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Remortgaging property to buy another

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INTRODUCTION

Can you remortgage to buy another house?

We are often asked the question, “Can I remortgage my house to buy another property?”.

The short answer is yes! Remortgaging your house to buy another property is a common way of raising money for people who are looking to invest in buy to let or to purchase a second home. In this article, we will discuss some of the considerations if you are thinking about remortgaging to buy a second home.

What should I think about if I want to remortgage my house to buy another?

Your options will depend on the purpose of the funds. There are many different circumstances where you can remortgage to buy a second property, such as:

Let to Buy

This is where you rent out your current home to tenants in order to buy another property.

Remortgage to invest in Buy to Let

Raising money on your current property to buy a different property to rent to tenants.

Remortgage to buy a holiday let

This is where you buy a property to rent to people on a short-term basis for short breaks or holidays.

Remortgage to buy a holiday home

Using the money raised to buy a second property that you intend to use in addition to your current home.

Remortgage to invest in commercial property

Raising money to buy a property that will be used by a business, such as a shop or office.

Remortgage of a commercial property

If you currently own a commercial property, it will be possible to refinance this in order to buy another property. For more information on this, take a look at the Commercial Mortgages section of our website.

For each of these circumstances, there are a number of factors that will impact how much you are able to borrow. In this article, we will talk about those factors, which include:

  • Equity
  • Affordability
  • Credit history
  • Property types
  • Personal circumstances
  • Other factors


How to remortgage a house to buy another

Equity

The first thing to consider if you want to remortgage to buy a second property is how much equity you currently have in your home. The level of equity you have is equal to the value of your property minus the balance of your existing mortgage and a remortgage is one way of accessing this.

One factor that determines how much a lender will be able to lend you is loan to value (LTV), which is the balance of the mortgage that is secured on your home, expressed as a percentage of the value of the property. If you are remortgaging to buy another house, there are currently lenders that will be able to lend up to 95% loan to value, depending on your circumstances.

Hypothetical Example

So, for example, your home is currently worth £500,000 and you have a mortgage of £200,000, your current loan to value is 40% and you have £300,000 of equity in your property. If you wanted to release this equity to buy another property, you could potentially borrow up to £475,000, which would provide you with £275,000 for the purchase and take your LTV to 95%.

Lenders are generally more comfortable with lower LTV loans and so you will have fewer options, and can expect to pay a higher rate, if you want a mortgage with a higher LTV.

The maximum LTV you can borrow also depends on your circumstances, such as your age and credit history, and the purpose for the loan. For example, the maximum LTV on a standard residential mortgage is 95%, whereas the maximum LTV for a Let to Buy or Buy to Let mortgage is 85% and holiday let mortgages are available up to 75% LTV.

Affordability

I want to remortgage to buy another property – how much can I borrow?

If you choose to do this, your new mortgage will be larger than your existing one. This means you will need to show a lender that you can afford the repayments on the larger loan.

Lenders will assess your income in different ways and, in order to understand how much money you will be able to raise by remortgaging to buy another property, it is important to be aware of your options.

Calculating affordability

Every lender will have a different method of calculating how much you can afford to borrow, often using sophisticated affordability models. Therefore, if you want to remortgage property to buy a second property you have a lot of choice and it is important to choose the right lender for your circumstances as this will make a big difference to how much you will be able to borrow.

Lenders will base affordability on your level of income and consider your outgoings. Some lenders will be able to lend up to a maximum of 6x your income, while others will take a more standard approach of lending up to 3x or 4x income.

Additionally, different lenders will take different approaches to additional sources of income, such as bonus or overtime. Some lenders are able to consider 100% of bonus, while others may take 50% and some lenders may not consider bonus payments at all.

A combination of these different approaches can make a big difference to how much you are able to borrow.

Hypothetical Example

Suppose you earn a basic salary of £35,000 and an annual bonus of £10,000. A lender that considers only 50% of your bonus and lends up to 4x income would be able to lend up to £160,000. A different lender might be able to consider 100% of your bonus and lend up to 5x income, which means it could lend a maximum of £225,000. Your circumstances haven’t changed, but the way that different lenders treat your income makes a big difference to how much you could borrow.

More information on affordability can be found in the ‘How much can I borrow on a mortgage?’ section on our website.

How to remortgage to buy a second property if you are self-employed

Nowadays there are many mortgage options for borrowers who are self-employed. Traditionally lenders have asked for 3 years’ worth of business accounts, but there are now many lenders that will make a decision based on just 1 years’ accounts and a couple of can consider less trading history than this if, for example, you are close to your year end, or if you were in the same line of work as an employee before you became self-employed.

