There are many reasons you may wish to buy a second home. It could be an investment property that will fund your retirement. It may be a place for your children or grandchildren to live while at university. Or it may be a holiday home for you and your family to enjoy.
One of the most popular ways to afford a second home is to remortgage your current home to raise the funds. Remortgaging can release the earned equity in your current home and give you enough money for a mortgage on a second home.
If you are considering a remortgage to buy a second home, there are a few key things to consider. In some cases, remortgaging will cost you more in the long term, particularly if you already have favourable mortgage terms. You will also have to pay back your mortgage for longer, which will increase the total you pay for the property.
In this guide, we will look at the process of remortgaging and what steps you will need to take to do this to secure a second mortgage.
What is remortgaging?
A remortgage is when you take out a new mortgage against a property you are still paying back. You can do this with the same lender or with a new lender. Some people remortgage when they come to the end of a fixed-rate period. Rather than switch to a variable rate mortgage, they will remortgage their property to secure a similar deal on another mortgage product.
Once you have been paying your mortgage back for a while, you will typically have paid down some of the interest and also increased your equity in the home. At the start of your mortgage, you will only own a percentage value equal to your deposit, but a few years down the line, you will build up a greater portion of your equity.
When you remortgage, you can either use this equity to secure a better deal, or you can release some of this money and effectively start your mortgage at zero. When you take out a mortgage for the first time, you might have a 15% deposit and an 85% mortgage. But after a few years, your equity in the home may have increased to 40%, with 60% left to pay.
You should then be able to secure much better terms on your mortgage, as it would be like buying a home with a 40% deposit. Any increase in the value of your home will also help to secure favourable terms. If you were to sell your home, you would get more back than you paid for it. This will drive down the LTV you need to borrow, making your remortgage an even more attractive prospect.
Remortgaging to buy a second home
Another option is to release some of the equity and then using this as a deposit for a second mortgage. To do this, you will need to pass the affordability checks for your remortgage and then for the second home. This is a popular method used by property developers to create a portfolio of properties without needing to secure new investment every time.
If you plan to let out the property, you will need a buy-to-let mortgage. These are typically harder to secure as you will need a larger deposit, usually around 40%. However, this type of mortgage may be easier in some respects, as you can use the potential rental yield to show that it is affordable. This can remove the need for some affordability checks. See calculator here.
If you plan to live in the home yourself or to use it as a holiday home, you will need to pass the affordability checks for your second mortgage. Unless, of course, the amount of equity you release will cover the cost of the home in full.
Just like your first mortgage, you will need to provide a deposit of around 20%. The more deposit you can provide, the more favourable your terms will be. If you are planning to remortgage to buy a second home, working with a specialist mortgage broker will help you to find and secure the best deal. This is a specialist sector of the market, so you should take the time to find the best long-term deal.