Remortgaging a property to buy another is an interesting approach for those looking to expand their holdings and invest more in the property market. Whilst borrowing against the equity in an existing property to fund a new purchase may sound like a fairly straightforward proposition, there could be some potential pitfalls that property owners should be aware of before attempting to do so.
The process of how to remortgage to buy another property is dependent upon both market factors such as rates of interest as well as the applicant's financial circumstances. Let’s look closer at what affects a property owner’s ability to remortgage and why it is, and sometimes isn’t a viable tactic.
Why Remortgage to Buy Another Property?
Remortgaging can offer the capital needed to fund another property purchase without requiring a new mortgage or substantial cash reserves. This approach has several benefits, including leveraging the equity in an existing property, allowing the owner the ability to access the funds needed for a down payment or, even purchasing another property outright (provided the equity they have built up is large enough).
Refinancing your current mortgage could allow property owners to secure lower interest rates, if they can switch their mortgage deal to a lower interest rate or a longer interest-free period, reducing their monthly costs significantly for several years and making it easier to afford the new property’s costs (which could also be on a similar rate and thus, more attractive for a potential property owner to remortgage).
How To Remortgage A Property To Buy Another?
Evaluating your financial situation will help determine how much capital you need to purchase the new property. Calculate the required down payment (usually 10% of the full property price) and consider other potential expenses such as legal fees, conveyancing, mortgage brokers and arrangement fees, as well as stamp duty. Having a clear overview of finances will ensure that you can get the funds you need to finance the purchase of another property.
When applying for a remortgage, be ready to provide documents that verify your income and details of existing debts, such as credit agreements and bank statements, as well as information on the new property purchase. Lenders may arrange a property valuation to confirm its current market value and factor this into their affordability assessment.
The amount you can borrow depends on the equity in your current home and mortgage lenders will look at the property’s market value and the outstanding mortgage to determine available equity. For a property worth £400,000 with an outstanding mortgage of £200,000, the owner may be able to release up to 80% of this equity to put towards their new mortgage.
Once you assess the equity in your existing property, it will give you a clearer picture of the amount you can borrow. Mortgage lenders will look at the property’s market value and the outstanding mortgage to determine available equity. Consider consulting a mortgage broker to help identify the best mortgage deals and, compare interest rates, terms, and fees.
A broker will help to find a mortgage that gives you the highest threshold of your loan to the value of the property you’re trying to purchase (LTV). However, mortgage brokers will charge a fee for their services which can be as much as a percentage of the total loan e.g: 4% of a £450,000 loan which would be £18,000, so keep that in mind before engaging their services.
Consider Stamp Duty Implications Before Remortgaging
Purchasing any property in the UK comes with the liability to pay stamp duty if the price is over a certain threshold and the buyer is not buying a property for the first time. However, stamp duty on multiple property purchases in the UK includes a 3% surcharge on top of the standard rates, which is worth factoring in before remortgaging, especially as stamp duty rates and reliefs are due to change after the 31st of March, 2025.
The changes coming into place are:
1. 0% charge for properties valued at £250,000 will return to the previous level of £125,000.
2. A new 2% rate will be introduced for properties valued from £125,000 up to £250,000
3. 0% relief for first-time buyers purchasing properties up to £425,000 will return to the previous level of £300,000.
4. First-Time Buyers Relief at £625,000 will return to the previous level of £500,000.
Remortgaging can take up to several months to complete, and with the changes to stamp duty coming into effect next year, any owners thinking of remortgaging should consider making a decision soon. The potential to pay much more money in stamp duty could stretch your finances too far to make remortgaging tenable.
Key Considerations Before Remortgaging
Remortgaging a property may sound attractive given the potential to capitalise on acquiring new property, but there are significant factors that can severely impact an attempt to remortgage a property.
Temporary Interest Rates and Mortgage Terms: Ensure that the terms of your new mortgage are affordable for the long term. A lower interest rate can make remortgaging more attractive, while a fixed-rate mortgage provides predictable monthly payments but, fixed-rate periods will typically only last for several years, and then rates switch to a lender’s Standard Variable Rate (SVR), which can incur much higher monthly repayments, putting your finances under strain.
High Fees: Remortgaging is not inexpensive – broker fees on your new mortgage could cost into the tens of thousands of pounds alone. Coupled with making early repayment charges on your existing mortgage, application fees for the new mortgage, as well as any valuation fees required, can quickly rack up into a sizeable amount that may impact your ability to remortgage.
Impact On Overall Financial Health: While remortgage can provide access to significant capital for investing in new property, it’s essential to evaluate the impact on your overall finances before doing so. You’ll be responsible for managing two mortgages, so ensure your budget can support this additional expense and make sure your personal finances are as secure as possible in case of any setbacks or unforeseen hurdles.
When Remortgaging Isn’t A Good Option?
If your current mortgage has high early repayment fees, then breaking your existing mortgage might incur costly penalties and be an impractical decision which jeopardises your finances. If making the monthly repayments is already proving challenging, then taking on more debt is not a sensible step to financing the purchase of a new property.
Limited Equity might not yield enough capital for a new purchase and could rule out any attempts to remortgage from the start. If you have not owned your property with a mortgage for very long, then you will have very limited equity in your home unless a sizeable deposit was paid at the time of purchase.
For example, on a property purchased for £300,000, with a 90% mortgage and a 10% deposit of £30,000, after four years of making regular payments, the outstanding mortgage balance is now approximately £260,000. An attempt to remortgage now would only provide £40,000 in equity, making financing the purchase of another property far more difficult.
Rising interest rates could make remortgaging more expensive than other financing methods. If interest rates or lenders rates rise above what the original mortgage rate is, then refinancing an existing mortgage to purchase a new property could become significantly more expensive.
Think Carefully Before Remortgaging A Property
Remortgaging to buy another property can be a strategic way to build your property portfolio or fund a new investment, depending on financial situation, property goals, and the costs involved. Consulting with a mortgage advisor can provide valuable guidance and help you find the most favourable terms to move forward with your new purchase.
It is important to weigh the costs and risks of remortgaging to ensure it aligns with your long-term financial goals, without jeopardising your present circumstances to expand your property portfolio.
