How does remortgaging work to buy another property?

Remortgaging your first property to buy another is a common strategy that could prove fruitful for your finances in the long run. Read our guide to discover how it works.

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By

Matthew Boyle

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This strategy works well when you have built lots of equity in your first home, have a good credit score and won’t have to pay huge penalties to get out of your current mortgage.

With these things in place, it could be one of the cheapest ways to raise the deposit for a buy-to-let mortgage, or maybe even to fund a house purchase in full.

Remortgaging will increase the size of the repayments you make on your existing mortgage, and lenders will conduct affordability assessments to ensure you can afford it. They’ll also want to see evidence that your new property can cover 125% of your buy-to-let mortgage payments.

Still, these are the only major obstacles to having a brand new property in your name.

How does remortgaging to buy another property work?

  • Calculate your equity. To calculate your equity, you must discover your property’s current value and subtract your remaining mortgage debt. In order to do this, your lender will revalue your property and allow you to withdraw cash based on the equity you hold. Most lenders won’t allow anyone to withdraw more than 80% of equity.
  • Find a new property. In order to fund a deposit for a buy-to-let mortgage, you’ll need to raise 25% of your new property’s value. That means you’d need to release £50,000 of equity to buy a £200,000 house.
  • Apply for a remortgage. To make sure you can afford your new repayments, you’ll go through the same affordability and credit checks as when you first bought the house.
  • Apply for a buy-to-let mortgage. Being approved for a buy-to-let mortgage is a bit different than for residential mortgages, but our tips can help you find a great deal.

When is remortgaging not a good idea?

  • If you can raise a deposit organically. If you can save a deposit for a buy-to-let mortgage without sacrificing equity, this is likely to be your best option. After all, you won’t have to pay the fees associated with re-mortgaging, nor wait longer to become mortgage-free on your property.
  • If the remortgaging fees are huge. A lot of mortgages with introductory deals include a sizeable early repayment charge if you switch before this deal has ended. These may be enough to make you think twice about remortgaging.
  • If you don’t have a lot of equity. If you haven’t built up a lot of equity in your house, it’s likely you won’t be able to afford a deposit for a mortgage on a second property (as well as all the associated fees).
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

Should I remortgage with my current mortgage provider?

There’s no guarantee that your current mortgage provider will approve the remortgage deal you’re looking for. Even if they do, it might not be the best deal on the market. It’s definitely worth shopping around for the best deal, perhaps with the assistance of an experienced mortgage broker.

Having said that, the approval process is a lot smoother with an existing mortgage provider.

As such, you might be best off finding a superior remortgage deal, then using this to haggle with your existing provider. It might be willing to drop its rate in order to keep your business.

Remortgaging with bad credit

There are specialist lenders who will allow you to remortgage even if you have a bad credit score. Some will even work with you if you have suffered defaults or other financial misdemeanours.

A large deposit, perhaps raised through significant equity in your home, can make it much easier to be approved in spite of a poor credit score. In this situation, you’ll be deemed less of a risk to a lender because you’ll be borrowing less money.

A mortgage broker has specialist knowledge of individual lenders’ eligibility criteria and will therefore be able to recommend you the best deal that’s likely to be available to you.

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