability could depend on your age, what you want to use the remortgage for and the loan to value on the mortgage.
You may be able to get an income multiple of 4 or even up to 6 depending on your mortgage affordability.
If you are looking to get the maximum mortgage amount then you may want to consider using a mortgage broker who can help you find mortgage lenders who meet your circumstances and needs.
When assessing how much you can borrow, your income is a major factor but not all mortgage lenders accept all sources of income.
Some mortgage lenders will also only accept a certain percentile of an income source which could greatly limit your mortgage affordability.
If you have a lot of supplementary income such as the below then you may find it much harder to get a remortgage to buy another property depending on the mortgage lenders you approach.
Supplementary income could include:
- Pension income
- Investment Income
- Overseas earned income
- Maintenance Payments
- Rental Income
- Attendance Allowance benefit
- Carer’s Allowance benefit
- Child Benefit
- Child Tax Credit benefit
- Disability Living Allowance (DLA)
- Incapacity Benefit (IB)
- Industrial Injuries Benefit (IIB)
- Maternity Allowance benefit
- Pension Credit benefit
- Severe Disablement Allowance
- Widow’s Pension benefit
- Working tax credit benefit
If you are a self-employed borrower you may also face similar challenges in getting the mortgage lender to accept your sources of income and take them all into account when working out your mortgage affordability.
You will also usually need to provide at least 3 years worth of accounts but there are some mortgage lender that will accept as little as 12 months worth of accounts if you are self-employed.
You may need a self-employed mortgage broker to help you with this.
Usually, asking the mortgage lender to perform a manual underwriting will help you secure a remortgage.
That being said, most high street mortgage lenders do not offer such levels of flexibility.
Can you remortgage with bad credit?
If you want to remortgage to buy another property then you may naturally find it much harder if you have bad credit.
Different mortgage lenders have various criteria on how they treat bad credit borrowers and this area of the mortgage market is quite a niche area.
If you have bad credit then it will usually determine on what type of bad credit and how long ago you incurred it.
If you have had a CCJ, mortgage default, bankruptcy or home repossession then most mortgage lenders will not lend to you within the first 12 months of these incidents happening.
To increase the likelihood of you getting a remortgage to buy another property you may need to put down a much bigger mortgage deposit if you don’t have sufficient equity in your home but you can still expect to pay a higher mortgage rate.
Can you remortgage to buy a buy to let property?
Yes, remortgaging to buy a buy to let property is certainly possible but most mortgage lenders will offer a maximum loan to value of 85%.
This means you will need to have at least 15% equity in your home after the remortgage.
Remortgaging to buy a buy to let property is quite common amongst UK landlords who aim to use the equity they have built up in their properties to finance other properties rather than raising additional investment funds from other sources.
If the property you want to remortgage is a buy to let property then this is not an issue however most buy to let landlords tend to have interest-only mortgages which have less equity as the monthly mortgage repayments do not go towards paying down the mortgage balance and hence do not increase the equity the borrower has in the property.
In these cases, most landlords rely on capital appreciation plus the initial mortgage deposit they have used to purchase the property.
Before remortgaging to buy a buy to let property, the mortgage lender will want to see the projected rental income to work out the rental coverage.
They may also want to see accounts for the property from the previous few years.
You may also be able to remortgage a portfolio of buy to let properties in order to fund a mortgage for a residential home.
Government scheme considerations when remortgaging
If you have bought your property using any of the Government schemes below then you may have some issues remortgaging to buy another property.
With some of the schemes below, you may have to pay off any loans you borrowed from the schemes or pay back any discounts you may have received.
Depending on the scheme you may also be in violation of the terms of the scheme by owning more than 2 properties in a particular time frame or under certain conditions.
You should check with the scheme provider to ensure you are within your rights before remortgaging to buy another property.
Some of these schemes include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy– allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire- same as above.
Other factors to consider when remortgaging to buy a second home
Before committing to remortgage to buy another property there are a few other factors which you should be aware of.
You may be required to pay stamp duty on a second how which will come with an additional rate of 3%.
The mortgage lender will have mortgage fees attached to the mortgage.
Using a mortgage broker
You may want to consider using an independent mortgage broker to get a mortgage.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
FAQs: Remortgagfing to buy another property
Can I use the equity in my house to buy another house?
Yes, you can use the equity in your house to buy another house. This is common practics amongst homeowners looking to buy new homes.
How much deposit do I need for a 2nd house?
To buy a second house you will usually need a mortgage deposit of around 25%. This is because mortgage lenders view second home mortgages as being much riskier.
In this brief guide, we answered the question “how does remortgaging work to buy another property”.
If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.