If you’ve been living in your current home for a longer period and have built up significant equity, you might be wondering about remortgaging to purchase a second property. The good news is that this is entirely possible, but it can also be a little more complex than securing your initial mortgage.
For this reason, we highly recommend you consult a qualified mortgage broker, like Your Mortgage People, who can navigate your unique situation and help you secure the best deal.
To discuss your options with our team, fill out a contact form by clicking here.
Why Remortgage to Finance a Second Property?
There are several reasons why people choose to remortgage their home to finance the purchase of a second property. Below are some common scenarios:
Buy-to-Let Investment
If you’re looking to become a landlord for the first time, remortgaging your current property can help you take that first step toward building a property portfolio.
Unlike your first mortgage, which focused on your income, lenders will assess your affordability by considering the rental income you expect to receive from the new property.
Let-to-Buy
Like a buy-to-let – but in reverse. This option allows you to rent out your current home and use the equity to purchase a new one. If this is something you’re considering, you’ll need to convert your existing residential mortgage to a let-to-buy mortgage while also securing a new mortgage for the property you plan to live in.
Purchasing a Holiday or Second Home
Dreaming of a vacation spot for your family? Buying a holiday home can create wonderful memories but also comes with added costs and considerations. Our mortgage brokers can help you account for all expenses to ensure you’re not overextending yourself, helping to make your holiday home dream a reality.
Holiday Rentals
A holiday rental property can be a fun and rewarding way to earn passive income. However, securing a mortgage for such a property may be challenging, with deposit requirements often as high as 25%-30% of the property’s value. This doesn’t make it impossible, it’s just important to keep in mind how you intend to finance it.
Providing a Home for a Family Member
Helping a relative or dependent with housing can be extremely gratifying for all parties; however, it’s crucial to have the proper legal agreements in place to avoid complications down the road. Remember you are paying the mortgage, so ensure you have the proper safeguards in place to protect you and your loved ones.
What Are Your Financing Options?
If the equity in your current home isn’t sufficient to cover the cost of a second property, you’ll need to consider other financing options. Here’s what you should know:
Single Remortgage
If you have enough equity, you might be able to release funds to buy the second property outright, leaving you with just one mortgage on your original home.
Two Remortgages
This is the most common scenario, where you release equity from your first property to cover the deposit for the second. This results in two separate mortgages—one on each property.
How Do Lenders Assess Your Application
When remortgaging your current property to buy another, lenders will consider several factors:
Equity in Your Home
The primary factor is the equity in your current home. You can either replace your original mortgage entirely or opt for a second charge mortgage—a separate loan secured on your existing property.
Affordability
If the property isn’t buy-to-let, lenders will consider your ability to afford a second home by comparing your income with your outgoings, including utility bills, childcare and any existing loans, including your second mortgage. Ensuring you can manage the payments and upkeep of a second property is essential.
If you’re looking to buy-to-let, lenders will also consider to what extent the income from rent payments is likely to cover the loan.
When the rent doesn’t fully cover the mortgage, the lender considers both the rental income and your personal income to make a decision. For instance, if the rental income is £500 and the mortgage payment is £650, the lender will evaluate whether your personal income is sufficient to cover the £150 shortfall while still managing your other financial obligations.
This is more often part of the stress test for future interest rates or because you’re buying a property for a family member and discounting the rent.
Your Income
Your income, including salary, bonuses, dividends and other sources will influence how much you can borrow. Lenders typically allow up to 4x your income, though some may offer up to 6x.
Credit Status
A poor credit history could limit the amount you can borrow. It’s crucial to ensure that you’re not taking on more debt than you can manage.
That being said, a good mortgage adviser can help you find the right deal, even if you have less-than-perfect credit.
Employment Type
If you’re self-employed or have recently started a new job, it could affect your mortgage application. Lenders will assess the risk involved in lending to you based on your employment status.
Additional Considerations
Second Home Stamp Duty
Purchasing a second home incurs a stamp duty surcharge of 3% on top of the standard rates. The exact amount depends on the property’s price:
Properties under £125,000: 3% Stamp Duty
Properties between £125,001 and £250,000: 5% Stamp Duty
Properties between £250,001 and £925,000: 8% Stamp Duty
Buying Property Abroad
You can remortgage your home to buy property abroad if you have substantial equity. This can be an attractive option for those looking to invest in a foreign vacation home or rental property.
New Job or Part-Time Work
Most lenders require you to be in your current job for at least three months before approving a mortgage, although some may consider applications before this. Working part-time can also affect your mortgage application, but specialist lenders may offer solutions tailored to your situation.
Age Restrictions
There are no specific age restrictions for remortgaging, but your options may narrow after age 65. Many lenders require the mortgage to be repaid by a certain age.
Early Repayment Charges
You can remortgage before the end of your current mortgage term, but this may involve an early repayment charge, potentially costing thousands of pounds.
Remortgaging an Owned Property
If you own your home outright, you can remortgage it to buy another property. The amount you can borrow will depend on your current home’s value and the purpose of the remortgage.
Finally…
Buying a second home is an exciting opportunity and a potentially rewarding investment.
At Your Mortgage People, our team of mortgage advisers is here to help you make informed decisions about your finances and ensure you get the best deal possible.
Contact us today to discuss your remortgaging options.
