Can I Raise Money From My Mortgage to Invest in a Business or Property?

If you own a property with equity, you may be able to raise additional capital against it.

But the calculation is not simply:

Property value – mortgage balance = money available to withdraw.

A mortgage lender will consider:

• Available equity
• Loan-to-value
• Affordability
• Property
• Credit history
• Purpose of the money
• Existing borrowing
• Proposed transaction

The reason you want the money can be particularly important.

What Is Capital Raising?

Capital raising means increasing borrowing secured against a property to release funds for another purpose.

For example:

Property value: £500,000 Existing mortgage: £200,000

The property contains £300,000 of gross equity.

That does not mean the owner can automatically borrow another £300,000.

The lender will apply maximum loan-to-value and affordability requirements.

Why Do People Raise Capital?

Common reasons can include:

• Deposit for another property
• Investment-property purchase
• Property refurbishment
• Business purposes
• Repaying existing borrowing
• Buying out another owner
• Other legitimate expenditure

Lender policies concerning acceptable purposes vary.

Remortgaging to Buy Another Property

A homeowner or landlord may want to release equity to provide a deposit for another property.

The lender on the existing property may want information about:

• Amount being raised
• Proposed use
• Existing mortgage
• Property value
• Applicant income
• Affordability

The lender financing the new purchase will separately assess that transaction.

Both sides therefore need to work.

Raising Capital From a Buy-to-Let

A landlord may potentially release equity from an existing investment property.

The amount available can depend upon:

• Property value
• Current mortgage
• Rental income
• Interest coverage calculation
• Maximum loan-to-value
• Portfolio position
• Purpose of funds

The affordability methodology can therefore be very different from a residential remortgage.

Raising Money for Business Purposes

This requires particular attention.

Some residential mortgage lenders may restrict capital raising for certain business purposes.

Others may have criteria allowing appropriate cases.

Depending upon the transaction, a conventional residential remortgage may not be the most suitable financing structure.

Potential alternatives could include:

• Further advance
• Second-charge mortgage
• Buy-to-let remortgage
• Commercial mortgage
• Bridging finance
• Other specialist secured finance

The correct solution depends upon what is actually being funded.

First Charge or Second Charge?

Suppose your existing mortgage has an attractive interest rate.

Replacing the whole mortgage simply to raise additional money may not always be the best option.

A second-charge mortgage could potentially allow the existing first mortgage to remain in place while additional borrowing is secured separately.

However, second-charge lending has its own:

• Interest rate
• Fees
• Term
• Affordability assessment

The total cost needs comparison.

What About a Further Advance?

Your existing lender may potentially offer additional borrowing without replacing the existing mortgage.

Again, this should be compared with alternative options.

The fact that an existing lender will offer a further advance does not automatically mean it represents the best overall solution.

Could Bridging Finance Be Used?

Bridging can potentially be appropriate where money is required for a shorter period or where conventional mortgage finance cannot meet the transaction timetable.

Examples can include:

• Auction purchases
• Refurbishment
• Chain breaks
• Property not initially mortgageable

Bridging is generally more expensive than conventional long-term mortgage borrowing and requires a credible repayment or refinance strategy — commonly called the exit.

It should not be used simply because it is easier to arrange quickly.

Equity Is Not the Same as Affordability

This is one of the most important points.

You might own a £1 million property with only a £200,000 mortgage.

That represents substantial equity.

A regulated residential mortgage lender must still establish that additional borrowing is affordable.

Security alone does not remove affordability requirements.

Capital Raising Can Increase Long-Term Interest

Suppose you release £50,000 and add it to a mortgage with 25 years remaining.

Even if the mortgage rate is lower than alternative borrowing, repaying that £50,000 over 25 years could produce substantial total interest.

The monthly payment should therefore not be considered in isolation.

Questions to Answer Before Raising Capital

Establish:

1. How much is required?
2. What is it for?
3. Which property contains the equity?
4. What mortgage is currently secured against it?
5. What is the existing interest rate?
6. Are early repayment charges applicable?
7. What is the property worth?
8. Is it residential, buy-to-let or commercial?
9. How will additional borrowing be repaid?
10. Is the requirement short-term or long-term?

Only then should the available structures be compared.