Remortgaging your house to buy a second home is becoming common practice in the UK. In fact, Brits spent a massive £93 million in remortgaging in ONE MONTH alone, according to research carried out by financial company ClearScore in 2018, with the majority aiming to buy another property on a buy-to-let basis as an investment.
Before you go ahead with remortgaging, bear in mind it's a long-term financial commitment. Going down this route can have its advantages, but by the same token, it pays to have the full picture.
A remortgage means you apply for a new mortgage but intend to stay in your current home. The new mortgage will be secured against your property. This means your home is being used as a guarantee that you will repay the loan.
If you're taking out a second mortgage, you will essentially have two loans secured against your home. However, with a second mortgage, unlike your first, you can spend the money however you wish.
You must tell your mortgage adviser or lender if you want to buy a second home, as it will enable them to choose the appropriate mortgage product for you. Lenders will also take the reason into account to determine whether it's financially viable to approve your mortgage application.
The most frequent reason for remortgaging to buy a second home is to become a landlord. The standard way to start a property portfolio is with an interest-only, buy-to-let mortgage. If you decide to move to your new property and keep your old home to rent it out, you can change your mortgage terms appropriately.
Both types of letting can be financed through a remortgaging deal, whether it's a full remortgage or a second mortgage on your main property.
You might decide to purchase a smaller second home, such as a flat, in the location of your workplace if the alternative is a long daily commute. Many people choose to do this in order to cut down on their weekly traveling time.
Perhaps you're looking to support elderly parents by helping them to get a smaller home, or you fancy buying a family holiday home for yourself. Remortgaging your primary home will enable you to buy a second home with an additional residential mortgage
You can even buy a commercial property, for business use by remortgaging your home. Many lenders will consider this arrangement.
If you're lucky, the remortgage on your first property will be sufficient to cover the outstanding mortgage, while leaving enough to purchase your second property in full.
For many people, this won't be the case and you will end up with two mortgages. The equity released by your house will form the deposit for your second home. On average, you'll be aiming to secure a deposit of at least 20% for your new property out of the equity in your home.
The answer is yes, there are many different types of mortgages. For example, if your second property is a buy-to-let home, the remortgage on your original family home will remain a residential one, while your second home will be bought with an interest-only, buy-to-let mortgage.
There are multiple types of mortgage products available. The latest - a new Help to Buy Equity Loan scheme - was launched on 1st April 2021 for first-time buyers.
First-time buyer mortgages are for individuals who have never owned a home before and for couples where both partners have never bought a home previously. At least 5% of the price of the home is required as a deposit, but the government will lend home-buyers up to 20% of the cost of a newly-built home.
This means the government has an equity share of up to 20% until you repay the equity loan. There are regional variations - for example, the government will lend up to 40% in London. The scheme will continue until March 2023.
A buy-to-let mortgage is specifically for people who buy property as an investment, rather than somewhere to live themselves.
A standard variable rate (SVR) mortgage is set at the lender's basic rate of interest. It doesn't come with a discount or reduced interest rate and the lender is permitted to change the rate of interest they charge.
Another option is the slightly more complex limited company mortgage. Aimed at borrowers looking to expand their property portfolio up to three properties, a limited companies buy-to-let mortgage could be the solution. It provides a way of taking out a mortgage on properties through a limited company, rather than in your own name
This type of mortgage is designed for the purchase and remortgaging of residential properties that are either already let, or will be ready to let within a month of completion.
You don't need your mortgages to be from the same lender. Instead, you will be able to work with your broker to get the most suitable deal. Getting a remortgage is all about the numbers, with your property's equity being the key in your application.
The other significant factors that lenders will consider are your income, credit status and whether the loan will be affordable.
To calculate equity, take your property's current value and minus the total value of the current mortgage and any loans secured on it. For example, if your property's market value is £310,000 and you owe £208,400 on your mortgage, the equity would be £101,600.
Normally, the equity is represented as a percentage, so your equity in this case would be 32.77%. When you decide to remortgage, the total loan-to-value (known as the LTV) that you can leverage against your home is usually between 80% and 95%, depending on the individual lender's terms.
Using the figures from the example, a full remortgage of 90% LTV would release £279,000. Then, you would have to pay back the outstanding balance on the original mortgage (£208,400) and this would leave you with £70,600. Once the associated fees were paid, whatever was left could be used as a deposit on a second property.
If you found a lender willing to go to 95% LTV total, this would net you a mortgage of 27.77% of your home's value, leaving 5% in the property. This means the combined loan-to-value across both mortgages would be £86,087.
A second charge wouldn't necessitate repaying the original mortgage. This would mean you wouldn't incur an early repayment penalty.
However, avoiding the early repayment fees does not necessarily mean a second charge is the right choice on every occasion. You also must take into account factors such as the interest rate, your deal terms and the affordability of the deal.
As well as the costs associated with actually remortgaging, you should also consider the need to take out mortgage insurance and buildings insurance for your properties.
Mortgage payment protection insurance enables you to continue paying off your mortgage if you're no longer receiving a secure income. For example, it will cover repayments should you be made redundant.
Buildings insurance will cover the cost of rebuilding your home if it's destroyed or damaged. It is usually compulsory if you're taking out a mortgage or remortgaging. You may not be accepted for the loan if you do not take out buildings insurance as well.
Your income is extremely relevant, as it determines the size of your mortgage. Usually, lenders allow a mortgage of four times the borrower's income. A smaller number will allow five times and a handful will stretch to six times.
When asked about your income, this does not mean just your salary. Mortgage lenders will look at your total regular annual income. This can include things such as regular, reliable bonuses, dividends, maintenance payments, tax credits and child benefit.
When you detail all your income properly, it is possible you can get a considerable increase in the maximum value of the loan.
Again, this will depend on the individual mortgage lender, as they will evaluate each source of income differently. Some lenders will consider only 50% of annual bonuses, for example, while others might be more generous.
Unfortunately, if you have a poor credit history, this will adversely impact your mortgage offers. Choose a broker who works with a range of specialist lenders if you know you have a poor credit rating, as you will be more likely to find one who can help.
Your credit rating can improve over time, especially if you gradually start paying off past debts. Even three months without any missed repayments can make a difference, so don't give up hope if you have a poor credit history. Be patient and try again further down the line.
A lender will determine the affordability by looking at your income and deducting the outgoings. Every responsible lender will do this, as it is very important. Taking out a second mortgage will place a significant additional financial burden on your income and the lender must be confident you can afford this.
If you were to remortgage your house and realise, further down the line, the repayments were not affordable, you could end up having your home repossessed. This is why mortgage lenders have to be responsible. They will need to see strong affordability before increasing the size of your current mortgage or letting you take out a second.
If you can’t show you can afford the extra expense, your mortgage application will be turned down. As a mortgage is secured against your home/property, it may be repossessed if you do not keep up with the mortgage repayments.
Please get in touch with Mortgage Mentor for free advice and zero fees. We guide new buyers through the entire process. Mortgage Mentor will be offering an innovative new mortgage brokerage - coming soon!
Contact UsSources
https://www.onlinemortgageadvisor.co.uk/remortgages/remortgaging-property-to-buy-another/
https://www.ownyourhome.gov.uk/scheme/help-to-buy-2021-2023/
https://www.barclays.co.uk/mortgages/remortgage/remortgage-process/
https://www.barclays.co.uk/business-banking/borrow/limited-company-buy-to-let/
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