A Guide to Using Home Equity to Buy a Second Property

The UK has one of the largest property markets in Europe and consistently offers strong investment returns. This is the primary reason many people look at purchasing a second home. The second income can make life easier now and help you create a more prosperous retirement.

However, to buy a second, (or third) property, you’ll need a deposit. Typically, you’ll need a 25% deposit when purchasing a second property. That’s a hefty sum which is why many people look to release funds from their current home.

Understand how does home equity work

Home equity means the amount of your property that belongs to you. For example, if you buy a property for £200,000 and put down a 10% deposit, the mortgage company owns £180,000, and your equity (the part you own) is £20,000, or 10%. After 10 years of faithfully paying the mortgage, you may owe £100,000, meaning your equity is £100,000: 50% of the property value. (For the sake of the example, we’re ignoring property appreciation.)

In short, the longer you pay your mortgage the greater your share of the property value. This equity can be accessed in various ways:

Remortgaging

Speak to our mortgage specialists and you can take out a mortgage to replace your existing mortgage. The new mortgage will repay the original and give you additional cash. This can be used for your second property deposit.

Secured loans

It’s also possible to take out a loan which is secured against the house. This runs alongside the mortgage and works like a standard loan. The difference is, default and the lender can take your home.

Revolving credit

This is similar to a secured loan, however, you don’t have to draw all the agreed funds in one go. There is a distinct draw period which is followed by the repayment period, when you have to repay the credit you’ve borrowed.

Criteria and eligibility for securing a loan against your home

To borrow against your home you need to be listed as an owner on the deeds. You’ll also need the following:

Owned the property for at least 6 months
Proof of income – 3 months payslips or 3 years tax returns for self-employed
High credit score – most lenders prefer it to be over 600, we suggest to improve your credit score if too low
Debt-to-loan ratio below 30%
Any other document an individual lender wants

What interest rates and fees you should expect?

It’s typically cheaper to borrow money against your house than it is to use credit cards and unsecured loans. Depending on the mortgage you choose, the interest rate can be the same as the current Bank of England rate. Currently, the average mortgage interest rate is just below 6%. It is possible to get lower rates by choosing a longer-term fixed-rate mortgage deal.

You should also verify if there are other charges, such as a valuation fee, mortgage or equity release administration fee, or early repayment penalties. These can be an issue when you want to pay back your mortgage early, specifically when remortgaging. Your current mortgage may have these fees.

What are the risks and considerations when using your home as collateral

Before you go ahead, it’s a good idea to speak to our equity release specialists. They will highlight the dangers which include:

Failing to pay the new mortgage payment could mean losing both properties
Opting for a secured loan or second charge on your property is likely to mean a larger monthly expense than your current mortgage
Fees can add up quickly, you need to be ready for them

The process of applying for a loan against your house

Have your home valued
Work out your debt-to-income ratio (should be under 30%)
Check your credit score
Speak to Moneysprite to find the best mortgage deal – we’ll help with the application too
Provide fact-proving documents
Wait for approval
Sign final documents and wait for the mortgage to be finalised/additional funds released

Ready to explore your options for borrowing against your home?

It’s time to take a look at your finances and future plans. Using your home to invest in property can be a lucrative investment opportunity. Call us at 0345 450 4660 for a consultation and discover your options!