Remortgaging your home to fund the purchase of another property is a way many people fulfil their ambition of investing in a buy-to-let or a second home. There’s lots to think about when making this move, so Think Plutus has created this article to walk you through all the considerations for remortgaging to buy another property. If, at any time, you feel you need to speak to an adviser, the experts at Think Plutus are just a phone call away.
What are the options?
The options available to you will depend largely on what you plan to use the funds for. The scenarios in which a person might remortgage to buy a second property include:
- Investing in a buy-to-let – this is where you’ll be raising money from your current property to buy another one which you will subsequently let to tenants.
- Let-to-buy – bring tenants in to your current home in order to buy a new home for yourself.
- Holiday lets – this is a type of property that you rent on a short-term basis to people needing accommodation for their holidays.
- Second home – the money raised from remortgaging could go towards a buying a second home like a holiday home.
- Investment in commercial property – the money you raise will buy a property that will be let to a business, such as a shop.
- Remortgaging commercial property – maybe you already own a commercial property which you can refinance to buy another property. This involves commercial mortgages, which are a little different to residential ones.
What should I be thinking about if I’m remortgaging to buy another property?
No matter your plans, there will be a number of important factors that will determine the amount you are offered for your mortgage. The factors you need to be thinking about include:
- Credit history
- Personal circumstances
- Types of property
- And more…
How does remortgaging to buy another property work?
If you plan to remortgage to buy another property, the very first thing to think about is the amount of equity you have in your current home.
How much equity will I need to remortgage to buy another property?
You calculate the amount of equity you have by taking the value of your property and subtracting the remaining balance of your mortgage. A remortgage can enable you to access this equity.
One fundamental factor that mortgage lenders will use to assess how much they can lend is loan to value (LTV). This refers to the balance of the mortgage currently secured against your home, and it is presented as a percentage of the property’s overall value. When remortgaging to buy another property, Think Plutus can help you find lenders that will offer up to 95% LTV, depending on your equity, affordability and creditworthiness.
Let’s say your home’s current value is £400,000 and you have an outstanding mortgage of £100,000. Your LTV would be 25% and the equity in your property amounts to £300,000. If you wished to release this equity in order to purchase another property, the amount you could borrow could be up to £380,000, leaving you with £280,000 for the property purchase with an LTV of 95%.
We find that lenders are usually happier with a lower LTV loan. If you want a remortgage with a higher LTV, you will have fewer options available and should expect to pay a higher rate.
The maximum LTV available to you will also depend on your circumstances. Factors like your credit history, your age, and the purpose of the loan will all have an impact. For example, with a standard residential mortgage, the maximum LTV is 95%, whereas for a buy-to-let/let-to-buy mortgage it is 85%. For a holiday let mortgage, the LTV offered is usually up to 75-80%.
How does affordability factor into remortgaging to buy a new property?
If you aim to refinance in order to purchase a second property, the new mortgage is going to be larger than your current one. Lenders will only be willing to make this step up if they are satisfied that you can afford to make the repayments on a larger loan.
Your income could be assessed in a number of ways as different lenders take different approaches. To be able to understand the amount of money a remortgage could make available, you’ll need to be aware of the options at your disposal.
How is affordability calculated?
Every lender has their own method of calculating the amount you can afford to borrow. They often employ complex eligibility models to do this. This means that when remortgaging to buy a new property there is a lot of choice. It’s essential to select the right lender for your circumstances as the amount offered to you hinges on this choice.
Affordability calculations will be based on both the level of your income and, in many cases, the sum of your regular outgoings. There are lenders who will be able to offer up to 5.5x your annual salary, but the more standard approach is to lend up to 4-4.5x your income.
It’s important to note that different lenders will have different attitudes to additional sources of income, such as overtime and bonuses. Some lenders will consider 100% of your bonuses in their calculations, while others will only consider 50%. There are even lenders who will not consider bonuses in their calculations at all.
Finding the lender with the right variables for your circumstances can make a huge difference to the amount you are offered.
Your basic annual salary is £40,000 and you get an annual bonus of £10,000. If you approach a lender that only considers 50% of your bonus, and offers a maximum of 4x your salary, you will be offered up to £180,000. If you have the help of a whole-of-market adviser, you might find a lender who considers 100% of your bonus and lends up to 5x your income, meaning the maximum amount you could be offered is as high as £250,000. There’s nothing different about your circumstances, but the different approach from lenders makes a massive difference to what you can borrow.
Remortgaging to buy another property as a contractor
Some lenders have made great progress on improving the way they accommodate contractors. Depending on your circumstances, there should be an option out there for you.
