It’s certainly possible to borrow money against your house to buy another property. It’s a route some people take if they want to buy, for example:
- A buy-to-let property (to rent out to tenants)
- A second home or holiday home
- A holiday let (to rent out for shorter periods)
- A commercial property, like an office or shop
- A home for a child or another family member
So, how does it work? What are the pros and cons? And is there anything that might stop you borrowing against your home? Let’s take a look.
How can I borrow money against my house to buy another property?
When you borrow money against your home, you’re essentially releasing the money you’ve got tied up in the property (also called your “equity” or “capital”). You can then use that money for something else – in this case, buying a second property.
That means, if you want to borrow money in this way, the first step is to check how much equity you have in the property. There’s a simple way to work this out: just subtract the amount you still owe on your mortgage from the value of your home.
Example: Your home is valued at £300,000, and you have £200,000 left to pay back on your mortgage loan. £300,000 - £200,000 = £100,000. So your equity is £100,000. In other words, you own a £100,000 portion of your home, and your lender owns the other £200,000. (Another way of putting it is to say that you have a loan to value ratio (LTV) of 66%, because the lender owns two-thirds of the value of your home.)
In the above example, by borrowing money against your house you could raise up to £100,000 to put towards buying a new property.
A note about negative equity
One thing that will stop you borrowing money against your house is being in “negative equity.” That’s where the amount you owe on your mortgage loan is greater than the value of your property. You can end up with negative equity if house prices fall after you buy your home.
Example: Your home was valued at £320,000 when you bought it, but its value has since fallen to £280,000. You have £283,000 owing on your mortgage. £280,000 - £283,000 = -£3,000. So you have negative equity of -£3,000.
You’ll need to pay off more of your mortgage or wait for house prices to rise again to get out of negative equity. And then you can have another look at borrowing money against your home.
Now, if you’re happy with the amount of equity you own in your property, you have a couple of different options.
1. Remortgage your home
Remortgaging is where you replace your existing mortgage with a new one, either with your current lender or a different lender. Many people remortgage to get a better mortgage deal (with lower interest rates, for example), but you can also remortgage to borrow money against your home.
Example: You owe £200,000 on your mortgage for your £300,000 house, and you want to release £70,000 of equity from the £100,000 that you have tied up in the property. To do that, you remortgage your home for £270,000. So, your mortgage loan is now larger, but you walk away with £70,000 to invest in a new property.
To remortgage, you would need to:
- Find a lender (Habito can help with this)
- Submit a mortgage application (Habito can help with this too!)
- Pass the lender’s affordability checks. The lender will check that you have enough equity in the property and that you’ll be able to afford your new, larger mortgage payments. They’ll need to know the reason that you want to borrow money, too.
2. Take out a second charge mortgage on your home
Another way to borrow money against your home is to take out a “second charge mortgage.” This is a second mortgage that’s completely separate from your existing mortgage.
Like your original mortgage, a second charge mortgage is a type of loan that’s secured against your property. Basically, that means the lender can sell your property to cover your debt if you stop paying the mortgage back. But a second charge mortgage is only secured against your equity in the property, rather than the whole property.
Example: You have an existing mortgage of £200,000 for your £300,000 house, leaving you £100,000 of equity. To free up £70,000 of that equity, you can take out a second charge mortgage for £70,000. So, you then have two mortgages – one for £200,000 and one for £70,000 – and £70,000 cash to invest in a new property. (Plus, you still have £30,000 equity in your house).
To take out a second charge mortgage, you would need to:
- Get your existing lender’s permission.
- Find a second lender and prove to them that you can afford two lots of mortgage repayments.
- Check how much equity you can borrow (some lenders will let you borrow 100% of your equity; others might cap it at 75% or 80%).
Remortgage vs second mortgage
Which option is right for you? Remortgaging or getting a second charge mortgage? Here are some things to consider:
- Remortgaging is simpler – you only have one mortgage and one lot of mortgage payments to deal with for that property.
- But, if you remortgage before the end of your introductory period on your old mortgage, you could face early repayment charges (ERCs). Plus, your new deal might have a higher interest rate (meaning higher monthly payments).
