In recent months, the UK housing market has experienced strong growth, with prices rising significantly. This means that if you are a property owner, the equity in your home has probably increased. With this in mind, you might be thinking, “can I borrow money against my house to buy another property?”
When considering this question, there can be a lot of things to think about, so read on for everything you may need to know.
Why might my equity have increased?
Given that the coronavirus pandemic has made a significant negative impact on the UK economy, it might be somewhat surprising to find out that the property market has boomed during this time. According to figures from the Office for National Statistics, house prices have grown by 13.2% this year to June 2021.
This is due to a combination of three main factors. The first is that, since the start of the pandemic in Spring 2020, interest rates have sat at a historic low of 0.1%. This has enabled prospective buyers to borrow money more cheaply and take out larger loans from mortgage providers.
Another factor was the rise of remote working after the government’s implementation of national lockdowns. With a large portion of the public working from home, many people re-evaluated what they wanted from their homes since they were spending more time there. This prompted many people to upsize.
Finally, one of the biggest factors which stimulated the housing market has been the government’s temporary Stamp Duty holiday, during which buyers could save up to £15,000 when purchasing a property.
This means that your home may have significantly increased in value since you first took out your existing mortgage. If it has, you may be able to use this to finance the purchase of another home.
“Even unusual and niche properties that we market through our auctions have seen price increases post pandemic and we’re seeing investors refinancing to expand their portfolios,” comments Ruban Selvanayagam of Property Solvers.
Why should I buy another home?
There can be many good reasons to borrow money against your current property to buy a second home. Some of these reasons are:
- To invest in a buy-to-let property – Buy-to-let can be a useful way of making a passive income by buying a house to then rent out. Buy-to-let mortgages have become much more common in recent years.
- Buying a holiday home – You could buy a property abroad or, with the pandemic popularising the “staycation”, you may want to buy a second home in the UK for holidays. Alternatively, you could use it as a holiday rental property.
- Investing in commercial property – This can also be a good source of passive income, such as renting out an office to a small company.
- Buying a home for children who are studying – If you’re concerned about your loved ones being overcharged by student landlords, you may want to buy a property for them to live in.
What are my options for getting money out of my property?
Whatever your reasons for wanting to borrow money to buy a second property, it’s important to know what your options are. There are essentially three ways to access the equity in your house: remortgaging, equity release, and securing another loan against the value of it (such as a buy-to-let mortgage). All three options have pros and cons, so you may want to think carefully before acting.
At this point, it’s important to understand what equity is. Essentially, equity is the share of the value of your property that you actually own. An easy way to work this out is the value of your home minus the value of your remaining mortgage. This is also sometimes expressed as a percentage called the “loan-to-value” (LTV) ratio.
Typically, when you remortgage your home, you will be offered more favourable rates if you have a higher amount of equity in your property.
What is remortgaging?
If you’re hoping to buy a second property, one of the ways to release equity in your home is to remortgage.
As I explained earlier, there has been strong growth in the housing market in recent months. If the value of your home has increased, your equity has risen and you might be able to take out a second, larger mortgage which reflects its current value.
For example, let’s say that your current residential property was worth £200,000 when you bought it 10 years ago but has since risen in value to £250,000. You may still have a remaining mortgage debt of £100,000, which you owe to your lender.
Since the house has risen in value, you could capitalise on this by taking out a new mortgage worth, for example, £150,000. Using the first £100,000 of your new loan to pay off your outstanding mortgage, this would give you £50,000 in cash to use as the deposit for another property.
What are the benefits of remortgaging my home?
Remortgaging gives you the ability to access the equity in your home and can give you money to use for other things, such as buying a second property.
While you may have to pay additional fees when organising a second mortgage, such as valuation costs, you could end up better off than you were before. However, before you make any decisions, there are two important things to consider:
Whether you have enough equity
Before you do anything else, it can be essential to know how much equity you’ve got in your home and how much your property has increased in value. This can help you to make a properly informed decision, which is why it’s important to get a valuation done before you act.