The specialist advisers at Think Plutus are able to identify the best mortgages for professionals who work on different types of contracts. These can include:
- Self-employed contractors
- Zero-hours contracts
- Employed, fixed-term contractors
- Construction Industry Scheme (CIS) contractors
- Agency workers
Once again, there will be different requirements from different lenders. Some will insist on a minimum period working as a contractor, while others will consider applications from new contractors who are contracting in the same industry they were previously employed in.
With regards to people who are employed on a fixed-term contract, some lenders will want to see that the contract has been renewed at least once in order to consider an application. Other may need to see a minimum amount of time remaining on the current contract.
The amount offered to contractors tends to be based on the day rate earned, so a calculation is likely to look something like this:
Day rate – £250
Weekly rate – £200 x 5 = £1,250
Annual salary – £1,250 x 46 weeks = £57,500
This means that for a contractor with a day rate of £200 a lender might consider £46,000 to be your annual income. Lenders don’t multiply the weekly rate by 52 because they allow some weeks for holidays and the time between contracts.
If your earnings come via the Construction Industry Scheme (CIS) then there are actually specialist mortgage options made with you in mind. These specialist mortgages allow you to submit your gross earnings on payslips rather than business accounts or self-assessments. We have more information about this on the CIS mortgages section of our website.
Remortgaging to buy another property if you are self-employed
In modern times, there are a number of mortgage options that self-employed borrowers can choose from. The tradition has always been for lenders to ask for 3 years’ of business accounting history, but many lenders today will be willing to accept only 1 year of accounts. There are even some who will consider even less than 1 year’s trading history if you are close to that year’s end, or if you are working in the same kind of business you were employed in immediately before switching to self-employed. There are, however, other factors involved in a remortgage.
Different lenders assess income in different ways. Salary and dividends are often used for company directors, but sometimes other profits retained within the business are considered, which makes a substantial difference to the outcome.
As director of a limited company you are a 50% shareholder in the business. The company makes a profit of £200,000 but you only take a £10,000 salary plus £40,000 dividends in order to minimise your tax liability. A lender will usually consider your income to be your salary plus the dividends, meaning £50,000. A lender that will offer 5x salary will offer up to £250,000.
However, a specialist lender that also takes the business profits into account might base its calculations on the £200,000 profit. As a 50% shareholder, your share of this amount is £100,000. Even if the mortgage lender offered a more standard 4x income model, this type of lender might offer up to £400,000 in these circumstances.
Again, there are many lenders and even more options on offer from them. Given the many considerations, we recommend speaking to Think Plutus for guidance and advice to make the best possible decision.
Is it possible to remortgage to buy a second home on a low income?
If you have a low income you could still find a remortgage deal for your home if you are able to demonstrate your affordability. Some lenders will stipulate a minimum income for borrowers, often between £15,000 and £20,000. There are, however, many lenders who don’t stipulate a minimum income for their applicants.
Can I remortgage my house to buy another one if I have loans and/or credit cards?
Loans and credit cards will not necessarily be a barrier to remortgaging. The only thing to be mindful of is that any outstanding debts you have may impact your affordability, reducing the amount you are able to borrow. If you plan to remortgage your house in order to buy another one, all your regular outgoings and credit commitments will be factored into the affordability calculations of any lender. It will be helpful if you can reduce the balances on your unsecured debts before applying for a remortgage – this could potentially increase the amount of money offered.
Your salary is £40,000 per year and your loan and credit card commitments cost you £500 per month. When a lender processes its financial assessment, these existing commitments may be subtracted from your income. If that lender offers up to 4x salary, the calculation would look like this:
£50,000 – £,6000 = £44,000 x 4 = £176,000
You can improve on this by paying off your existing debts and credit cards so that the lender doesn’t factor those commitments into the calculation. It would then look like this:
£50,000 x 4 = £200,000
This is a significant difference, so it is definitely worth considering. By reducing your existing credit commitments before applying, you could greatly increase the amount you are able to borrow by remortgaging.
Can I remortgage to buy a new property if I work part-time?
There is no reason this would be a problem as long as you are able to prove that you can afford the new mortgage amount.
Including other sources of income in your application
If you are remortgaging to buy another property, you may want to include additional sources of income to improve your affordability. There are lenders out there who will consider all sources of extra income, including overtime, bonuses, second jobs and earnings from investments. However, there are also lenders who will cap the level of additional income they can consider at 75% or even just 50%. Some lenders will also consider benefits like working tax credits, child tax credits and child benefit in their affordability calculations, while others will not.
This is an area where there is great variation from one lender to the next so we recommend you contact Think Plutus to get help from our expert advisers in finding the best options available to you.
Can I remortgage my house to buy a new property if I recently started a new job?
