Written by Lewis Ridley
Updated over a week ago
In this article, we’re going to break down in simple terms how you can remortgage your current property to pull out enough equity to buy another property. Let’s get started.
The absolute first step you should do is get in touch with a reputable mortgage broker. Mortgage brokers are experts in remortgaging and have connections with loan providers that allow you access to better financial vehicles.
If you were to do this by yourself and for through a standard bank, you could be denied or might receive a poor offer. With a mortgage broker, you can pick between different options and decide what is right for you based on funds, LTV, and risk.
Please bear in mind we’re not mortgage brokers, but we are experts in property. Check out some mortgage brokers in your local area or use some reputable companies, such as L&C
If you want to do some due diligence yourself before getting involved with a broker, you need to understand your mortgage options. In most cases, you will either need one, two or three mortgages when you’re going through the process.
• One Mortgage – In some cases, you might be able to pull out another equity from your first property to cover the complete purchase of your new property. This might be the case when the property you’re looking to purchase is a fixer-upper or if you have paid off the mortgage on your first home. If the case if the latter, you could pull out hundreds of thousands, allowing for a cash purchase on a second home.
• Second Mortgage – This is the most common case. You’ll need a mortgage for the first property and then a second mortgage for the new property. This will be required when the amount of equity pulled out of the first home is only enough for a deposit. This will result in having two mortgages – one for the first and one for the second property
• Third Mortgage – This is an uncommon case. This is when you take out a second charge mortgage on the first property, which layers over the mortgage already on it. This releases enough equity to then put a deposit on a third mortgage on your second property. Make sense?
Already, you’re starting to see this can get more complicated than you first might have expected. This why seeking advice from a broker is the best approach.
Remortgaging to buy a second property is all a numbers game. If you want to do this yourself, you need make sure you’re pulling out enough money to put down another deposit (or pay in full) for a second property.
Typically, if you’re using the standard two-mortgages approach, your equity release will be whatever the value of the property is minus the remaining mortgage. So, if you have a house valued at £400,000 and you have £100,000 left on the mortgage, you can pull out £300,000 in equity. This is, of course if you had a 100% LTV loan.
In most cases, you can expect an LTV (loan to value) between 80-95%. This is why finding a good mortgage broker can be helpful, as they’ll find the lenders providing the best LTV. The higher the LTV, the more equity you can pull out of the first property.
Second charge mortgages work differently, as they don’t cancel out the existing mortgage on the first property. You can sometimes get a higher LTV on a second charge loan, with some lenders offering 95%. This means more equity for a new deposit and no early repayment fees on the existing mortgage.
However, although second charge mortgages seem attractive, always bear in mind the deal terms, interest, and affordability. Don’t get blindsided by the more attractive equity release. Again, speak to a broker for more advice!
The value of the loan you’ll receive from lenders will greatly depend on your income. In most cases, lenders will provide a mortgage that is 4x your annual income. However, they may stretch to 5x or even 6x. It really all comes down to individual circumstances.
Remember that you should be as detailed as possible when filling out your income details. Mortgage lenders will consider multiple sources of income when evaluating you. This means if you have any income from stocks (dividends or capital gains), these should be including. Also include child benefits and any tax credits you receive. These will also be accounted for.
Also, remember lenders consider each source of income differently. They only take into account 50% of bonuses, for example. So, don’t rely too heavily on your job in your application. Try and squeeze out as much detail as possible.
As you can expect, having any damaging credit under your name is a huge red flag for lenders. If you do have poor credit, it might be best to work on it for a few months to improve it.
Getting something like a charge card or normal credit card and using it as a daily payment card could be a good way to improve your credit. Obviously, pay back the balance every month so you don’t full into debt.
For more advice, speak to a financial advisor. They’ll be able to direct you towards the best path to improving your credit score.
One thing lenders are going to be looking at is whether they think you can afford the additional overhead.
When you remortgage and take on another mortgage on a second property, your outgoings are going to increase drastically. This is part of the reason lenders want to see solid income streams going into your bank account. The last thing they want is someone who can’t afford repayments, resulting in defaults.
Lenders want to see strong affordability when you’re applying for a loan. If they don’t think you can afford the new overhead, you’ll get flat-out rejected.
Going through the process of remortgaging to buy another property isn’t actually that complicated. It is just a question of whether you get access to good deals from lenders and whether you have the criteria lenders want to see.
In either case, consulting a mortgage broker is the first thing to do. They’ll make sure you get the best product from a reputable lender. They’ll also fill you in on all the details to make sure you create the best application.
For more help on mortgages and the financial elements behind property investing, see our knowledge centre now.
If you’re looking to squeeze as much money out of a property with sitting tenants as possible, there are a few things you can do.
If you have a larger budget, consider doing some large renovations like extensions. Property Reports stated that adding an extension can boost a property’s value by 8%. You can also make the property more environmentally friendly with a new boiler, double-glazed windows, and solar panels.
For small budgets, a simple repaint, a few easy eco-friendly bulbs and thermostats, and a newly renovated garden could give your property a much-needed value boost.
Increasing property value exceeds the scope of this article. For more information, we have a complete guide on increasing property value in our knowledge centre.
If you have a house with sitting tenants and are looking to sell, the process is simple. You have a few options in front of you and they don’t really differentiate with how you’d usually sell a property.
The first is by using an estate agent, preferably one with experience in selling houses with sitting tenants. This is probably the easiest method and the one where you’ll have the most control. With an experienced estate agent, they’ll be able to price the property appropriately and handle the full process. Just bear in mind this process is slower.
The second is via auction. If you’re looking to sell your tenanted property fast, this is the place to go. However, understand there is more risk with putting your property in an auction. You have less control over the final price and individuals come to auctions hunting for a bargain. If your property gets sold for a price you’re not happy with, you can’t pull out of the sale – it’s final.
Thirdly, you can use a home buying company. These will provide the quickest sale but at a heavily reduced price. The company will take over your landlord responsibilities and various other fees associated with the above options. Just be willing to take a hit in profit.
Not many people know this, but you can in fact sell the house directly to the sitting tenants. Landlords can offer the tenants “first refusal”, which basically means offering the property before it goes on the market. This means you’re likely to get a quicker and more straightforward sale without estate agent fees or house viewings.
Tenants are also likely to be happy with this arrangement as they’ll already be moved in, and mortgage payments tend to be cheaper than renting.
It is true that sitting tenants will devalue a property you’re trying to sell. In some case, you can expect a devaluation of up to 40%. However, it all depends on the type of tenancy.
There are still ways to improve your property value, so you don’t lose too much profit. And if you’re looking to sell, the process is straightforward.
For any further advice or if you want to investigate what tenanted properties are going for in your area, check out our platform for free now.
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