Different lenders also have different way of assessing income. Many will use salary and dividends for company directors, but some may also consider profit that is retained within the business and this could make a significant difference to the outcome.

Hypothetical Example

You are a director of a Ltd company and a 50% shareholder of the business. The company makes £250,000 profit but you only draw a £10,000 salary plus £40,000 dividends to reduce your tax liability.

A lender would typically consider your income to be salary plus dividend, which would be £50,000 and so a lender that can lend to 5x income might be able to lend £250,000.

A specialist lender that is able to take into account profit that is retained in the business, would base its calculation on the £250,000 profit. Given that you are a 50% shareholder, your share of this is £125,000. Applying a standard 4x income calculation to this would mean that the lender could advance up to £500,000.

Given the number of options and the difference between lenders, it is a good idea to seek advice from a specialist advisor to help you make the best decision for your circumstances.

For more information take a look at the Self Employed Mortgages section of our website.

Can I remortgage to buy a second home if I am a contractor?

Lenders have really improved the way they deal with mortgage applications from contractors and, depending on your circumstances, there should be an option for you.

We work with specialist advisers who are able to source mortgages for people working on different types of contracts, including self-employed contractors, employed fixed term contractors, workers on zero hours contracts, agency workers and Construction Industry Scheme (CIS) contractors.

Again, different lenders will have different requirements. Some lenders will want a minimum period working as a contractor, whereas others will consider new contractors if they have previously been employed in the same industry in which they are contracting.

When it comes to lending to people working on fixed term contracts, some lenders will ask that the contract has been renewed at least once before they are able to lend, while others will want a minimum time remaining on the current contract.

Lending to contractors is generally based on the day rate you earn, and a typical calculation might look like this:

Hypothetical Example

Day rate = £200

£200 x 5 days (1 week) = £1,000

£1,000 x 46 weeks = £46,000

If your day rate is £200 a lender might then consider your annual income to be £46,000.  A lender will not multiply your weekly rate by 52 as it will allow a number of weeks for holidays and time between contracts.

If you are paid through the Construction Industry Scheme (CIS) it is worth noting that there are specialist mortgage options available to you, which allow you to use the gross income on your payslips rather than your business accounts or self-assessment. Take a look at the CIS section of our website for more information.

Take a look at the Contractor Mortgages section of our website for more information.

“Can I remortgage my house to buy another house if I have a low income?”

Yes, it is possible to remortgage property to buy another on a low income as long as you are able to demonstrate affordability. Some lenders will require borrowers to earn a minimum income, usually between £15,000 and £20,000, but there are many lenders that do not stipulate a minimum income for applicants.

"Can you remortgage to buy a second home if you have loans and credit cards?"

Yes, loans and credit cards will not necessarily stop you getting a mortgage. The thing to remember here is that any outstanding debt you have on unsecured credit may reduce the amount you are able to borrow. If you are remortgaging your house to buy another, your outgoings and credit commitments are taken into consideration by a lender when it calculates the maximum amount it could lend to you.

So, if you are able to reduce the balances on your unsecured debt before the mortgage goes through, you might be able to increase the amount of money you are able to raise on the mortgage.

Hypothetical Example

Assume that you earn £40,000 a year and have credit card and loan commitments that cost you £500 a month to service. A lender might subtract these existing commitments from your income as part of its affordability assessment. If that lender lends up to 4x income, you might therefore be able to borrow

£40,000 - £6,000 = £34,000 x 4 = £136,000

However, if you can afford to pay off your credit cards and loans, the lender would not subtract these commitments from your income and so the lender may be able to lend:

£40,000 x 5 = £200,000

This is a big difference, and so sometimes it is worth thinking about how reducing the balance on other credit commitments could impact how much you are able to borrow on your mortgage.

Can I remortgage my property to buy another if I work part-time?

This shouldn’t be a problem as long as you can demonstrate that you can afford the new mortgage.

Using other income sources for the application

If you are remortgaging to buy a new house you might want to use additional sources of income to show that you can afford the new loan. Some lenders are able to consider 100% of additional sources of income, such as regular bonus, overtime, second job or investment income. But other lenders may cap the level of additional income they accept at 75% or even 50%. Similarly, some lenders can consider any benefits you receive, such as child tax credits, working tax credits and child benefit to contribute towards the affordability calculation, while others will not.