- A second charge mortgage means you get to hang onto your current mortgage deal for your first mortgage (if it’s a really good one, it could save you money).
- But, you end up with two mortgages and two sets of mortgage payments to manage. Plus, interest rates on second charge mortgages are often higher.
Buying your new property
Once you’ve arranged your remortgage (or second charge mortgage), you can then use the money you’ve freed up from your home as a deposit for your new property – or to buy it with cash if you’ve raised enough money.
If you’re planning on investing in a buy-to-let property and want a mortgage, you’ll need to apply for a specific buy-to-let mortgage. These are often interest-only. In other words, you’ll only pay back the interest on your loan each month until the end of the mortgage term. When the term ends, you then pay back the entire loan amount.
Here are a couple of other things to bear in mind when you’re buying a second property:
You’ll usually need a bigger deposit to take out a mortgage on a second property. That’s because it’s considered a higher risk for the lender when you have two mortgages to keep up with.
Most lenders will only offer you a second mortgage of up to 80% LTV (loan to value ratio). In other words, they’ll lend you up to 80% of the value of the property. So you’ll need a 20% deposit.
For a buy-to-let mortgage, the deposit is typically higher again. Often, lenders will want a 25% deposit, but it could be up to 40%.
When you buy a second property, you automatically pay an extra 3% on top of the usual Stamp Duty Land Tax (SDLT).
Example: If you buy a £250,000 house and that’s the only property you’ll own, you’d usually have to pay 2% stamp duty on £125,000 of the property’s value (unless you’re a first-time buyer). So your stamp duty would be £2,500.
If that £250,000 house is going to be your second home or a buy-to-let property, you’ll have to pay 2% on the first £125,000 of the property’s value (£3,750), then 3% on the next £125,000 (£6,250 ). So your stamp duty will be £10,000.
Borrowing against your home to buy another property: quick pros and cons
If you’re thinking about borrowing against your home, it’s always best to get some independent financial advice first. Here are some quickfire pros and cons to mull over:
- You release the money to start a buy-to-let business / enjoy a new holiday home / help your child get on the housing ladder.
- You’re able to borrow a larger amount of money than you could with a personal (unsecured) loan, which tends to be capped at £25,000.
- Your new mortgage may have a lower interest rate than a personal loan.
- You’ll need to cover the repayments for a new, higher mortgage on your home (or two mortgages, if you go down the second charge route) and the mortgage on your new property (unless you’re buying in cash).
- Taking equity out of your home increases the risk of going into negative equity if house prices fall.
- Unlike a personal loan, a mortgage loan is secured against your property, so there’s a risk it could be repossessed if you don’t keep up with your mortgage payments.
Borrowing against your house: FAQs
Let’s finish up with some FAQs about borrowing against your house to buy another property.
Can you borrow against your home with bad credit?
Depending on your circumstances, it may still be possible, but you might have a smaller number of lenders to choose from. A mortgage broker, like Habito, can help you find a lender who specialises in mortgages for people who’ve had credit issues in the past.
Can you borrow against your home when you’ve used the Help to Buy scheme?
No, there are only a few reasons you’re allowed to remortgage your Help to Buy home to borrow money, and that doesn’t include buying another property. Find out more about Help to Buy and second homes.
Can you borrow against a property you own outright?
Yes, it might be possible to take out a mortgage on a property you own outright (also called an “unencumbered” property) to buy a new house. As with any mortgage, potential lenders will consider your financial situation and why you want the loan before they approve it.
Can you borrow against your home to buy a property abroad?
In many cases, yes, lenders will allow you to remortgage your home to help you buy another property abroad. If you’re not able to buy the new property outright, you’ll need a specialist overseas mortgage. And bear in mind that there will be different property taxes and charges depending on which country the new property is in.
Looking to remortgage your home? Habito can help
If you’re thinking about remortgaging your home to raise money for a second property, chat with one of our expert mortgage advisers here at Habito. We’ll search the whole market (that’s over 20,000 mortgages) to find a remortgage deal that’s right for you.