Releasing Equity to Buy Another Property

Releasing equity from your current property through a remortgage is often the most affordable way to buy another property. The funds can be used to buy a range of property types from investments to commercial premises, but it is not without risk.

In this article we’ll look at some of the most common reasons that buyers use their house as collateral and show you how to ensure you get the best deal on your second property.

Can you release equity to buy another property?

Yes. This is possible and is a common reason why people refinance their homes. The transaction is essentially a remortgage of your existing property that extends your loan to give you a lump sum which can be used to buy another property outright or to use as a deposit.

The loan will be subject to a lenders’ normal eligibility and affordability checks and the rate you are offered will depend on a number of factors, including the loan to value (LTV) ratio.

Equity is the proportion of your property that you own outright and the LTV is that amount expressed as a percentage of the property’s value.

Often, maximising borrowing on your current mortgage is cheaper than applying for a second mortgage as a lower LTV enables you to benefit from lower interest rates.

If you’re looking to remortgage before your fixed term runs out, you will need to factor in the cost of early repayment charges too.

One, two or three mortgages?

If there is enough equity in your current property to buy a second home outright, you can own two properties but only have one mortgage

Where the equity you release is only enough to cover the deposit for your second home you will need to take out an additional mortgage on the new property. This will leave you with an increased balance on your initial mortgage plus a new mortgage for the new home.

Instead of remortgaging your primary property, you may choose to take out a second charge mortgage against it to use as a deposit to buy another home.

In this case you would end up with three home loans to repay. There is no requirement for them all to be with the same lender but it’s highly recommended that you speak to an experienced mortgage broker before going down this route as it comes with numerous complications and risks.

Do you have to pay stamp duty?

Yes. Since April 2016, second and subsequent homes bought in England and Northern Ireland have been subject to an additional 3% on each stamp duty band.

You can calculate the amount of stamp duty you will have to pay by using our calculator below.

How to remortgage to buy another property

The key to remortgaging is working out the numbers.

While you may not have the in-depth knowledge necessary to pick out the right mortgage deal from the thousands that are out there, there are some things you need to do before you start searching for the best deal.

Step 1: Calculate your equity

To do this you will need to know the current value of your property and the total amount of all outstanding debt secured against it.

You can get a good estimate of your property’s value by checking the price similar houses have sold for recently by visiting the government website or speaking to a local estate agent.

If you contact an estate agent, remember to consider sale prices over advertised prices.

Your equity is the amount of the property you own outright. For example, if your home is valued at £250,000 and your total mortgage debt is £100,000, you own £150,000 worth of the property. Equity is expressed as a percentage so you would have 60% equity in the property.

Step 2: Work out how much you need to borrow

Equity is just one part of the equation. You will also need to work out how much you need to borrow to buy another property.

If you already have a specific property in mind, you will have a guide price of the purchase cost, but you will need to consider any additional costs associated with the purchase. This could include stamp duty, taxes, legal fees or renovations.

The ideal situation is normally that you have sufficient equity in your current property to buy the new one outright and enough savings to cover any additional costs.

This is not always the case and there may be several options available to you in terms of how you finance each part of the transaction.

The important thing at this stage is to be aware of how much you need to borrow and what the LTV of your new mortgage will be.

Our remortgage calculator below will be able to give you an idea as to how this could work out.

Step 3: Speak to a broker

A broker will take into consideration all factors surrounding your remortgage, personal circumstances and affordability to find the best options for you.

They will provide advice on what each option means for your monthly payments and long term borrowing costs to allow you to make a fully informed decision according to your attitude to risk and future financial plans.

Remortgaging if you own your home outright

There is nothing to stop you taking out a mortgage on a property that you own outright. If you’ve paid off your mortgage or inherited property, using it as collateral is usually the cheapest way to borrow.

In many cases, homeowners with no mortgage will be over 55 and the biggest barrier to taking out a new mortgage will be age. But that doesn’t mean you can’t borrow against your property in later life.

While many high street lenders may be wary, there are lenders who specialise in niche mortgage products and a broker will be able to find a finance house that suits your circumstances.

Equity release is another option, but you need to speak to somebody qualified in equity release products if you’re considering that option.

We work with brokers who understand specialist lending markets and are qualified to provide equity release advice so you can get a full comparison of both products before making your decision.

What property types can you use the funds for?

Generally speaking lenders are more concerned with your ability to pay than with the type of property you want to buy but there are some property types that will ring alarm bells for many of the big name lenders.

Common property types to buy with equity include:

• Buy to let – If you plan to use the equity in your property to buy a second home to use as a source of rental income, you will need to take out a buy to let mortgage. Typically you will need a minimum deposit of 25% for this type of borrowing.
• Holiday home/second home – When buying a second property in the UK for your own use you can usually get a standard residential mortgage. Normal criteria applies and, if you meet them, the transaction is very similar to taking out any other residential mortgage product. If you are looking to buy abroad, you will need to apply for an overseas mortgage. These are widely available but the transaction will almost certainly be subject to additional fees and taxes.
• Holiday let – Buying property abroad to rent out is similar to buying a holiday home for your own use but requires a specific type of mortgage. Speak to your broker to determine which option is right for you.
• Commercial property – If you want to start or expand a business, taking equity from your own property is usually significantly cheaper than taking out a business loan. However, some lenders only approve mortgages for bricks and mortar properties and will not sanction the loan for what they call ‘non-standard’ buildings. The good news is there are specialist lenders who can help you unlock the cash in your home to grow your business regardless of the type of property you are looking to buy.
• Let to buy – You might want to move to a new house without selling your current property. This is perfectly possible. Some lenders will allow you to release equity from your first property to buy a second home on the basis that you move into the newly acquired property and rent out the old one.

Eligibility criteria

Different lenders have different eligibility criteria but there is some standard information that you should collate before starting to look for mortgage deals.

Length of ownership

Most lenders will want you to have owned your home for a minimum of 6 months before they consider any additional loan.

Affordability

Not only do lenders need to satisfy themselves that you can keep up with repayments, they are also duty bound to lend responsibly. You will need to be able to evidence all income that you want to include as part of your application.

If you are self-employed or have multiple income streams from investments, state benefits, bonuses or overtime, some lenders will not accept your application. Others may cap the amount of these income streams that they will take into consideration when assessing your application.

If the loan is for a buy to let or holiday let, you will also need to show your expected rental income.

Loan to Value (LTV)

When releasing equity to buy a second property the maximum LTV is usually between 80% to 85% although some lenders cap it at 75% and others will be prepared to go as high as 90%.

Credit Record

Lenders will check your credit history as part of your application. A history of bad credit will not necessarily prevent you from remortgaging to buy another property but it will impact on your application.

Your pool of potential lenders will be smaller and the rates you pay higher. Ongoing debt issues are more likely to adversely affect your eligibility and it is often best to fix those problems before applying to ensure you don’t end up paying over the odds.

Get matched with an expert mortgage broker today

With so many variables when it comes to releasing equity to buy another property it makes sense to seek professional advice first.

Each lenders’ eligibility criteria and affordability checks differ and the best way to ensure you get the possible deal is to speak to get professional advice

While buying a second property comes with risks, it can also be incredibly rewarding both personally and financially. But to make sure it goes smoothly and you are able to maximise the benefits, it’s essential you speak to a specialist broker.

We work with mortgage brokers who have a track record of helping people refinance to buy another property  and they can find you the most appropriate lender, guide you through the application process and help you complete the paperwork correctly.

Call today on 0808 189 0463 or enquire online to arrange a no-obligation chat between you and your ideal mortgage broker today.