Again, this is an area where criteria can vary from lender to lender so it’s best to speak to an advisor to get a better idea of what you should do.

Can I remortgage my house to buy another if I recently started a job?

Yes, there are lenders that will consider your application if you have recently started a new job. This is another area where criteria vary greatly from lender to lender. Some will ask for a minimum of 12 months’ employment history while others are happy with 6 months, some lenders will insist on you completing any probationary period and some lenders are happy to lend from your first day in a new role.

There are even lenders that will consider a future contract within 3 months of the start date of a new job. A specialist broker will have a good understanding or the options available and the best lenders for your circumstances.

Affordability on Buy to Let and Let to Buy

 

If you are remortgaging to buy a second property that you intend to rent out to tenants, or you intend to let your current property with a Let to Buy mortgage, affordability is based on the rental income the property can achieve, amongst other factors

It used to be the case, that calculating how much a lender would lend on a buy to let mortgage was based purely on rental income and deposit, but new regulations mean that lenders need to apply more complex affordability assessments that also consider what level of tax you pay.

On a Buy to Let mortgage, the rental income needs to cover at least 125% of a mortgage that is charged at 5.5% for basic rate taxpayers and for higher rate taxpayers this increases to 145% or even 160%. This is because of the increased tax burden that is being phased in for Buy to Let landlords in the coming years.

Hypothetical Example

A £200,000 Buy to Let mortgage with interest calculated at 5.5% would have monthly interest payments of £916. This means that the monthly rental income must be at least £1,146 if a lender is basing its calculation on 125% and it might need to be as high as £1,466 if a lender is using 160%.

In addition to minimum stress tests and tax changes, there are also new regulations that impact how lenders deal with applications from portfolio landlords who own 4 Buy to Let properties. On these applications, a lender needs to assess the landlord’s entire portfolio to calculate the total income and loan to value across all of their properties alongside any other income.

Needless to say, different lenders have different ways of applying the new rules and this makes the market more complicated, with some significant differences in the way that lenders will assess a loan. We work with expert Buy to Let advisors who understand all of the options and are on hand to guide you through the whole process.

"Can I remortgage to buy a second property if I have bad credit?"

A common question we receive is “can I remortgage to buy a second property if I have credit problems?”

And the answer is yes, remortgaging to buy a second home is possible, depending what type of credit problems you have had and how recently you have had them.

They will want to know what the issue is, how long ago it was, how much it was for and whether it has been repaid. Some lenders will also ask for an explanation about previous credit problems to help them to understand whether these were one-off events or are likely to happen again.

Maximum loan to values for borrowers with bad credit do tend to be lower than for customers with a clean credit history, but it is still possible to borrow up to 90% LTV if you have had credit problems, sometimes more than this if they are older.

Rates on bad credit mortgages are often higher than standard high street mortgages, but the market is competitive and there are a lot of competitive deals available for customers with different types of bad credit.

Late payments & arrears

A late payment is an isolated incident where a payment has been missed on an account, whereas arrears are when someone has fallen further behind. There are options for people with both and your options will depend on whether your late payments and arrears were on secured or unsecured credit and how recently they were registered. If you are looking for a high LTV mortgage from a high street lender, the lender might ask for a clean credit record in the last 12 months, but there are options from specialist lenders for customers with more recent late payments and arrears.

Defaults & CCJs

There are a growing number of lender who will consider borrowers with CCJs and Defaults.

Some lenders will require Defaults and CCJs to be satisfied, but other lenders can consider applications from customers even where the CCJ has not been satisfied, and there are lenders that are able to lend even if these have been registered in the last 6 months. The main things to consider are the date they were registered, the amount and how many you have to your name.

Debt Management Plans

There are mortgage lenders which take the view that a borrower who has entered a Debt Management Plan (DMP) has taken responsibility to address their financial situation and, as long as you have successfully maintained payments on the plan, there are options for you even if you are in an active DMP.

IVAs & Bankruptcy

There are now lenders that are able to lend up to 75% high LTVs to borrowers who customers who are currently in an IVA or have only been discharged from bankruptcy 1 year ago.

Mortgages for people with bad credit are often only available through brokers and so you will have many more options if you speak to an advisor than if you contact lenders directly. We work with specialist advisors who know what each lender will and will not consider and can source the best deals that are available to you.

Property types

A mortgage is a loan that is secured on property and so lenders have different criteria about the type of property they are able to lend on. Most lenders are fine with most standard construction terraced/semi/detached houses and purpose-built flats. Options may be more limited if you live in a studio flat, ex-council property or in a property that is made from unusual materials such as concrete or timber and so it is important that you choose a lender that is able to lend on your property.