Another thing to consider is whether you will be able to afford the mortgage repayments, as the amount of money you owe is likely to increase. While you may have been able to cover your monthly mortgage payments on your existing loan, this may no longer be the case once you remortgage your home.
Furthermore, you also need to take into account any fees that you may incur while organising a second mortgage. This may include an early repayment charge on your current mortgage, as well as upfront costs and legal fees of your new loan. In this case, you may benefit from taking expert advice from a professional, such as a mortgage broker.
What is equity release?
If you don’t want to remortgage your home, another option is equity release, although you must be over the age of 55 to be able to do it. The most popular type of equity release product, a lifetime mortgage, will allow you to access the equity in your existing property without you needing to sell it.
Unlike when you remortgage your home, there are no ongoing monthly repayments. This can give you one less thing to worry about since it means your retirement income won’t be affected. Instead, the interest on the money you borrow will add up over time and you’ll need to repay the value of the loan plus interest when you sell the home, move into care, or pass away.
Another alternative is home reversion, in which you sell all or part of your home in exchange for a lump sum or regular payments. You will still have the right to continue living there but you’ll have to agree to maintain and insure the property.
You can also ring-fence a percentage of the value of the property for your own use, such as to give to your children as an inheritance. At the end of the plan, your home will be sold and the proceeds will be divided up according to the proportions of ownership.
What are the benefits of equity release?
One of the main benefits of equity release is that you can access the value tied up in your home to do what you’d like, while still having a high degree of flexibility.
For example, if you don’t want to be landed with a hefty interest bill when the time comes to repay the loan, you typically have the option of making regular interest payments. You can also choose whether you’d like to have access to the money in one lump sum or in smaller, regular payments.
However, if you’re considering equity release, it’s important to find providers who are authorised and regulated by the Financial Conduct Authority (FCA) and belong to the Equity Release Council. Such lenders have to follow strict guidelines, which can help to ensure that you are treated fairly and are protected throughout the process.
Typically, lenders that belong to the Equity Release Council have to offer you loans under which you are protected by the “No Negative Equity” guarantee. This essentially means that you will never owe your lender a higher amount than your property is worth.
If you’re considering equity release, it’s important to carefully consider your options as while it can be useful, such as when you want to buy a second property, it could lead to a reduced inheritance for your family.
What is a buy-to-let mortgage?
If you want to buy a second property to rent it out, you may be able to get a buy-to-let mortgage, but you might need to secure the debt against the value of your current home. In order to be approved for one, you may have to pass a stringent financial check and credit score from buy-to-let lenders to ensure that you can keep up with your monthly payments.
For example, you may need to show the likely rental income of the investment property that you’re hoping to buy, so the lender can accurately predict whether you can afford it. Many lenders will check your credit rating, as giving a loan to someone with bad credit history can be a significant risk. You may also need to be able to prove that you’ll be able to keep up with your payments if interest rates rise.
Also consider: Will interest and savings rates rise in 2022?
You may have the option to choose between a traditional capital repayment mortgage, or interest-only mortgages, as the latter can be more common for this type of loan.
How can seeking financial advice help me?
With the internet, it’s never been easier to find information about personal finance and investments. This sometimes leads people to take a DIY approach, instead of working with a professional. Of course, if you’ve ever tried DIY, you will know that making a mistake can be expensive and this is particularly true when it comes to purchasing a house.
Buying a property can be a significant investment, so before you remortgage to buy another, you may want to seek mortgage advice. Working with a professional, such as a mortgage advisor, can help to ensure that you make the right decision in your financial situation when it comes to raising money using your existing property.
When you work with an expert, they can use their in-depth knowledge of finance to ensure that your decision is right for you in your personal circumstances. They can also scour the market and compare mortgage lenders on your behalf to find you the best deal on your loan, as choosing to remain with the same lender for another mortgage may not be best for you.
Working with a financial advisor can help you to make informed decisions, giving you greater confidence and peace of mind.
Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.