How to Release Equity to Buy Another Property
There are 2 main options for your situation that allow you to release equity to buy another property.
- You can release equity to buy another property, such as a buy-to-let to rent out, via a simple remortgage on your home. Unless you have large cash reserves to afford the new property outright, you’ll likely also need a buy-to-let or second home mortgage
- You can release equity from your property to buy a new house, renting out your old one at the time, via a process called let to buy
In both these situations you don’t need one lender to do both mortgages. You can choose from the whole of the market for each mortgage and use 2 different lenders, meaning you’ll have access to more and better products.
Remortgaging to Release Equity to Buy Another Property
To release equity to buy a buy-to-let or second property, you can simply remortgage your home for an amount greater than your outstanding mortgage balance. You can then use these funds – along with any cash savings – as a deposit on the new rental property. If the funds released are large enough, it may even be possible to purchase the property outright – although this is less likely.
Note that increasing your outstanding mortgage balance on your home to release equity will increase your mortgage term and/or monthly payments, as well as overall borrowing.
Release equity to buy a buy-to-let
In this situation, you’ll have a main residential mortgage on your home, and likely a new buy-to-let mortgage on the new property. Fortunately, lenders use expected rental income to calculate affordability for a buy-to-let mortgage, so you don’t have to worry about both affording both mortgages based on your personal income.
Release equity to buy second home
When you release equity from your house to buy a second home, you’ll find the second home affordability criteria stricter. This is because you won’t be renting out the second property, so there’ll be no rental income to cover the monthly payments like with a buy-to-let.
The 2 mortgages in this scenario are: the main residential mortgage on your house and a new residential mortgage on your second home. The new lender will need to make sure that you can cover both mortgage payments based on your personal income and affordability and will likely require a deposit of at least 15%.
How to Rent Out Your House and Buy Another with Let to Buy
Renting out your house and buying another with let to buy works similarly but inversely to releasing equity from your home to purchase a new buy-to-let. You still take out 2 mortgages, but this time it’s a buy-to-let remortgage on your existing property and a residential mortgage on your new home.
You raise funds via the buy-to-let mortgage on your existing home and use these funds – in addition to any cash savings you may have – as a deposit for your new mortgage on your new home.
Let to buy is a popular way to remortgage your existing property on to a buy-to-let so you can rent it out, releasing equity from it at the same time that you can use a deposit for a new home.
Consent to let
An alternative to remortgaging your current property onto buy-to-let is to approach your current residential lender and ask for “consent to let”. This is where your lender gives you permission to rent out your property to a tenant, without the need to remortgage it onto a buy-to-let basis. However, lenders will sometimes only consider consent to let if you intend on moving back into this property in the foreseeable future. People will often apply for consent to let if they’re currently in the middle of a fixed rate that has early repayment charges.
Nonetheless, it’s still often worth asking your lender what their stance is because your current interest rate will likely be cheaper than you’ll get on a buy-to-let mortgage.
How Much of My Equity Can I Use to Buy Another Property?
The first thing to consider when releasing equity to buy another property is how much equity you can release. The second thing to consider is how much you’ll need in mortgage deposit to purchase the new property (unless you’re buying the property outright). These figures will ultimately depend on your situation. Don’t worry, we’ve broken it down below.
Remortgage to buy a buy-to-let or second home
Equity available in current home
You can typically remortgage your home at an LTV of up to 95% of the existing property value, subject to a valuation and affordability assessment.
Deposit needed for new mortgage
You’ll usually need a deposit of at least 25% for a buy-to-let mortgage, and 15% for a second home mortgage.
Let to buy
Equity available in current home
You can typically release up to a maximum LTV (loan-to-value) of 75% of your existing property using a buy to let mortgage, subject to a valuation and rental assessment.
Deposit needed for new mortgage
You’ll usually need at least 5% in deposit for the mortgage on your new home.
How Much Can I Borrow on a Second Home?