For more on non-standard constriction property mortgages see our article here.

Personal circumstances


Can I remortgage my house to buy a second home at any age?

The minimum age for most lenders is 18. For older borrowers who are considering remortgaging to buy a second house, there are now a number of options. Lenders may stipulate a maximum age at application or a maximum age at the end of the mortgage term, but there are lenders that do not have a maximum age. The key is affordability again and, if you are looking to take a mortgage that will stretch into retirement, then you may need to demonstrate that you will be able to afford repayments based on your retirement income.

Will I be able to remortgage if I have a recent conviction?

If your conviction is spent under the Rehabilitation of Offenders Act 1974, you do not need to disclose any information about previous cautions or convictions and, a lender will not be able to take them into account. If your conviction is unspent, you may need to declare this. We work with specialist advisors who will be able to talk through the options available to you.

Other factors

Can I remortgage to buy another house if I have Early Repayment Charges to pay on my current mortgage?

You can, but if you have Early Repayment Charges on your current mortgage you will need to think about whether it is worth paying those charges or waiting until there is no longer a penalty for remortgaging. There may be times when you decide that it is worth paying an Early Repayment Charge and there will be times when it is not. A conversation with the advisors that we work with will help you to understand these considerations.

Raising money to buy another property with a secured loan

If you want to raise money to buy another property, you might find that a secured loan is a more suitable option for your circumstances than a remortgage. We work with specialist advisors who will be able to consider both options and tell you what is the best approach for you.

Can you remortgage to buy another property with cash?

Yes. If you are able to raise enough money from remortgaging your home to pay cash for a second property, then this is certainly possible. In fact, you might find that maximizing borrowing on your current mortgage is cheaper than a buy to let or second home mortgage.

If you cannot raise enough to buy the second property, you may need to get another mortgage. The type of mortgage you take on the second property depends on how you intend to use it. If you are planning to rent the property to tenants, then you should look into Buy to Let Mortgages, but there are also specialist products available if you intend to use the property as a second home or holiday lets.

Remortgaging if you are moving house

We speak to some customers who want to move to a new house but do not want to sell their existing property. This is certainly possible and there are lenders that offer Let to Buy mortgages, which enable borrowers to let their existing property to tenants and raise the funds to buy, or put down a deposit on, a new home. If this is something that interests you, get in touch to speak to a specialist Let to Buy mortgage advisor.

Can I remortgage an investment property?

Yes, remortgaging one property to release equity that is used to help buy another property is a common method that landlords use to grow their portfolio. Some Buy to Let lenders will lend up to a maximum loan to value of 85% and affordability is based on the level of rental income that can be achieved by the property.

Recent changes to the regulation of Buy to Let mortgages means that lenders have to apply a minimum stress test when they calculate how much to lend and the level of this stress test depends on whether you are a higher rate or basic rate taxpayer.

You can find more information on the Buy to Let remortgaging section of our website.

Can I remortgage to buy property abroad?

Yes, it is possible to remortgage to buy a holiday home abroad. Lenders are usually happy for funds to be used for this purpose and criteria is generally the same as remortgaging to buy property in the UK.

If you are thinking of remortgaging to buy property abroad you may be able to raise enough money on your existing home to purchase the property in cash, but if you need to raise further funding you might need a specialist mortgage.

Want to remortgage to buy abroad?

We work with specialist brokers who will be able to consider your options and advise you on the best way to buy a property abroad. Get in touch to speak with an advisor who can help you out.

Am I able to remortgage inherited property?

Remortgaging an inherited property is usually not a problem as long as probate has taken place and you have become the legal owner of the property. Lenders will usually insist that you have been the owner of the property for at least 6 to 12 months, but there are some lenders that will allow a remortgage sooner than 6 months.  All beneficiaries and owners of the property will need to be on the mortgage, unless you are buying their share of the property as part of the remortgage.

If you want to remortgage the house to buy another property and you intend to rent the inherited property to tenants, you will need a Buy to Let mortgage. Take a look at the Buy to Let Mortgages section of our website for more information.

If you are looking to remortgage your home to buy another property, send us an enquiry using the form below and one of the remortgage specialists will contact you ASAP.

If you need immediate assistance, get in touch now.

 

Updated: 31st July 2018
OnlineMortgageAdvisor 2018 ©

FCA disclaimer

The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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