Remortgage to Buy Another Property

How Does Remortgaging to Buy Another Property Work?

The principle is straightforward. If your home has increased in value since you bought it, or you have paid down a significant portion of your mortgage, you will have built up equity. Remortgaging allows you to access some of that equity by taking out a new, larger mortgage on your existing property.

For example, if your home is worth £400,000 and you owe £200,000, you have £200,000 in equity. If you remortgage to 80% loan-to-value (LTV), you could borrow up to £320,000, releasing £120,000 in cash that you could use towards purchasing another property.

The released funds can be used in several ways:

• As a deposit — putting down a deposit on a second property and taking out a separate mortgage for the balance
• Outright purchase — if you have sufficient equity, you could buy a cheaper property outright without needing a second mortgage
• Auction purchases — having cash available puts you in a strong position at property auctions where quick completion is required
• Bridging finance deposit — using released equity as security for short-term bridging finance

It is important to understand that when you remortgage to release equity, you are increasing the debt secured against your home. Your monthly payments will rise, and you need to be confident you can afford the higher repayments. Lenders will carry out thorough affordability assessments to ensure you can manage the increased commitment.

You should also be aware that if the released funds are used to purchase a buy-to-let or additional residential property, different tax rules and stamp duty rates will apply compared to buying your first or only home.

Types of Property You Can Buy

The equity released from your remortgage can be used to purchase a wide range of property types. Each comes with its own considerations and potential challenges.

Buy-to-let investment property: This is one of the most common reasons homeowners remortgage to buy another property. You purchase a property with the intention of renting it out to tenants, generating a monthly income. The rental income can help cover the mortgage payments on either the investment property or your main home. However, buy-to-let comes with significant responsibilities including landlord obligations, maintenance costs, potential void periods and changing tax rules.

Holiday let or second home: Some homeowners release equity to purchase a holiday home for personal use or as a holiday let business. Holiday lets can generate strong seasonal income, particularly in popular tourist areas. However, they also come with higher stamp duty rates and specific tax treatment.

Property for a family member: You might want to help a child, parent or sibling by purchasing a property for them to live in. While this is a generous gesture, it has implications for stamp duty (you will pay the higher rate on additional properties) and potentially for inheritance tax and capital gains tax.

Commercial property: Some homeowners use released equity to invest in commercial premises, either for their own business or as a commercial investment. This is a more specialist area and typically requires different financing arrangements.

Property to renovate: Buying a property below market value, renovating it, and selling it for a profit is a strategy some homeowners pursue using released equity. While potentially lucrative, it carries significant financial risk and requires careful planning.

Whatever type of property you are considering, it is essential to seek professional advice on the financial, tax and legal implications before committing.

Lender Criteria and Affordability

When you apply to remortgage with the intention of buying another property, lenders will assess your application carefully. They need to be satisfied that you can afford the increased mortgage payments on your existing home and, if applicable, any mortgage on the new property.

Income and affordability: Lenders will look at your total income from all sources, including employment, self-employment, rental income (if you already have investment properties), and any other regular income. They will then assess your total outgoings, including your increased mortgage payments, existing debts, living costs and any financial commitments related to the new property.

Loan-to-value ratio: Most lenders will allow you to remortgage up to 85-90% LTV on a residential property, though the best rates are typically available at lower LTV bands. If you are remortgaging specifically to raise capital, some lenders may apply stricter LTV limits, particularly if the funds are for investment purposes.

Credit history: A clean credit history will give you access to the widest range of deals and the most competitive rates. If you have any adverse credit, specialist lenders may still be able to help, though rates will typically be higher.

Purpose of funds: Lenders will ask what the released equity is for. While most are comfortable with property purchase as a reason, some may have specific policies around investment property purchases. Being upfront about your plans is essential, as misrepresenting the purpose of funds can constitute mortgage fraud.

Stress testing: Under Financial Conduct Authority (FCA) guidelines, lenders must stress test your ability to afford mortgage payments at a higher interest rate. This ensures you could still manage your repayments if rates were to rise significantly.

A whole-of-market mortgage adviser can help you understand which lenders are most likely to approve your application and which deals offer the best value based on your specific circumstances and goals.

Tax Implications You Need to Know

Buying an additional property in the UK has significant tax implications that you need to understand before proceeding. Getting professional tax advice is strongly recommended.

