It’s certainly possible to borrow money against your house to buy another property. It’s a route some people take if they want to buy, for example:
So, how does it work? What are the pros and cons? And is there anything that might stop you borrowing against your home? Let’s take a look.
When you borrow money against your home, you’re essentially releasing the money you’ve got tied up in the property (also called your “equity” or “capital”). You can then use that money for something else – in this case, buying a second property.
That means, if you want to borrow money in this way, the first step is to check how much equity you have in the property. There’s a simple way to work this out: just subtract the amount you still owe on your mortgage from the value of your home.
Example: Your home is valued at £300,000, and you have £200,000 left to pay back on your mortgage loan. £300,000 - £200,000 = £100,000. So your equity is £100,000. In other words, you own a £100,000 portion of your home, and your lender owns the other £200,000. (Another way of putting it is to say that you have a loan to value ratio (LTV) of 66%, because the lender owns two-thirds of the value of your home.)
In the above example, by borrowing money against your house you could raise up to £100,000 to put towards buying a new property.
One thing that will stop you borrowing money against your house is being in “negative equity.” That’s where the amount you owe on your mortgage loan is greater than the value of your property. You can end up with negative equity if house prices fall after you buy your home.
Example: Your home was valued at £320,000 when you bought it, but its value has since fallen to £280,000. You have £283,000 owing on your mortgage. £280,000 - £283,000 = -£3,000. So you have negative equity of -£3,000.
You’ll need to pay off more of your mortgage or wait for house prices to rise again to get out of negative equity. And then you can have another look at borrowing money against your home.
Now, if you’re happy with the amount of equity you own in your property, you have a couple of different options.
Remortgaging is where you replace your existing mortgage with a new one, either with your current lender or a different lender. Many people remortgage to get a better mortgage deal (with lower interest rates, for example), but you can also remortgage to borrow money against your home.
Example: You owe £200,000 on your mortgage for your £300,000 house, and you want to release £70,000 of equity from the £100,000 that you have tied up in the property. To do that, you remortgage your home for £270,000. So, your mortgage loan is now larger, but you walk away with £70,000 to invest in a new property.
To remortgage, you would need to:
Another way to borrow money against your home is to take out a “second charge mortgage.” This is a second mortgage that’s completely separate from your existing mortgage.
Like your original mortgage, a second charge mortgage is a type of loan that’s secured against your property. Basically, that means the lender can sell your property to cover your debt if you stop paying the mortgage back. But a second charge mortgage is only secured against your equity in the property, rather than the whole property.
Example: You have an existing mortgage of £200,000 for your £300,000 house, leaving you £100,000 of equity. To free up £70,000 of that equity, you can take out a second charge mortgage for £70,000. So, you then have two mortgages – one for £200,000 and one for £70,000 – and £70,000 cash to invest in a new property. (Plus, you still have £30,000 equity in your house).
To take out a second charge mortgage, you would need to:
Which option is right for you? Remortgaging or getting a second charge mortgage? Here are some things to consider:
Once you’ve arranged your remortgage (or second charge mortgage), you can then use the money you’ve freed up from your home as a deposit for your new property – or to buy it with cash if you’ve raised enough money.
If you’re planning on investing in a buy-to-let property and want a mortgage, you’ll need to apply for a specific buy-to-let mortgage. These are often interest-only. In other words, you’ll only pay back the interest on your loan each month until the end of the mortgage term. When the term ends, you then pay back the entire loan amount.
Here are a couple of other things to bear in mind when you’re buying a second property:
You’ll usually need a bigger deposit to take out a mortgage on a second property. That’s because it’s considered a higher risk for the lender when you have two mortgages to keep up with.
Most lenders will only offer you a second mortgage of up to 80% LTV (loan to value ratio). In other words, they’ll lend you up to 80% of the value of the property. So you’ll need a 20% deposit.
For a buy-to-let mortgage, the deposit is typically higher again. Often, lenders will want a 25% deposit, but it could be up to 40%.
When you buy a second property, you automatically pay an extra 3% on top of the usual Stamp Duty Land Tax (SDLT).
Example: If you buy a £250,000 house and that’s the only property you’ll own, you’d usually have to pay 2% stamp duty on £125,000 of the property’s value (unless you’re a first-time buyer). So your stamp duty would be £2,500.
If that £250,000 house is going to be your second home or a buy-to-let property, you’ll have to pay 2% on the first £125,000 of the property’s value (£3,750), then 3% on the next £125,000 (£6,250 ). So your stamp duty will be £10,000.
If you’re thinking about borrowing against your home, it’s always best to get some independent financial advice first. Here are some quickfire pros and cons to mull over:
Let’s finish up with some FAQs about borrowing against your house to buy another property.
Depending on your circumstances, it may still be possible, but you might have a smaller number of lenders to choose from. A mortgage broker, like Habito, can help you find a lender who specialises in mortgages for people who’ve had credit issues in the past.
No, there are only a few reasons you’re allowed to remortgage your Help to Buy home to borrow money, and that doesn’t include buying another property. Find out more about Help to Buy and second homes.
Yes, it might be possible to take out a mortgage on a property you own outright (also called an “unencumbered” property) to buy a new house. As with any mortgage, potential lenders will consider your financial situation and why you want the loan before they approve it.
In many cases, yes, lenders will allow you to remortgage your home to help you buy another property abroad. If you’re not able to buy the new property outright, you’ll need a specialist overseas mortgage. And bear in mind that there will be different property taxes and charges depending on which country the new property is in.
If you’re thinking about remortgaging your home to raise money for a second property, chat with one of our expert mortgage advisers here at Habito. We’ll search the whole market (that’s over 20,000 mortgages) to find a remortgage deal that’s right for you.
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