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Questionnaire: Can I Use My First Property as Equity?

By: Emma Eilbeck BA (hons) - Updated: 25 Mar 2013 | comments*Discuss
 
First Home Second Home Deposit Property

If you are considering buying a second home but are not cash rich, you may want to think about releasing some of the equity in your first home.

Many would-be second homeowners find it hard to raise a deposit for their second home because of other financial commitments, but they know they would be able to cope with the second monthly mortgage payments.

Releasing the equity in your first home to pay for another is not appropriate for everybody though, these questions should give you an idea of whether it is right for you.

Questionnaire

1) How Much Mortgage Is Outstanding On Your First Home?
  • A) More than 70%
  • B) Between 50-70%
  • C) Lower than 50%
2) How Old Are You?
  • A) Over 60 years old
  • B) 45-60 years old
  • C) Below 45 years old
3) How Much of A Deposit Do You Need?
  • A) Over £40,000
  • B) Between £20,000-£40,000
  • C) Less than £20,000
4) Why Can You Not Save For A Deposit?
  • A) Can’t afford to
  • B) Currently have other financial commitments but these will soon finish
  • C) We are paying rent on a second property
5) What Are You Buying Your second Home For?
  • A) A holiday home
  • B) Part holiday home, part investment
  • C) Investment property/to make money
Your Answers

Mostly A – You Do Not Have Enough Equity

It sounds like it could be risky for you to consider using the equity in your property to fund a second home. If you have less than 30% equity in your home a mortgage lender may not let you remortgage to release the capital. The 70% loan to value threshold is usually the cut off point for cheaper mortgage rates, once you go past 70% your mortgage rates will increase.

If you are paying both increased mortgage rates and a second mortgage this will raise issues of affordability with the mortgage lender. If you have less than 30% equity in your property and are nearing retirement it ‘s unlikely a lender will let you release money as you will not have enough working years to pay any shortfall.

The larger the deposit you need the more equity you will need to have in your property, and withdrawing anything above £30,000 will ring alarm bells for a mortgage lender. If you simply want the property as a holiday home but are unable to raise a deposit through saving, you may want to ask yourself how you are going to pay the second mortgage.

Mostly B - It Could Be Taking On More Than You Can Afford

You sound as though you are borderline in terms of how risky it would be for you to use the equity in your home. If you have nearer to 50% equity in your home and not 70% this lowers the risk. It will also depend on how much your home is worth. If your home is worth £300,000 and you have 50% equity and only need to withdraw £20,000 for a deposit you should not have any problems.

The less equity you have though and the more you want to borrow, the riskier it gets. Your age will play an important part in getting a second mortgage. A lender will be looking at your finances and want to know that you can afford the payments. It is rare a lender will give you a mortgage into retirement, so the later in life you buy the less time you have to pay it off.

Mostly C – You Should Be Able To Use The Equity

It sounds like you are in a good financial situation and a lender would be willing to let you release the equity from your home to buy a second property. The main points they will take into consideration is whether you can afford the payments on both properties and whether your second home will prove to be a worthwhile investment and go up in value.

If you already have other financial commitments that have prevented you from saving a deposit, such as rent on another property this is a sign you will be able to afford the second mortgage payments. As long as you have equity of above 50% and don’t want to borrow too much you should be able to release the money.

House prices are fluctuating constantly, which is why it can be seen as risky to use the equity in your home to fund another. If house prices suddenly crash you could find yourself in negative equity on your first property. If however you are lucky enough to be sitting on a property with lots of equity there should be no reason you cannot tap into this and use it to fund your second home.

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