Stamp Duty Land Tax (SDLT): If you already own a property and are buying an additional one, you will pay a higher rate of stamp duty. The surcharge for additional properties in England and Northern Ireland is currently an extra 5% on top of the standard rates. In Scotland, the Additional Dwelling Supplement (ADS) applies, and in Wales, the higher rate of Land Transaction Tax (LTT) applies. These additional costs can be substantial and need to be factored into your budget from the outset.

Capital Gains Tax (CGT): When you sell a property that is not your main residence, you may be liable for capital gains tax on any profit you make. The rates for residential property are higher than for other assets, and the annual tax-free allowance has been significantly reduced in recent years.

Income Tax on rental income: If you rent out the additional property, the rental income is taxable. Since April 2020, landlords can no longer deduct mortgage interest from rental income before calculating tax. Instead, you receive a tax credit at the basic rate of income tax. This change has particularly affected higher-rate taxpayers.

Inheritance Tax: Owning additional property increases the value of your estate, which could increase the inheritance tax liability for your heirs. There are various strategies to mitigate this, but professional advice is essential.

Council Tax: You will be liable for council tax on any additional property you own, even if it is unoccupied. Some councils apply premium rates for empty properties or second homes.

Tax rules are complex and change regularly. It is vital to consult a qualified tax adviser or accountant before making any decisions about purchasing additional property.

The Step-by-Step Process

If you have decided to remortgage your home to fund the purchase of another property, here is the typical process you can expect to follow:

1. Assess your equity and affordability. Start by getting a realistic picture of how much equity you have in your current property and how much you can afford to borrow. Use online calculators for initial estimates, but speak with a mortgage adviser for accurate figures based on current lender criteria.

2. Get professional advice. Before committing to anything, speak with a mortgage adviser, a tax adviser, and ideally a solicitor. They can help you understand the full financial implications and ensure you are making an informed decision.

3. Research the property market. Whether you are buying for investment, personal use, or to help a family member, thorough research into the local property market is essential. Understand property values, rental yields (if applicable), demand in the area, and any local factors that could affect your investment.

4. Apply for your remortgage. With your adviser's help, submit your remortgage application. You will need to provide comprehensive documentation including proof of income, bank statements, details of your existing mortgage, and your plans for the released equity.

5. Property search and offer. While your remortgage is being processed, you can begin searching for the property you want to buy. Once you find a suitable property, you can make an offer, making it clear that your funding is in place or in progress.

6. Arrange financing for the new property. If you need a mortgage on the new property as well, your adviser can help you arrange this alongside your remortgage. For buy-to-let properties, you will need a specific buy-to-let mortgage, which has different criteria from residential mortgages.

7. Completion. Once your remortgage completes and funds are released, you can proceed with purchasing the new property. Your solicitor will handle the legal work for both transactions.

The timeline for this process varies, but you should allow at least two to three months from initial enquiry to having funds available, and potentially longer if the property purchase itself takes time to complete.

Risks and Considerations

Remortgaging to buy another property can be a rewarding strategy, but it is not without risks. Understanding these risks before you proceed is crucial to making a sound financial decision.

Increased debt: You are increasing the mortgage on your primary home. If your financial circumstances change, for example through redundancy, illness, or a relationship breakdown, you will have larger monthly payments to meet. Your home is at risk if you cannot keep up with repayments.

Property market fluctuations: Property values can go down as well as up. If the value of your additional property falls, you could end up in negative equity on that property, particularly if you have borrowed heavily to purchase it.

Interest rate rises: If you are on a variable rate or when your fixed rate ends, rising interest rates could significantly increase your mortgage payments on both properties. Make sure you have considered how you would cope if rates were to rise substantially.

Void periods and tenant issues: If you are buying to let, there may be periods when the property is empty and generating no income. You need a financial buffer to cover mortgage payments, maintenance costs and other expenses during these periods. Problem tenants can also create significant stress and expense.

Maintenance and management costs: Owning a second property means double the maintenance responsibilities. Boiler breakdowns, roof repairs, and general upkeep all cost money. If the property is some distance away, you may also need to factor in the cost of a property management company.

Regulatory changes: The government regularly reviews the rules around property ownership, taxation and landlord responsibilities. Changes to tax relief, licensing requirements, energy performance standards or tenant protections could all affect the financial viability of owning additional property.

Despite these risks, many homeowners successfully build property portfolios by using equity in their existing homes. The key is thorough research, professional advice, and careful financial planning to ensure you are prepared for all eventualities.