Seen loads of odd topics on STW, hoping someone can help answer this one!
Someone I know wants to buy a new house before selling their old one – for whatever reason, I’m not about to debate that here.
They’ve paid the mortgage off on their existing property so own it outright, but they want to move to a bigger (more expensive…) property. Would they be able to use their existing house as collateral in order to borrow a larger amount than the lender would normally offer them based on their income?
i.e. If their house is worth lets say 200k and lender will offer a mortgage for e.g. 100k could they borrow 300k or therabouts from the bank using the existing properties equity?

Taking out an interest only mortgage to keep the payments affordable initially then once they’ve moved and sold the old house remortgage to a repayment mortgage after using the money from the house sale to bring the loan back to within what they would be approved for.

Yes it is that complicated, and yes I have told them it’s daft, but they would like to explore this option anyway – so does anyone know if this is possible?

Thanks for any advice, even if it’s “no it isn’t possible” at least I can go back with that.

Someone I know wants to buy a new house before selling their old one

The buyer knows they’ll need to pay additional stamp duty as this will be a 2nd property?

Sounds complicated, and banks don’t like complicated. And if they did say yes the interest rate also likely to be higher as treated as a2nd property again.

Possibly, depending on the lenders criteria. Some lenders have ltv limits on res lending if a customer owns any other properties. Where I work it is 75%. They wouldn’t take the other property as ‘collateral’ – they would have to raise a mortgage against they house they already own as the deposit for the new one. But there again the criteria for capital raising are very strict. If they seriously wanted to contemplate it their income would be need to be shown they could support both loans. Either way I’d suggest employing a decent mortgage broker.

I don’t think they could afford to pay 2 mortgages, but they do have a deposit already that might bring the total mortgage down to 75% LTV. I’d have to check.

100k could they borrow 300k or therabouts from the bank using the existing properties equity?

I would have thought that that would fail affordability criteria. It doesn’t really matter how much they have in assets if they can’t afford a 300K loan then they can’t afford it.

The buyer knows they’ll need to pay additional stamp duty as this will be a 2nd property?

Doesn’t this depend on how long they own the two for? IIRC there is some sort of bridging allowance where you don’t pay/get it back if you sell the first within a certain time

2nd stamp duty can be reclaimed if they sell their first property within a certain time frame.

Time frame is 3 years

I would have thought that that would fail affordability criteria. It doesn’t really matter how much they have in assets if they can’t afford a 300K loan then they can’t afford it.

I see where you’re coming from but I think their POV is that they can afford the interest only payments and the equity in the house would provide evidence that they could pay the balance at the end. Only they don’t intend to keep the house that long but you get the drift.

Thanks for the info regarding the stamp duty, I knew they would have to pay more but good to know they can claim it back within 3 years.

I think I’ll advise them to speak to a mortgage broker to discuss options. Do they normally charge a fee, or get a % from the mortgage vendor if they go through a broker?

Bear in mind these days banks what to see a bulletproof plan on repaying the capital on interest only mortgages these days.

Relying on the equity of a property isn’t generally acceptable as the value may fall etc.