We have two properties and want to buy a third – can we raise money to help with the mortgage?

We’re looking to buy a holiday home which will be somewhere between £325,000 and £400,000 in value. 

We are mortgage-free on our home and currently have a second property with a buy-to-let mortgage which we rent out, worth £411,000. 

The house was purchased for £242,000 and we understand if we were to sell this property we would be liable for capital gains tax.

We have £70,000 which we could use as a deposit on a third property. We were looking at trying to get a mortgage to cover the difference. Alternatively, we were thinking of maybe selling the rental property.

Someone suggested to us that we could even try to get a second mortgage on the rental to raise funds as another option. 

Would two mortgages be a viable option? Would we save money or would we be better off taking out a single mortgage? 

 – P Yates, via email  

Shaun Church, of mortgage broker Private Finance, replies:  While you have £70,000 to put towards a new home, the stamp duty bill for purchasing a second home, in addition to other associated costs will quickly diminish this pot of money to around £45,000, assuming you purchase at £400,000.

This will leave you requiring a mortgage of around 90 per cent loan-to-value in order to cover the difference and purchase your holiday home. 

With very few lenders in the market currently offering 90 per cent LTV for second homes, your choice will be incredibly limited and the rate likely uncompetitive.

As your home is mortgage-free, I’d instead suggest your best option is to use some of the equity from your residence to build up a bigger deposit to put towards your holiday home. 

Broker Private Finance’s Shaun Church 

This should hopefully enable you to take out a mortgage roughly at around 50 to 60 per cent LTV to cover the remaining difference. 

A mortgage product at this LTV level will be far more competitively priced and manageable from a servicing perspective.

Working on the assumption that you’d like to avoid liquidating your assets if possible, we’d advise against selling your rental property, as doing so means you’ll face a capital gains tax bill and also lose out on a source of income. 

A second mortgage, or second charge as it’s otherwise known, is a viable option subject to income, however these can be expensive. I’d therefore recommend leaving your rental property and the mortgage as it is.

With a number of properties, some mortgaged, others mortgage free, we’d advise the best approach is to balance the debt across your property portfolio at around 50 per cent LTV. 

This will help to ensure you get the best mortgage rates and that you’re not overburdened by one specific property.