How does using another property as collateral work for a mortgage?

9 replies

satraa · 26/12/2023 23:35

If we wanted to buy a property for £1 million and owned a flat mortgage free worth £400 thousand, could we buy that property with no cash deposit if we used the flat as collateral?

OP posts:

AllergicCatLover · 26/12/2023 23:50

Your mortgage lender will need to lend you £1m to buy the property as they have no way of getting money from your flat. So, you have no deposit unless you are selling the flat.

I think it's extremely rare / not possible for domestic property mortgages to work without deposits. Happy to be corrected.

hannahcolobus · 26/12/2023 23:51

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HP89 · 27/12/2023 00:03

Cheeky follow as I also want to know the answer to this!

grandkk454 · 27/12/2023 00:14

We did. We owned a property and wanted to buy another home with a mortgage but had no real cash deposit. We borrowed some against the property we owned outright in order to get a deposit and score a lower ltv on the house we were buying.

redastherose · 27/12/2023 00:38

If you earn enough to service a mortgage on the million pound house you would take a mortgage out for the maximum you can borrow against the flat (maybe 75%) that would give you the deposit and the balance of the mortgage on the house. You'd need a broker to set it up for you and find a lender who would agree you would have borrowings of something like £700k to service though.

zigzag716746zigzag · 27/12/2023 00:52

We were going to do this about 15 years ago and it was all quite feasible (although we didn’t go ahead), but tried to do it 2 years ago and couldn’t make it work.

Twiglets1 · 27/12/2023 07:21

Never heard of this “collateral “ idea. Most sensible thing is surely to sell the 400k property and use the money to have a smaller mortgage on the £1M property?

ibelieveinmirrorballs · 27/12/2023 09:40

As I understand it you would need to extract equity from the flat to provide the cash deposit for the house purchase, which would give you two mortgages to pay - one against the flat and one against the house. Eg if you took £200k out of flat you’d have £200k (buy to let?) mortgage against the flat and then an £800k mortgage on your residential property.

user701 · 27/12/2023 09:45

As others have says, you don’t. You mortgage the flat, use that money as a deposit and then end up with two mortgages, one against each property.

Not nearly as easy to do as it used to be.

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