Whether to expand your property portfolio or to give yourself more choice as to where and how you live, remortgaging to buy another property can be a significant and worthwhile undertaking. All of us need somewhere to live and with a shortage of housing in the UK, there will never be problems in finding occupants to make good use of property and even pay the bills. If you have a suitable amount of equity in your home, it may be possible to remortgage to buy another property or remortgage to buy a rental property.
Organising a remortgage to buy another property is a common way in which many homeowners use their primary asset to raise more capital to purchase another property. As with all financial decisions, going down this path means carefully assessing your resources and your options, possibly aided by some expert advice.
Spending the money
When you try to release capital through property you already own, the amount of cash to which you have access will be affected by how you are planning to spend the money. These choices will include getting a remortgage to buy another property which may be to purchase a holiday house or a second home. You may remortgage to buy a rental property in which case the new property will be rented out to tenants. Another option consists of renting out the property you already own to finance the purchase of another property, possibly with a remortgage as well. If you have some savings that can be used as a down payment then this further widens the options available.
Another common approach is to remortgage to buy another property in the commercial sector. The capital raised could be used to invest in a shop or office space. It could even include buying a factory, or buying into some other kind of business.
If you're already the owner of a commercial site, then you may want to remortgage this to buy another property in the sector. Commercial property remortgaging is another specialist area and to embark on this may require an adviser who focuses on commercial real estate.
Do your research & some number crunching
There are a number of factors to consider when remortgaging, particularly if you want to remortgage to buy a rental property. First of all, you need to think about how much your property is worth and how much of it you already own. If you have paid off 95 per cent of the mortgage, you have a lot more flexibility than if you still have to pay 90 per cent of it off. When you have plenty of equity - in other words, you owe little on your property - then this is wealth that can be leveraged to buy another asset.
Some sums will be needed to get an estimate as to how much money you will have to spend on a property as this will determine what kind of second property you can afford to buy. If the next property is to be a second home or a holiday home then you will need to know that you can cover the mortgage payments from your income, plus have sufficient cash to run the home you already have and pay all your other costs of living.
If you are remortgaging to buy a rental property, then you will have the income from rent to help pay the costs of another mortgage. This could require a significant amount of research as you need to ascertain what level of rent you could reasonably expect from the kind of property you are looking at.
Not all the rental income will be available to spend on mortgage repayments, however, as there are costs to factor in with a rental property. You may need estate or letting agents to manage the property for you and that can cost in the realm of 10 per cent of the rental income or even more depending on the agent and the services that they provide. Money will also need to be put aside for repairs, service charges if the property is a flat, money for emergencies and a sinking fund for major jobs such as replacing a boiler. If you have tenants and something has broken or stopped working there is no choice but to get it fixed. It is your responsibility to keep a property in good order.
Your credit history or other personal circumstances may also affect getting that remortgage, but having plenty of equity in the first property always helps.
How much equity is enough equity?
In remortgaging to buy another property, the amount of equity in the property you already own is an important factor. To be precise, the value of the equity you have is what the property is worth, less the amount that is still owing on the existing mortgage.
Mortgage lenders may want to quantify the amount you can borrow by putting it in terms of LTV - or a Loan to Value ratio. If LTV is mentioned, it is referring to the size of the current mortgage on your property expressed in the form of a percentage of its total value. While higher equity certainly makes remortgaging easier, some lenders can give more than 90 per cent LTV, taking into account other factors.
As an example, take a property that is valued at £500,000. If the mortgage is currently £200,000, then 200K divided by 500K is an LTV of 40 per cent, which means there is equity of £300,000 in the property. This equity could be put to use to buy an additional property. Potentially, you could borrow an amount in the vicinity of £475,000, which would cover the £300,000 still owing on the first property and generate another £275,000 to buy an additional property. Borrowing £475,000 would take the LTV on the first property to 95 per cent and some lenders may go up to this limit.