The amount you can borrow on a second home mortgage will depend on your financial circumstances, such as your income, dependants and the amount owed on your first mortgage. As long as you can afford both your first and second mortgage payments, you should be able to borrow a decent amount for your second home. You’ll need to provide at least 15% in deposit for a second home, due to the increased risk for the second mortgage lender.
How Much Can I Borrow on a Buy-to-Let?
You can borrow up to 75% of the property purchase price on a buy-to-let mortgage.
Most buy-to-let mortgages are interest-only. This means you only make interest payments each month and repay the loan at the end of the mortgage term. It also means affordability calculated different for a buy-to-let mortgage compared to a normal homeowner mortgage.
Lenders use expected rental income to calculate affordability on a buy-to-let mortgage, often requiring that the rental income covers 125% – 145% of the monthly mortgage interest payments.
The buy-to-let lenders will still want to check your income to make sure you can afford to cover any periods when there is no rental income and any maintenance or repairs the property may need in the future.
It’s important to remember that you also need to factor in any potential lettings agent fees and that the rental income is still a form of income and therefore you may be taxed on it.
Use our buy-to-let rent calculator to find out how much you need in rental income to qualify for a mortgage.
How Much Can I Borrow on a Let to Buy Mortgage?
For the buy-to-let mortgage on your existing property
Remortgaging your home on to buy-to-let works the same way as getting a buy-to-let mortgage on a new property.
Most lenders will cap the buy-to-let mortgage on your current property at 75% of its value, although there are a few who do go higher. The loan can also sometimes be restricted by the anticipated rental income, with lenders typically looking for the rent to be a minimum of 145% of the monthly payment at a “stress test” rate of around 5%. This, rather than your earned income, will decide how much you can borrow.
For the residential mortgage on your new home
The residential mortgage on the new property will be assessed against your earned income as usual. However, the lender will still look at the impact of a buy-to-let mortgage in the background when determining how much you can borrow. Lenders have slightly different ways of doing this. They’ll want to know how much you’re borrowing on the buy-to-let mortgage and what your rental income will be to ensure you can afford both mortgages.
It’s also worth noting that, as you’re looking to buy your second residential property (despite intending to live in this new home), you’ll have to pay the Additional Stamp Duty surcharge of 5%.
Rent Out House to Buy Another Key Considerations
Here are some key considerations if you’re thinking about renting out your home:
- Check mortgage and local regulations:
- Review your existing mortgage agreement to ensure that renting out the property doesn’t violate any terms. Some mortgages have restrictions on renting
- Check local regulations and laws to ensure compliance with any requirements related to renting out residential properties
- Inform your lender:
- If you plan to rent out your home, it’s advisable to inform your mortgage lender. They may provide guidance on any necessary steps or adjustments to your mortgage agreement
- Calculate rental income:
- Determine how much rental income you can reasonably expect to generate. This calculation should consider factors such as local rental market conditions, property size, amenities, and location
- Property management:
- Decide whether you will manage the property yourself or instruct a property management company to manage it on your behalf. Property management companies can handle tasks such as tenant screening, rent collection, and property maintenance
- Tax implications:
- Understand the tax implications of rental income. Rental income is generally taxable, but there may be deductions available for expenses related to property management and maintenance
- Affordability for a new property:
- Consider how the rental income from your current home contributes to your ability to afford a new property. Lenders may take rental income into account when evaluating your financial situation for a new mortgage
- Financial cushion:
- Have a financial cushion for unexpected expenses related to the rental property, such as maintenance or repairs. Being a landlord comes with responsibilities, and having reserves can help you handle unforeseen circumstances
- Tenant screening:
- Screen potential tenants thoroughly to minimize the risk of issues such as non-payment of rent or property damage
- Long-term vs. short-term rentals:
- Decide whether you want to pursue long-term rentals or short-term rentals (such as through platforms like Airbnb). Different rental strategies have varying requirements and considerations
It’s crucial to approach renting out your property with careful planning and consideration of your financial goals. Consulting with an estate agent, and mortgage broker can provide valuable insights tailored to your specific situation. Call us on 023 8235 2300 for more information.
