How the remortgage-for-purchase strategy works
You have a home worth £400,000 with an existing £180,000 mortgage. Equity = £220,000. You remortgage to a new lender at 75% LTV (£300,000), redeem the existing £180,000, and walk away with £120,000 in cash. That £120,000 becomes the deposit on a second property worth, say, £400,000 with a 70% BTL mortgage of £280,000.
Result: two properties, total mortgage £580,000, total value £800,000. Total LTV across the portfolio: 72.5%.
What lenders ask when you capital raise
- Purpose of funds. "Deposit on a residential second home", "Deposit on a BTL", "Cash purchase of UK property" — all generally acceptable. "Deposit on overseas property" or "Business investment" are restricted by many lenders.
- Affordability on the larger loan. Standard residential affordability stress test (rate + 1%) against your income.
- Evidence of intent. Some lenders ask for a memorandum of sale or estate agent letter on the target property.
- Source of deposit on the second property. The second lender will treat the released equity as your deposit and ask for proof of provenance.
Stamp Duty (SDLT) on the new purchase
England & Northern Ireland (from October 2024):
- Second home/BTL up to £250k: 5% surcharge (standard rate is 0% in this band, total 5%).
- £250k–£925k: standard 5% + 5% surcharge = 10%.
- £925k–£1.5m: standard 10% + 5% surcharge = 15%.
- Above £1.5m: standard 12% + 5% surcharge = 17%.
Worked example: £400,000 second home. SDLT = (£250k × 5%) + (£150k × 10%) = £12,500 + £15,000 = £27,500.
Residential remortgage vs second-charge mortgage
- Residential remortgage. Cheaper (4%–5%), simpler, but replaces your entire existing mortgage — bad if you're mid-fix with high ERCs.
- Second-charge loan. Sits behind the first mortgage. More expensive (7%–10%), but leaves your cheap fix untouched. Useful when ERCs make breaking the first mortgage cost-prohibitive.
Rule of thumb: if breaking your existing fix costs more than the difference between residential rates and second-charge rates over the remaining term, take the second charge.
Tax considerations
- If the second property is a BTL: mortgage interest on the BTL is tax-deductible via the 20% credit (personal name) or fully deductible (limited company SPV). Interest on the additional borrowing on your main home that funded the BTL deposit is also deductible against rental income — keep documentation.
- If the second property is a second home: no income tax deduction on either mortgage. CGT applies on disposal.
- Furnished holiday let: tax treatment changed in April 2025 — broadly aligned with standard BTL.
When the strategy works — and when it doesn't
Pros
- Cheap residential rates vs expensive BTL or bridging.
- Single lender relationship for your main mortgage.
- Released equity counts as 'cash' for the second purchase.
- Builds a portfolio without selling your main residence.
- Mortgage interest on BTL deposit funds may be tax-deductible.
Cons
- Overleverages your main residence — repossession risk if income drops.
- Triggers SDLT surcharge on the new property.
- Higher monthly payments on your main home reduce disposable income.
- Breaking existing fix can trigger £5,000+ ERCs.
- Affordability stress tests harder at higher LTV.