Not surprisingly, most lenders prefer a lower LTV, with 95 per cent being very much the upper limit. Other factors, such as the age of the applicant, credit history, and what the money will be spent on will be taken into account. A lender will probably want to assess the risk that may be involved in the loan and a lower LTV is generally more attractive because it means lower risk. Because of this, a mortgage that involves a higher LTV may incur higher fees.
Your duties to make the payments
If you remortgage to purchase another property, then, of course, the new mortgage will be larger than the previous one. It will be necessary to demonstrate that you are fully capable of meeting the payments on this larger mortgage. Lenders will want details of your income and they will want to understand how you intend to make the repayments.
Mortgage lenders have a variety of ways of assessing the incomes of loan applicants and deciding how much they can borrow without over-stretching themselves. Some lenders will have access to models or algorithms into which they can plug values regarding your situation to see exactly how much you can afford to replay on a larger remortgage.
In most circumstances, the loan applicant has a range of choices and it is important to make sure that you choose the right lender and product, reflecting your needs. This could ultimately have a significant effect on how much you can borrow, as some lenders are more conservative than others.
In assessing what you can afford, lenders will look at how much you earn and what your monthly outgoings are comprised of. Some lenders may only want to lend three or four times what you earn, whereas others may lend up to five times your income. Extra income such as bonuses may be taken into account. Lenders may take different views on how a bonus affects income, which will have an impact on the amount you can borrow.
An experienced mortgage broker can assist with organising your data to satisfy a lender in order to obtain the deal you want. Our advisors can look at your individual situation to see what solution will suit you best.
If you are self-employed, then remortgaging is always a little more tricky, but with expert advice and support, you should be able to do this without any trouble. Some lenders have changed the way they deal with small business people and offer special options for them. Our specialists can search for remortgaging deals that can accommodate your circumstances. In the past, contractors may have encountered difficulties in arranging remortgaging, but with expert support, it is possible to source mortgages for all kinds of contractors, including agency workers, fixed-term contractors and even those who have zero hours contracts.
Different lenders will have different requirements when setting up remortgages with contractors. Our brokers can look at the best solutions for your particular situation.
Even when you are on what is considered to be a low income, you may still be able to remortgage your property. Some lenders will want applicants to meet some kind of minimum income criteria, but others will not. A specialist mortgage broker will have the lender relationships necessary to focus on those with the relevant criteria.
Of course, some remortgaging applicants already have other loans, or balances to pay off on credit cards, but these responsibilities need not get in the way of remortgaging to buy another property. The one thing to take note of, however, is that unpaid debt may have some effect on the amount that you can borrow for the remortgage. When a lender looks at your remortgaging application, they will process your income against your outgoings and any regular amounts needed to repay any outstanding loans or debts. With the help of a trusted broker, itemising all these factors and presenting them in a clear and appropriate way to a prospective lender will be quite straightforward. The more organised you are, the easier it is for a lender to see that you are a responsible prospect for a remortgage who will deal with this additional responsibility accordingly.
Based upon your income, a lender may decide that you can borrow an amount with a certain repayment to be made each month. However, they may also add together all of your existing debt commitments and subtract this from your income and base the amount that can be borrowed on this revised figure. Reducing loans and credit debts may be worthwhile before embarking on remortgaging. One of our brokers will be happy to give you further advice in this regard.
Some applicants worry that working part-time may exclude them from remortgaging to buy another property. This should not be an issue, provided that you can demonstrate that meeting the payments will not be a problem. Identifying any other sources from which you derive income is also important, whether this is income from shares or other investments, regular overtime or even bonuses.
Even if you recently started working in a new job, you should still be able to remortgage, provided that your personal accounts are well organised and that you can demonstrate that making repayments is within your grasp. Of course when remortgaging to buy a rental property, then the income generated by the rental of the property will be taken into account as well. Assessments for remortgaging to buy rental property have become more complex and may include an evaluation of how much tax you will pay, but one of our advisers can assist with doing all the necessary calculations.
Whatever your situation, with a methodical and organised approach, a significant percentage of people can remortgage to buy a second property. Our expert mortgage brokers are here to help every step of the way.