There are lenders who will consider applications from borrowers who recently started a job. Once again, this area can vary significantly from one lender to the next. There will be some that require 12 months of employment history, while others will be satisfied with just 6 months. Some lenders will only require you to have completed the probationary period, and there will even be lenders who will consider your application from the very first day in a new job.
If you know where to look, you can even find lenders that will consider a future contract that starts in less than 3 months. These kinds of specialist brokers are not always easy to access for the general public, so ask Think Plutus about the options available when you tell us about your circumstances.
Affordability calculations for buy-to-let and let-to-buy
When your remortgage plans involve buying a second property to gain a rental income, whether buy renting out the new property or your current one, lenders will calculate affordability based on the rental income that property will achieve. Other factors will be considered alongside this.
In years gone by, a lender’s calculations for a buy-to-let mortgage would have been based entirely on rental income and deposits. Today, there are regulations that mean lenders must process more complex assessments that consider the level of tax you pay.
With a buy-to-let, the rental income must cover a minimum of 125% of any mortgage charged at a stress rate of 5.5% for basic rate taxpayers. If you are a higher rate taxpayer, the percentage increases to 145% or even 160%. This is because those people are subject to a greater tax burden that is to be arriving for buy-to-let landlords over the next few years.
A buy-to-let mortgage of £250,000 with a 5.5% interest rate would result in monthly interest charges of £1,145. This means the monthly rental income must be no lower than £1,431 if the borrower is on the basic tax rate, or even £1,832 if the borrower is subject to the 160% requirement.
These minimum stress tests and tax changes are not the only considerations. New regulations have come in that effect the way lenders approach applications from any portfolio landlord who owns 4+ buy-to-let properties. These regulations mean lenders must assess the entire portfolio of the landlord in question, calculating the total income and LTV incorporating every property they own alongside any other earnings.
Naturally, different lenders apply the new rules in different ways, and consequently the market has become increasingly complex. There can be significant differences between lenders in terms of the way they assess a loan. The expert advisers at Think Plutus work hard to stay on top of the latest developments so we understand all the options. We can guide you through the entire process to get the best outcome possible.
Can I remortgage to buy another property if I have bad credit?
The short answer is yes. It will be possible for you to remortgage in order to buy a second home, but it will depend on the nature of your credit issues and how recent they are. Lenders will need to know what issues you have had, how long ago you had them, the amount of money involved and whether it has been resolved. You may also be asked to give an explanation of your past credit problems to try and persuade the lender that they were a one-off and the chances of them happening again are minimal.
Expect the maximum LTV for a borrower with bad credit to be lower than for a borrower with a clean credit history. That said, it could still be possible to borrow as much as 90% LTV with issues on your credit history – perhaps even 95% if the issues were a long time ago. Additionally, you can expect the mortgage rates for a bad credit loan to be higher than those on standard high street products. Nevertheless, it is a competitive market and there are some good deals to be found from lenders who specialise in remortgages with bad credit. You just need to know where to look.
Late payments and arrears
The difference between a late payment and arrears is that the former is a one-off incident of missing a payment, while the latter means a person has fallen further behind with their payments. There are mortgage options for borrowers with either – the main factors involved are whether the late payments/arrears were on secured or unsecured credit and how much time has passed since they were registered. High street lenders might insist on at least 12 months of clean credit to offer a high LTV mortgage, but if you explore more specialist lenders then you will find options for borrowers with more recent issues with late payments and arrears.
Debt Management Plans
If you have entered a Debt Management Plan (DMP), there are lenders out there who will interpret this as taking responsibility to address their financial situation. If you have been disciplined in maintaining payments on the plan, some specialist lenders will consider your application even if the DMP is still active.
Defaults and CCJs
You may be surprised to learn that more and more lenders are willing to consider applicants with CCJs and Defaults. Most lenders will require a county court judgement or default to be satisfied, but there are some who approve applications even with an outstanding CCJ. Even if yours was only registered within the last 6 months, there are still some lenders who are willing to consider you. The main things that will impact your application are the amount of money involved, the date of registration and the number of defaults and/or CCJs you have to your name.
Bankruptcy and IVAs
Mortgages for individuals with credit issues can often only be accessed through a broker. You will increase the number of options available to you by speaking to Think Plutus than you would if you attempted to contact lenders directly. Our specialist advisers have access to the whole market of mortgage products and have the expertise to tell you which lenders will consider you. We will find the best deal possible for your circumstances.
Types of property
A mortgage is a specific type of loan that is secured on a property. For this reason, lenders have strict criteria regarding property types they can lend on. With standard terraced/semi/detached houses and purpose-built flats, there should be no problem with the majority of lenders.
