Can I remortgage my home to buy a rental property?

Abbie Laughton-Coles
Abbie Laughton-Coles
Updated 6 July 2022  | 3 mins read

If you’re looking to add a new stream of monthly income to your finances, purchasing a buy-to-let property may be an option worth considering.

Unless you have enough savings to cover a deposit or to buy it outright, it can seem out of reach financially. However, you may want to consider remortgaging your current home to help you raise enough money to buy a rental. It is important to consider your personal financial situation and how comfortable you are with making the repayments. Missed payments may lead to you repossession of your home. 

Key points

  • Releasing equity from your home can give you enough money to purchase a rental property
  • Analyse the costs associated with a rental property to find out whether it makes sense financially
  • You may be able to buy a rental property outright by remortgaging
  • Buy-to-let mortgages generally require higher deposits and have higher interest rates than residential mortgages

Can I remortgage to buy a second property for renting?

Yes, you can remortgage to buy a rental property but it’s definitely not a decision to be made lightly.

Taking on two mortgages at the same time can put you under financial stress, especially if there are periods of time where the rental property has no tenants, or it needs renovations to meet rental standards.

How do I remortgage one house to buy another?

Saving up enough money to buy a second property can seem like an impossible task if you’re already making mortgage payments on your own home.

But there are two different ways in which remortgaging your home could help you become a landlord.

The first method is to remortgage to a deal with a better mortgage rate, so your monthly repayments will be lower. You can then put aside the money you’re saving each month to build up a healthy deposit. Watch out for early repayment charges (ERCs) if you’re leaving a fixed deal though.

Alternatively, you could unlock some of the equity in your home and release cash by remortgaging.

This means your monthly payments will actually be more expensive because you’re increasing the size of your mortgage. If you have enough equity in your home, you may be able to purchase a rental property outright when you remortgage. This would mean that you wouldn’t need two mortgages.

You may want to think about this option if house prices have risen in your area and your house is worth a lot more than you bought it for, or you’ve already paid off a substantial amount on your mortgage.

There will be stringent affordability checks to ensure that you’re able to make larger monthly repayments though.

Lenders will assess how much equity you have in your property and your income, as well as any savings you may have. They’ll also run a hard check on your credit report and investigate any debt.

Always seek professional help before making such a large financial commitment. 

Financing your investment

If you can release enough cash from remortgaging your home to purchase a rental property outright, it could really save you a lot of money and hassle.

Although your monthly repayments will increase, you won’t have to take out a buy-to-let mortgage as well, which usually require higher deposits and have higher interest rates than residential mortgages.

In fact, a buy-to-let deposit is usually around 25% of the rental’s value, but it could be as much as 40% depending on the lender.

It’s worth noting that buy-to-let mortgages are generally interest-only, and you’ll be expected to pay off the full amount of the mortgage at the end of the term.

An alternative to remortgaging is to sell your home and move to a cheaper house, this could leave you with money left over to purchase a rental property.

Are buy-to-let properties a good investment?

Yes, buy-to-let properties can be a good investment.

With house prices increasing by 10.2% in just a year between October 2020 to 2021 according to the UK House Price Index, it’s harder than ever for first-time buyers to get on the property ladder, which has resulted in the rental market booming.

If the buy-to-let property you’re looking to purchase is in a desirable area and is of good quality with competitive rent, you should have no trouble finding tenants.

In contrast with other investments, like stocks and shares, you’ll receive a monthly income from your rental, rather than your money being locked away for the foreseeable future.

Remember that if the property is empty for a prolonged period, you won’t receive rent and may struggle to keep up with mortgage repayments (if you have any) and bills.

Of course, you can also sell it in the future and hopefully make a profit if house prices have gone up.

Consider the cost

There are a number of costs to consider both with remortgaging and buying a rental property. You should weigh it all up and analyse whether the potential rental income is enough to make it worthwhile.

Costs for remortgaging include:

  • ERCs – Your current deal may require you to pay an ERC for switching to a new mortgage. This is usually charged as a percentage of the outstanding balance and can be as much as 5% if you’re on a fixed-rate deal. Always check the terms and conditions
  • Arrangement fee – This is essentially a charge for setting up your new mortgage
  • Valuation fee – Pays for a valuation survey of your property
  • Conveyancing fee – Legal fees paid for a solicitor to manage the remortgage

Apart from the costs of taking out a new mortgage and the monthly repayments for your buy-to-let property (if required), here are just a few of the costs you may also have to pay:

  • Repair costs – It’s likely that something will break in your rental property (the washing machine, for example) whether that’s due to wear and tear or your tenants, but it’s up to you to get it fixed
  • Letting agent fees – If you plan on using a letting agent to manage the property and advertise for new tenants, it’s going to cost you
  • Regular maintenance – Keeping your rental in tip top condition is a must, not only for the safety of your tenants but also to avoid it falling into disrepair and requiring extensive work in the future
  • Landlord insurance – Protects your property and any furniture you own. You can also get landlord’s liability insurance and legal expenses cover
  • Renovation costs – You may have to redecorate and fix any potential hazards to get the property to rental standard. Also assess whether all safety regulations are being met

It’s really important that you don’t overestimate how much income you’ll make from your rental property. Make a budget of the potential incomings and outgoings to see whether it’s a viable option for you financially. You must be comfortable in making such payments monthly. Missing repayments might lead to you losing your home. 

Can I afford to invest in buy-to-let?

This will completely depend on your circumstances. The last thing you want to do is put yourself under unnecessary financial stress.

Remortgaging comes with costs and if your monthly repayments increase too, your income can take a hit.

If you then add the expense of buying a second property, taking out a second mortgage and the expenses associated with running a rental property, it can really add up.

You may want to think about talking with a financial adviser before taking the plunge. They can help you figure out how much you can make and the timeframes for seeing a return on your investment.

Have a think about whether it’s worth it for you. Apart from analysing whether it makes sense financially, it also will take up time and you’ll need to make sure that you can devote enough attention to your rental property.

Always think through what you would do if you weren’t able to find a tenant, or you were struggling to make your mortgage repayments. It’s important to consider the worst case scenarios before you make a decision.