Remortgaging to Finance a Second Property - Benefits, Risks, and Alternatives
Buying a property can be an exciting and lucrative investment opportunity, but it can also be a significant financial undertaking. Remortgaging, or switching your current mortgage to a new lender or product, can be one way to finance the purchase of another property.
In this blog, we will explore how remortgaging works when you want to buy another property, the potential risks and downsides of using a remortgage for this purpose, and tips for making an informed decision.
How does remortgaging work to buy another property?
Remortgaging can provide homeowners with access to additional funds that can be used to finance the purchase of a second property. There are two main ways to do this: porting your mortgage or taking out a new mortgage.
Porting your Existing Mortgage
Porting your existing mortgage means transferring your current mortgage to a new property. This option is available if your lender allows it, and it can be an attractive option if you have a good mortgage deal with favorable terms, such as a low interest rate.
However, it is important to note that not all mortgages are portable, and even if they are, there may be restrictions on the value of the property you can purchase or the time frame in which you must complete the transaction.
Taking Out a New Mortgage
Alternatively, taking out a new mortgage can provide you with more flexibility in terms of the amount you can borrow and the types of properties you can purchase. This option may also allow you to take advantage of better interest rates or other benefits that are available with a new mortgage product.
However, it is important to remember that taking out a new mortgage means that you will be subject to new eligibility criteria, which may affect your ability to secure a loan.
Benefits of Using a Remortgage to Finance Another Property
Access to additional funds
Remortgaging to buy another property can provide access to additional funds that can be used to purchase the property.
If you have built up equity in your current property, you can release some of this equity by remortgaging and using the funds as a deposit for the other property. This can be particularly useful if you do not have enough savings to cover the deposit.
Potentially lower interest rates
Interest rates can fluctuate over time, and if they have decreased since you first took out your mortgage, you may be able to remortgage at a lower rate. This can save you money over the life of your mortgage and reduce your monthly mortgage payments. Lower interest rates can also make buying a property more affordable and financially feasible.
Increase your property portfolio
Owning another property can be a smart investment, particularly if you plan to use it as a commercial property or a rental property to generate rental income. This investment property can provide a steady source of passive income and potentially increase your overall net worth. Additionally, owning multiple properties can help to diversify your investment portfolio and reduce your overall investment risk.
Potential for capital growth
Property values can increase over time, so buying a second property can provide an opportunity for capital growth and a potential return on investment when you eventually sell the property. This can be particularly beneficial if you purchase the property in an area that is experiencing significant growth and development.
Diversification of investments
Investing in property can help to diversify your investment portfolio and spread your risk across different asset classes. This can be particularly useful if you have a lot of money invested in stocks or other types of investments that are subject to market volatility.
Potential Risks and Downsides of Using a Remortgage
Monthly Mortgage Payment Risks
One of the main risks of remortgaging to buy a second property is that your monthly mortgage payments may increase significantly. This is especially true if you're borrowing a large sum of money or if interest rates rise in the future. If your mortgage payments become too high, you may struggle to keep up with them, which could put you at risk of losing both your primary residence and the second property.
There is also the possibility of repossession. If you're relying on rental income from the other property to help cover your mortgage payments, there's no guarantee that the property will be rented out consistently or that the rental income will be enough to cover your mortgage payments (depends on season, demand, location, for example.). If you can't keep up with your mortgage payments, you could risk losing both your primary residence and the second residence.
Additional Fees and Costs
Remortgaging to buy a second property can come with additional fees and costs, such as arrangement fee, legal fee, and valuation fee. These costs can add up quickly, so it's important to factor them into your overall budget when considering whether remortgaging is the right option for you.
Complexity and Time-Consumption
This process can often be a complex and time-consuming one. There's always the risk that something could go wrong during the process, such as a delay in the sale of your primary residence or a change in your financial circumstances that affects your ability to keep up with the mortgage payments.
