Can I remortgage to buy a second house?
Yes, you can. Buying a second property either as an investment on a buy-to-let basis or because you have a legitimate reason for a second home are both common reasons to refinance your mortgage. There’s no reason why the equity you have built up in your first home can’t be used to get you another.
What purchases are common as second purchases?
You will have to tell your mortgage advisor the reason for your second home. Not only will this enable them to select the right mortgage product for you, it will also be taken into account by lenders to determine your viability.
The following are the frequently seen reasons for a second property:
Becoming a landlord
An interest only buy-to-let mortgage is a standard way to start a property portfolio, a holiday let mortgage will enable you to buy a property with a plan for short-term lettings, and if you want to move to a new property but keep your original home and rent it out, the let to buy system enables you to alter your mortgage terms appropriately.
All of these three types of letting processes can be financed through a remortgage deal, either a full remortgage or a second charge on your primary property.
Buying a second home
You might need a smaller home in the city to avoid a daily commute, want to look at supporting retired parents or be interested in a family holiday home of your own. Buying a second home with an additional residential mortgage can be financed through a remortgage on your primary house.
Buying a commercial property for business use
If you are looking to invest in property for your company then a remortgage with that in mind will be considered by many lenders.
One mortgage, two, or three?
Unless the remortgage on your first property is going to be large enough to cover any outstanding mortgage and leave enough remaining to buy a second property in full, you are going to end up with two mortgages, with the equity released by the first property forming the deposit for the second.
Loan-to-value rates on your second mortgage are unlikely to be as large as for your first mortgage, so you will be looking to secure a deposit of at least 20% for the new property out of the equity in the first.
Your mortgages may also be of different types. If your second property is a buy-to-let, for example, then your remortgage on your family home will remain a repayment residential mortgage, while the second property will be purchased with an interest-only buy-to-let mortgage.
The options that will be presented are:
- One remortgage - If there is enough equity in your primary property to release funds to clear any existing mortgage balance and buy a second property in full, you will be left with one remortgage tied to your first property only.
- Two remortgages – This is the more usual situation, where there is enough equity in the primary property to replace the first mortgage and release funds enough to serve as a sizeable deposit on a second. You will be left with a larger mortgage on your first property and a second mortgage on your new property.
- Three remortgages – In these corner cases, you would apply for a second charge remortgage (sometimes called a secured loan) on the primary property, leaving the original mortgage in place. The money released in this way would then be used as the deposit for the third mortgage used to buy the second property.
There is no need for all your mortgages to be held by the same lender. At The Mortgage Hut we will work with you to get the best deal.
How do I remortgage one house to buy another?
Mortgages are all about the numbers. The equity in your property is going to be a significant factor in your remortgage application, as are your income, credit status and affordability. Let’s look at those in detail:
Your current home equity
Equity is calculated by taking the current value of your property and then taking away the total value of any loans secured on it (the current mortgage). If you had a property with a market value of £310,000 and the balance on your mortgage stands at £208,400 then your equity would be £101,600.
Equity is typically represented as a percentage. In this case, your equity percentage would be 32.77%.
When you look to remortgage a property, you have two options – to either get a full remortgage that replaces your original mortgage, or a second charge mortgage which is a separate loan secured on the home.
In all cases, the total loan-to-value (LTV) you can leverage against your home will be between 80% and 95% (depending on the lender’s terms).
Using the figures from the example above:
A full remortgage to 90% LTV would release total funds of £279,000. You would have to pay back the original mortgage in full (£208,400), leaving cash of £70,600 which could then be used (once all associated fees have been paid) as a sizeable deposit on a second property.
A second charge mortgage with a lender willing to stretch to 95% LTV total, would provide you with a loan of 27.77% of your house value (your equity, with 5% remaining in the property to mean a combined LTV across both mortgages of 95%). This is £86,087. A second charge would not require the repayment of the original mortgage and would save on any early repayment charge you are liable for.
Avoiding early repayment fees doesn’t mean a second charge is always the right choice – factors including your deal terms, interest rate and affordability are all going to be relevant when looking for your remortgage. To get a no-obligation quote or advice, why not contact us?
The greater the LTV of your loan, the less flexible your options will be and the greater the interest rate you can expect.
The size of your mortgage will be determined by your income. Lenders typically allow for a mortgage of 4x your income, while others will be able to look at 5x and a few stretch to 6x.
Your income doesn’t just mean your salary, though. Mortgage providers are willing to look at your entire regular annual income, including everything from reliable bonuses and dividends through to tax credits, maintenance payments and child benefit.
You can often squeeze a considerable increase on your maximum loan value through proper detailing of your income. It is important that you note the source of each part of your income, as mortgage lenders will evaluate each source differently – for example, many lenders will only consider 50% of annual bonuses.
To look at the maximum size of your potential mortgage, as well as evaluating stamp duty, use our mortgage calculator.
If you have a poor credit history it will impact your mortgage offers. At The Mortgage Hut we work with a range of specialist lenders who work with clients with bad credit and we will be able to help. For more information, read our range of articles on dealing with poor credit here.
Remember, time will help improve your credit rating, so be patient – three months can make a lot of difference.
Your affordability is determined by looking at your current income and deducting your outgoings. This is especially important when looking at remortgages and second mortgages, as you will be placing a significant extra financial responsibility on top of your current situation.
Mortgage lenders must be responsible and will be keen to see strong affordability before being willing to increase the size of any existing mortgage or evaluating you for a second. Simply put, if you can’t show that you can afford the additional expense, your application will be rejected.
With a wide choice of expert lenders, The Mortgage Hut can find you the deal that fits, and we will discuss your affordability with your before making our recommendations.
Keeping the cost of remortgaging down – expert advice from The Mortgage Hut
Remortgaging can come at a price - there are the agent and legal fees to consider, but most importantly if you are repaying an existing mortgage as part of your refinancing plan, you are likely to be subject to early repayment charges.
It is important to factor these costs into your planning – and our remortgage advisors can help.
With decades of experience, we can evaluate your costs in detail and find the deals that minimise these and keep costs low should you want to consider a second round of remortgaging later in the contract.
To get started, why not contact us to let us know your plans? Simply fill in our quick contact form or pick up the phone for a no-obligation chat!