How to remortgage to buy another property in the UK or abroad

The average return on a residential buy-to-let property in the UK is currently just over 5.60%, although regional variations mean some properties can attract up to 7% yield or more.

In comparison, the average easy-access savings account as of May 2024 is around 5% (check out our savings best buy tables). Despite higher savings rates, investment in a buy-to-let can provide a return while the underlying asset grows in value assuming house prices rise over the term that the property is held.

Some would-be landlords are using the value in their own home to fund their buy-to-let investment. Remortgaging allows them to free up cash locked in their property, which they can combine with other funds. But while the returns can be attractive, there are costs and risks to take into consideration before taking the plunge.

Can you remortgage to buy another property in the UK?

Yes, it is possible to remortgage your existing mortgage to raise funds to buy another property but it will depend on your affordability and the amount of equity you have in your current home.

Average house prices increased by around 33% in the decade between 2010 and 2020 - and although slowed, properties continue to increase in value with small drops from time to time. So if you have owned your home for a long period and seen its value soar, you may be looking to remortgage your house to buy a second house by releasing the equity that has built up over time. This could help fund a deposit for a buy-to-let mortgage or even buy a whole property in cash.

A remortgage may typically be used to move to a new mortgage rate, but you could also use it to release cash tied up in your home.

The process will usually involve further credit checks to ensure your credit status supports the buy-to-let mortgage and your residential mortgage. If you are looking to remortgage to buy another property that you intend to rent out then interest rates are usually higher for buy-to-let mortgages and you will have to meet lenders' qualifying criteria in terms of rental yields - lenders almost always insist that the potential rent is around 25% to 45% higher than the mortgage payment.

You will also have to consider the impact of early repayment charges if you are within the term of your current mortgage deal. A separate loan could be considered if you wish to retain the rates on your current mortgage deal and a specialist mortgage broker will be best placed to suggest the best borrowing solution in this circumstance.

Building a property empire may not be as easy as the Monopoly board game makes out, but you may be able to access a community chest close to home that could help you buy a second home or even a holiday home or commercial property.

How to buy a second property using equity in your existing property

The average UK property price as of the end of January 2024 was £282,000 according to the Nationwide House Price index, so you would need a lot of equity in your current home to release this much money, unless you can find a cheap property to buy outright.

Most second-home buyers would just release enough equity to cover a deposit for a mortgage on another property. You can’t use a residential mortgage on a rental property, so if you were buying a second home to become a landlord you would need a buy-to-let mortgage.

A typical minimum deposit on a buy-to-let mortgage is 25%, so based on the average property price, you would need to release over £70,000 from your home through a remortgage. This is an effective way of releasing equity to buy a second house but check that you can afford the new remortgage interest rate.

Your existing mortgage will increase in value as you are taking a bigger loan so you need to ensure you can still afford the repayments along with the new rate and whatever your buy-to-let mortgage costs as well as any property taxes and transaction fees.

It almost always pays to seek the advice of an independent mortgage adviser who can secure not only the best remortgage deal to help release the equity from your existing home but also the best buy-to-let mortgage for your second property. If you don’t already have a mortgage adviser that you trust then you may want to consider Habito*, an online mortgage specialist that has access to over 20,000 mortgage deals from more than 90 lenders. Check out our Habito review for more information.

Remortgaging to buy a second property abroad

You don’t just have to look in the UK for a second property. Some lenders will let you remortgage to buy a home abroad. Unless you are buying a property outright, you would need an overseas mortgage. Many UK lenders can help arrange this, but they may only cover countries where they have offices.

There are extra considerations when buying abroad as you need knowledge of the foreign property market so you are aware of the surroundings and possible rental yields if you rent it out. Many of the documents and legal terms may be in a different language so you will need a lawyer who can translate and ensure you understand what you are purchasing and any risks and potential issues.

There will also be different property taxes and charges depending on where you buy your home as well as the currency risks to consider. You need to consider the exchange rate when buying in a different currency and compare what your bank or other providers, such as MoneyCorp, will charge to transfer your funds. If you take out a mortgage in a local currency abroad there is also a risk that if the pound falls in value, the amount you pay in loan repayments will increase.

Remortgaging your property from residential to buy to let

The key to a successful buy-to-let portfolio is rental yield. This is the annual rent you receive as a proportion of how much the property costs to buy.

For example, if you purchased a property worth £200,000 and charged rent of £10,000 a year, your annual rental yield would be 5%.

This is a key factor in choosing where to purchase a buy-to-let as you want somewhere with decent rental returns. That may mean looking beyond where you live, but ensure it is somewhere you can travel to in case you need to conduct any checks or meet your tenants.

Remortgaging to a buy-to-let mortgage reduces your purchase cost as all you are technically funding is the deposit, while the rent you charge should cover the repayments. But the deposit is just one factor when you remortgage to fund a buy-to-let. You will also need to pay stamp duty to purchase a second home in the UK. Since April 2016, all second property buyers must pay an extra 3% on the existing stamp duty thresholds. That means, the average UK property of £282,000 would now have a stamp duty charge of £10,060 for a landlord.

There may also be mortgage fees as well as any costs for using a broker. There will also be fees if you are using a lettings agent to manage your property. As of 1st June 2019, lettings fees for tenants, such as for referencing and drawing up tenancy agreements is banned so you will need to think carefully about how you will fund these additional costs.

Many of the setup costs of buy-to-let can be claimed against your tax bill (remember rental income is taxable), such as agent fees and maintenance costs, but many of the perks are being scaled back. Up to April 2017, landlords could deduct mortgage interest costs from their property income before calculating their profits. This was known as mortgage interest relief and essentially reduced a landlord’s tax bill. But the government is scaling this back and landlords will instead receive a basic rate reduction from their income tax liability for their finance costs.

Remortgaging your property to buy a second home

Buying a second home will mean that you intend to remortgage to buy another residential property and not a rental property. You may want a second home to reduce your commute to work or simply get away for holiday breaks. Remortgaging to buy a second home will require extra affordability checks to ensure that you can manage the mortgage payments on your remortgage as well as any extra borrowing you take on to secure your second home.

If the funds that you raise through remortgaging are sufficient to buy your second home outright then you will only have to meet the affordability criteria to qualify for your main mortgage. However, should you require extra borrowing against your second home, your income will need to meet the criteria for your combined mortgage loan.

Remortgaging your home to buy a business

Banks are still pretty cautious about business lending and can impose strict criteria for small firms when trying to access finance. Alternatively, remortgaging your home to buy a business or set up your own firm could help release cash that you otherwise would have struggled to get. You would still need to meet the bank’s affordability criteria but the lender can’t tell you how to spend your money, so you could release much needed capital to make your dream idea a reality. There are some barriers though as banks can be cagey about lending to people who are self-employed so this may affect the rate or make it harder to get a remortgage approved in the first place.

A bank may be more willing to lend if you have a partner who is still in employment and can support the extra borrowing or if you continue to work to keep your income and start your venture as a sideline initially.

You also need to have a good business plan and strategy in place as you will need to pay the extra interest payments as soon as the remortgage is approved, while your actual idea may take time to start making money.

 

 

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