Therefore, it's important to seek professional advice and to carefully weigh up the potential risks and benefits before making a decision.
Overall, while remortgaging can be a useful way to finance a property purchase, it's important to be aware of the potential risks and downsides before making a decision. By carefully considering these factors and seeking professional advice, you can make an informed decision about whether remortgaging is the right option for you.
Tips for Remortgaging to Buy Another Property
If you are considering using a remortgage to finance the purchase of another property, there are several steps you can take to help you make an informed decision.
Review Goals and Financial Plans
First, it is important to prepare for a remortgage by reviewing your current financial situation and credit score. This can help you determine how much you can afford to borrow and what interest rates you are likely to qualify for.
Calculating your Remortgage Amount
Before remortgaging to buy another property, it is essential to calculate how much you need to borrow. This will depend on several factors, including:
Purchase price of the property
You will need to consider the purchase price of the second property you wish to buy. Research the market to find out the average prices of similar properties in the area you are interested in.
Your mortgage balance
Your current mortgage balance will also affect how much you need to remortgage. This will depend on how much equity you have in your current property.
Other costs associated with the purchase
In addition to the purchase price of the property, there are other costs associated with buying a property, such as legal fees, stamp duty, and survey fees. Make sure you factor these into your calculations to ensure that you have enough funds to cover them.
Let's say you currently have a mortgage on your primary residence with a balance of £200,000 and the property is worth £300,000. You want to buy a property for £250,000.
To calculate how much you need to remortgage for the second property, you would need to take into account the purchase price of the property, any associated costs (such as legal fees and stamp duty), and the amount of equity you have in your primary residence.
Assuming you have enough equity in your primary residence to borrow against, you might be able to remortgage for £250,000 to finance the purchase of the second property. This would mean that your total mortgage balance would be £450,000 (£200,000 on your primary residence plus £250,000 on the second property).
It's important to remember that this is just an example and the actual amount you can remortgage for will depend on a variety of factors, including your credit score, income, and the lender's lending criteria.
How long does it take to remortgage to buy another property?
The length of time it takes to remortgage when buying another property can vary depending on a number of factors, such as the complexity of the application, the lender's requirements, and the amount of paperwork involved. Generally speaking, the remortgage process can take anywhere from 4 to 12 weeks, although it can take longer in some cases.
It is important to note that the remortgaging process can take longer when buying another property than when simply remortgaging your existing property. This is because the lender will need to assess the affordability of both mortgages, and may require additional documentation such as a tenancy agreement if you are planning to rent out the second property.
Additionally, there may be delays if there are issues with the valuation of the property or if there are complications with the legal process.
To help speed up the process, it is important to be organized and have all the necessary documentation ready when applying for the remortgage. You can also consider using a mortgage broker who can help guide you through the process and ensure that everything is in order.
Alternatives to Remortgaging for Buying Another Property
While remortgaging can be a useful option for financing a second property, it is not the only option available. Other financing options include personal loans and bridging loans.
Personal loans can be a good option if you only need to borrow a small amount of money, but they may come with higher interest rates than a remortgage or other types of loans.
Bridging loans, on the other hand, are designed specifically for property purchases and can provide you with the necessary funds to buy a second property before selling your first one. However, they can be expensive, and you may be required to pay back the loan within a short timeframe.
It is important to carefully consider all of your financing options and compare the costs and benefits of each one before making a decision. It may also be helpful to seek advice from a financial professional, such as a mortgage broker or financial advisor, to ensure that you are making an informed decision.
Remortgaging can be a useful tool for financing the purchase of a second property, but it is important to carefully consider the potential risks and downsides before making a decision.
By preparing for a remortgage, calculating how much you need to borrow, and shopping around for the best deals, you can increase your chances of making a successful purchase.
However, it is also important to consider alternative financing options and seek professional advice before making any financial decisions. With careful planning and research, you can make an informed decision that meets your financial goals and objectives.