It seems like property investment is the next best business move across the UK. Yet, a mortgage is a huge responsibility that most people don’t dream of owning a day past their last repayment.
You may be wondering why homeowners suddenly release their houses after years of paying interest. In this article, we’ll guide you through the basics of Remortgage and help you decide if this may be the best path for you.
What are the pros and cons of equity release?
Equity release can be beneficial later in life, but it’s important to be aware of the risks. Before making a decision, take your time and weigh your choices.
Lifetime mortgages and home reversion plans are the two options. They vary in functionality, so do your homework to find out which one is right for you or contact us to discuss your options further if you need help.
Can I remortgage to buy another house?
Yes. Releasing equity, or remortgaging to release equity or raise capital, is a strategic way to gain funds for a second property.
What you should consider?
The type and structure of your prospective property will influence your lender’s decision to offer you a mortgage. You may be interested in a:
- Buy to let mortgage, where you rent out your second property.
- Let to buy property where you remortgage your current home into a buy to let mortgage and rent it out whilst raising money for a deposit for a new residential property you wish to live in.
- A Holiday Let, you rent to temporary visitors for their holidays.
- A holiday or second home that you use on your personal time or during vacations.
- Business property that you use for commercial services.
Generally, lenders consider brick houses as more solid investments than other ‘untraditional’ kinds. Untraditional kinds of construction types are more difficult to mortgage.
No fear. Our mortgage saving experts can help you find lenders willing to take up your plan for a wooden or metal-frame home.
Your employment details and personal finances affect which remortgage deal you may qualify for. Here’s an idea of what our mortgage advisers will consider:
If you’re looking to borrow more money, you will need to prove that you can afford it. Lenders do not favour employed over self-employed, but they do require you to be self employed for a minimum period of time or even employed for a minimum period of time.
However, our specialist mortgage brokers would like to handle your case. They have prior experience with people in similar circumstances and take you through the right channels and explain everything you need to do or who to use and where we can go to get your mortgage.
Income and affordability
Conventional jobs offer a permanent contract and scheduled pay with payslips. whereas solo business people hardly ever collect the same profits every month that’s why lenders need you to prove your income for an entire year and prove their income from the Inland Revenue in the form of tax Computations (also known as SA302s) and corresponding Tax year Overviews.
Wherever you fit, you’ll need to show your lenders that you can cover regular mortgage payments over the term of the mortgage.
If you don’t meet the criteria, a low-income lender could be of your assistance. They’ll allow you to include assets, a second job, and other supplements to increase the amount you can borrow such as benefits like child benefit, Universal Credit but not all lenders accept these forms of income but we know which ones do.
Affordability on buy to let and let to buy
The amount of mortgage you can borrow on a Buy to Let or Let to buy will be determined on a few factors such as how much ren you get, what tax bank you are and what interest rate you are taking, for example, you will always be able to borrow more money if you take a 5 year fixed rate in comparison to any other rate because the stress test assessment is less strict because you know what your payments will be for the next 5 years and nothing in the financial markets will affect your payments.
Bad credit, loans and credit cards
Credit card debt and bad credit history warn mortgage lenders that you may not repay your loan diligently. While there may be a few lenders willing to assess your application, it’s best to come with a clean slate.
A word with one of our advisers could steer you in the right direction.
How much equity you might need.
Your level of equity is the difference between the value of your property and the current balance of your mortgage.
Your mortgage advisor will convert this difference to calculate your loan-to-value (LTV) ratio. The lower your LTV, the greater your chances of remortgage and the lower the interest rate.
On the contrary, a homeowner with a high Loan To Value can expect to pay a more inflated interest rate.
Your credit history and property type also affect mortgage deals. Holiday lets, for example, offer lower LTV ratios than a regular buy to let mortgage due to the heightened income but irregularity of rental income.
What are the most common reasons for buying a second property?
Many people want to buy a buy to let property to create an income for themselves or they may want to see capital growth over a long period of time so when they come to retire, they have a property which has increased their value therefore a larger sum to retire with.
The following are the frequently seen reasons for a second or Buy to let property:
Becoming a landlord
Your first buy to let mortgage will pave the way to developing a successful investment portfolio. Interest-only loans allow you to pay reasonable amounts of money on your mortgage until its term ends. All you do is pay interest on the mortgage so you are not actually paying the mortgage off but because the payments are lower than a repayment mortgage you may earn income every month.
Even short-term ventures like a holiday home afford you the freedom of earning extra income during peak tourism months.
Buying a second home
You could remortgage your house to buy another – perhaps smaller – one near the countryside or in another city. It could be for a change in lifestyle, a new job, unexpected commitments, or merely a holiday.
Whichever case, a second home grants you the freedom to dictate your next move.
Buying a commercial property for business use
You could buy a commercial premise to work from yourself or maybe to rent to someone who wishes to run a business from their such as a shop. You will need a commercial mortgage to do this.
Is it worth remortgaging to purchase a Buy to Let?
Remortgaging to purchase a buy to let is a great way to do it because it is very cheap to borrow money this way so as long as you are prepared to pay a higher monthly payment on your residential mortgage for a few years then you should be fine. In the future if the value of your buy to let property increases then you may be able to transfer that part of your mortgage over to the buy to let and not have that part of your mortgage on your residential property anymore.
A buy to let could increase your income but be aware that your expenses will increase also, such as buildings insurance for the property plus letting agents’ fees if you use one or finders fees or advertising costs or even rental voids if you do not have tenants in your property. Don’t forget if you do not have anyone renting your property you will have to pay the mortgage payments and council tax also.
How to buy a second property using equity
How much equity do you have?
If you opt to change lenders for your remortgage, you’ll need to carry out a valuation process.
Typically, you can estimate the value of your property based on that of other houses in your residential area.