If the property in question is a studio flat or ex-council property, or it was built using unusual materials like timber or concrete, your options may be more limited and you might need a non-standard construction mortgage. It is important to approach the right lender for these types of properties, so if you feel uncertain about anything then contact Think Plutus for advice.
Can I remortgage if I have a recent conviction?
If, under the Rehabilitation of Offenders Act 1974, your conviction is spent, you are not obliged to disclose anything about historical cautions or convictions. This means lenders will not be able to take them into consideration. With unspent convictions, you will have to declare it if asked. Think Plutus can walk you through this and show you the options available to you.
Are there any age requirements for remortgaging to buy another property?
Most lenders have a minimum age requirement of 18. If you are a more senior borrower wishing to remortgage to buy a second home, there are various options for you. Some lenders will stipulate a maximum age either at the application stage or the end of the mortgage term, but many lenders have no maximum age requirements. The key question for lenders is affordability, so if you are taking out a mortgage that will stretch into your retirement, you may be required to prove that you have the means to afford repayments via retirement income.
Can I remortgage to buy another property if my current mortgage involves Early Repayment Charges?
Yes you can, but where Early Repayment Charges are involved on your current mortgage, it may be worth thinking about whether to wait until there is no longer a penalty for remortgaging. In some cases, it will be worth paying that Early Repayment Charge, while in other cases it will not. Talk it through with Think Plutus and we will be able to give our expert opinion on your best options.
Can I remortgage to buy another property with cash?
If you can raise sufficient money by remortgaging to be able to buy a second property with cash, then it is definitely possible. You may even find that maximising borrowing with your existing mortgage is cheaper than taking out a buy-to-let or second home mortgage.
If you are not able to raise enough to buy the second property, another mortgage may be necessary. The mortgage you take out on the second property depends primarily on your intentions for that property. There are specialist products for second homes or holiday lets, or you will need to look into buy-to-let mortgages if you plan to rent the property out to tenants.
Raising money with a secured loan
For some people, a secured loan or a second charge is a more suitable option that a remortgage. Think Plutus can take both options into consideration to advise on which will be the better approach for you to take.
Can an investment property be remortgaged?
Remortgaging one property to release equity in order to buy another is a common technique used by landlords to expand their portfolio. Some buy-to-let lenders will lend as high as 85% and calculate affordability on the basis of the rental income the property can achieve. Be advised that recent changes to the regulations mean that lenders must apply a minimum stress test with buy-to-let mortgages. The level of this stress test depends on whether you pay the basic or higher rate of tax.
Remortgaging to move house
Sometimes we meet customers who wish to move to a new home without selling their current property. Lenders offer let-to-buy mortgages for this purpose, enabling borrowers to rent out their existing property to raise the funds to buy, or put down a deposit for, a new home. Think Plutus can advise on this process to ensure you get the best deal possible.
Can I remortgage to buy an overseas property?
It is possible to use the funds raised by remortgaging to purchase a holiday home overseas. Lenders don’t usually have a problem with this purpose and the criteria will be largely identical to a remortgage to buy a new property in the UK.
If your objective is to remortgage to purchase a property abroad, you might be able to raise enough funds from your current home to buy the overseas property in cash. If, however, you need to raise further funding, it might be necessary to take out a specialist mortgage. Think Plutus can help you consider your full range of options and offer advice on your best route to securing that dream holiday home abroad. Contact us to speak to an adviser who can help.
Is it possible to remortgage a property I inherited?
In most cases, remortgaging an inherited property is not a problem. The probate will need to have been completed so that you are the undisputed legal owner of the property. Most lenders will require you to have been the legal owner for a minimum of 6-12 months, but there are a few who will lend on a property you inherited less than 6 months ago. All beneficiaries, and thus all owners, of the property will need to be named on the mortgage unless part of the deal is that you are buying them out of their share in the property.
Speak to a remortgage expert to discuss your plans to buy another property
If you are planning to remortgage your home in order to buy another property that you will rent out to tenants, you will need a buy-to-let mortgage. We have a detailed section of our website dedicated to buy-to-let mortgages, so take a look over there first.
If you have other plans for the new property, they have hopefully been covered on this page. If you have any questions or would like to find out more about anything we’ve covered here, please don’t hesitate to contact Think Plutus today. Our specialist advisers are experts in all types of remortgages and can offer you reliable, professional advice on every option available to you. We are a whole-of-market adviser, meaning we can find you specialist lenders and products that simply aren’t available to the general public, maximising your chances of getting the best possible deal.
Once you have told us about your plans and your circumstances, you can sit back and let Think Plutus do the legwork of finding the right lender with the best possible deal for you. For quality remortgage advice you can trust, Think Plutus.