However, it’s better to have a mortgage adviser or estate agent work out the details for you rather than guess. We can help you with this if you like as it will not take long to find out.
You can contact your mortgage lender to get your exact mortgage balance. Once you subtract the balance from your home’s worth, you’ll know how much equity you have left. You must note, though:
Are you an ‘older’ borrower or retired?
Some remortgaging terms have age limits i.e., 70 or 75 but some allow you to take a mortgage up to the age of 95 and some specialist mortgage also known as lifetime mortgages, Equity Release or Retirement Interest Only Mortgages have no upper age limit. Older borrowers may have more difficulty in repaying loans due to their income being lower into retirement, so certain providers set strict policies.
Your retirement income might kick in later than usual, or it may not be enough to cover your payments.
For example, if you are over 60, your lender may need you to pay off your mortgages when you hit 70.
What type of mortgage do you need?
Your mortgage must match your property type. For instance, you won’t qualify for a residential loan if you hope to have a commercial office. Landlords would need to apply for a buy to let mortgage. If you buy a shop, you will need a commercial mortgage. There are many different types of mortgages for many different types of property.
How much will stamp duty cost?
All buy to let mortgage applicants must pay stamp duty to own another property in the UK.
By law, all second property owners must pay an additional 3% stamp duty on all land tax (SDLT) thresholds. The values vary based on whether you wish to purchase a residential property or a house for rent and what laws are governing the country regarding stamp duty land tax at the time.
How do I buy a second property with no deposit?
The simple answer is: you cannot buy a property these days without a deposit. If you are buying a second property to live in the minimum deposit you will need is 5% but if you are purchasing a buy to let property (i.e., a property to rent out) you will need a 20% deposit minimum. You may have the option to raise equity or capital from your existing property to raise the deposit for the purchase of the new property. Our experts will be happy to help you see if you are able to do this.
Why would I want to buy a second property?
The benefits are exhaustive:
Long-term property investment
Buy to let properties can start a chain of long-term investments for your future. These days property investment is a long-term gain not short term so capital growth is most likely over the longer term
Your rental income will pay your mortgage payments and potentially give you a passive income.
Property is no longer a short-term profit. It is very hard to find properties to potentially make a short-term profit on. The types of property we mean are buying a property to renovate and then selling. The problem is many people are trying to do the same thing so it is very hard to do this, but it can be done so you will have to look hard.
The tourist season is an excellent time to do business with a holiday home. You could offer visitors and tourists temporary accommodation at your holiday let.
Buying your dream home
You could put your deposit towards your dream home and mortgage the rest. Again, your income must be high enough to warrant you borrowing the amount of mortgage you need to buy it.
Divorce and separation
You and your separated party may share ownership of certain assets. The two of you may want to arrange an agreement for a property transfer.
You may agree between the two of you that one party may be able to borrow enough money to pay off your current mortgage and raise enough capital to pay off the ex-partner.
The first thing you should do is contact your existing mortgage company to see if you have any Early repayment Charges and if you have then you need to apply to them for extra money to pay off your ex. You will then need to get a solicitor to arrange a “Transfer of Equity”. These are quite simple in the process and normally only cost a few hundred pounds with your solicitor. Once the Transfer of equity is done the property and mortgage is all transferred into one person’s name, and they then have sole ownership of the property.
You may want to enjoy a change of scenery and escape to your holiday home on days away from work.
What if I have a deposit to contribute?
Typically, lenders require at least a 20% deposit when buying a buy to let property but 25% would be much better, give you cheaper rates and give you more lenders who will assess your application therefore give you more choice.
If you are buying a property to live in, then you will need at least a 5% deposit.
Using other income sources for the application
When applying for a remortgage, you may use other sources of income to boost your affordability. Your options may include:
- Scheduled overtime on your primary occupation.
- Regular salary increments or bonus payments.
- Additional part-time jobs.
- Benefits such as Child benefit or Universal Credit.
- Rental income from profit declared to the Inland Revenue for buy to let properties owned.
Nevertheless, some lenders only consider a percentage from these sources. It would be best if you considered seeking mortgage advice on suitable loan providers for your situation.
Can you remortgage to buy another property with cash?
Yes, you can raise capital on any property you currently own (subject to T&Cs) for a deposit on a new property or to pay cash for one. Please remember if you need a mortgage to finance the purchase of a property you will not be classed as a cash buyer because you are having to raise finance to get the money to buy the property.
The ONLY time you are classed as a cash buyer is when you have the cash sitting in a bank or savings account and are not reliant on the sale of an asset or financing to buy the property.
With a clean track record (low debts, good credit score), it could cost you less to increase your current mortgage balance than to issue an additional one.
Bear in mind other property purchasing costs
Purchasing a separate property can come with various costs. Stamp duty, solicitors’ fees, mortgage arrangement fees are to name a few.
You should also consider funds for the following expenses:
- Valuation fees – to assess the value of the property.
- Mortgage advisor fees – to pay for contacting a suitable lender – not all brokers charge a fee.
- Letting agent charges – to include the cost of drafting a tenancy agreement.
- Early Repayment Charges – to cover your current mortgage, if it’s not at the end of its term or initial discounted, tracker or fixed rate.
Luckily, landlords can still claim to buy to let maintenance fees from their tax bill. This can drastically reduce the burden of costs for some homeowners.
Keeping the cost of remortgaging down – get professional advice from Mortgage Saving Experts
Getting a mortgage on a property whether it be residential, buy to let or equity release can be intimidating if you tackle it alone. We’re here to lighten the load.
At Mortgage Savings Expert, we specialize in finding you the best deals from our trusted and experienced mortgage advisers. Our experts can help cut the expenses of your remortgage so you can focus on its benefits.