If you remortgage your rental property at the right time, you can cut costs or raise additional funds to finance the investment.
But, as with any type of remortgage, you’ll need to plan ahead and make sure you’re on top of all the details. Here’s our guide covering everything you need to know about refinancing a rental property.
What is the re-mortgage?
Remortgaging is when you switch from one mortgage to another. For example, you could switch to a new product with the same lender, or you could switch providers.
The reasons for refinancing vary, but it’s usually because borrowers are looking for a better deal or their current contract is ending.
Remortgage is also a good way to raise funds. Homeowners can do this by taking out a new mortgage that includes the outstanding value of their previous mortgage plus the value of the equity they wish to release.
Many homeowners have interest-only mortgages, so a rental mortgage could allow you to switch to a repayment product if you want to increase your share of the property.
The basics of refinancing a purchased-for-lease property are similar to a product change on a residential mortgage. However, lenders will view your request differently because it is a business interest.
What are the reasons to remortgage a buy-to-let?
There are many reasons why homeowners remortgage their purchased rental properties, but it’s usually either to cut costs or to borrow extra money to invest.
Here is more detail on some of the main reasons homeowners remortgage.
Get a better deal
As with homeowners, one of the most common reasons to remortgage a buy-lease is to get a better deal and save money.
If you have a repayment mortgage, you can benefit from lower monthly payments and lower interest rates. Alternatively, homeowners with interest-only mortgages can save money by getting a lower interest rate.
Expansion of the portfolio
Expanding your portfolio can be difficult due to the costs involved, but refinancing is a great way to generate the extra cash you need to buy a property.
If you decide to remortgage to expand your portfolio, the lender will conduct an appraisal of your existing properties to see how much equity you have and how much they can lend you.
Factors that could affect the amount you could borrow include:
if you are a higher rate taxpayer
the size of your wallet
what type of product you want (full remortgage, portfolio mortgage or second charge)
Real estate improvements
You can remortgage your rental property to free up equity for home improvements such as a new kitchen or converting an attic.
Lenders are likely to want to offer you a good deal if the improvements increase the value of your property. Not only will the improvements benefit you when you sell in the future, they could help you attract more tenants and generate higher rents in the short term.
Equity release program
Alternatively, you may want to remortgage to access an equity release program in order to receive a tax-free loan on your rental property.
To do this, you will need to be over 55 years old. It should also be noted that the equity release program options for rental properties are limited and the loan criteria could be more stringent.
If you go this route, your new mortgage could be similar to a life mortgage, meaning it won’t need to be paid off until you move into a long-term care facility or you died. If this happens, the mortgage would be paid off from your estate money or by selling the property.
Homeowners interested in parole mortgage loans should consult a specialist broker, as there are many factors to consider.
Debt repayment and consolidation
If you have debt to consolidate, remortgage your rental property is a useful way to simplify your finances.
You will be able to consolidate your debts into one monthly payment, which could end up being cheaper than your existing payments.
That being said, some lenders may view you as high risk because you have accumulated debt. This could mean that there are fewer options available and the amount you can borrow could be limited.
It is important to note that there are risks involved in transferring your debt to interest-only debt as part of a remortgage. You’ll need to make sure that you can afford your monthly repayments comfortably, and it’s worth talking to a mortgage advisor first.
How to find the best rental home loan
What a lender will offer you depends on how much you want to borrow and the equity in the property (that is, how much of the property you own).
The amount that a lender will offer you is known as Loan to Value (LTV). For example, if your property is worth £ 350,000, with £ 280,000 of equity, and you want to borrow £ 140,000 over 25 years, then your LTV is 40%. But if you wanted to borrow £ 210,000, your LTV would be 60%.
Mortgage rental rates, products and terms vary widely. For example, there are lenders who will grant remortgage up to 90 percent of the LTV.
To get the best rental mortgage loan, you need to have all of your finances in order. Here are some of the key things lenders will consider when determining how much to lend you:
the current equity and the size of the mortgage you want
your credit history and current income
And here are some of the things you need to watch out for to get the best deal:
Does your current lender need a prepayment charge before making the switch?
does the new lender offer a free mortgage?
the higher your LTV, the less likely the products are to be available
Mortgage Redemption Rates – What Do Homeowners Need to Know?
If you’ve completed your fixed or trailing initial rate period, chances are you’ll switch to your lender’s Standard Variable Rate (SVR). This rate is usually higher, which is why many homeowners remortgage when this happens.
For example, if you have a £ 175,000 interest-only mortgage on a 4.75% SVR, your monthly payments will be around £ 690.
If you remortgage at 75 percent LTV, you could get a new mortgage at an interest rate of around 3.75 percent. This would reduce your monthly payments to around £ 545.
Lowering your interest rate by one percent could save you around £ 145 per month, with a total annual savings of around £ 1,750.
It is also beneficial to keep an eye on the base interest rate of the Bank of England, as many products in the market will follow. If the base rate goes up, your mortgage could cost more, and if it goes down, you could save money.
Can you be refused a BTL remortgage?
Most mortgage repurchase requests are accepted without any problem. However, just because you already have a mortgage doesn’t mean you’re guaranteed to get a new deal from a lender.
A common reason mortgage repurchase applications are rejected is the failure of a “stress test”. These are the checks a lender performs to see if you could still afford to repay if interest rates were to rise significantly.
You could also be turned down for a mortgage if you have a low credit score or if a financial background check raises an issue such as a County Court judgment (CCJ).
There are several other reasons why your mortgage repurchase request could be rejected, such as:
have a short lease – if your property’s lease is less than 80 years, it may be difficult to get mortgage financing or sell it in the future
lenders do not favor flat roofs – because they are known to need more maintenance
Japanese knotweed – any mention of this plant is likely to result in rejection due to the serious problems it can cause
be close to nightlife – if your property is near a nightclub or bar, lenders might consider it high risk and difficult to sell
How can I obtain a mortgage repurchase?
Once you’ve decided you want a mortgage loan buyout, it’s important to have a clear picture of your financial situation.
How much of the original purchase is unpaid? How much money do you want to borrow? What types of reimbursement conditions and fees are you looking for?
You will then have to start looking for the best mortgage repurchase deals. Just like you would with home insurance, you can compare quotes from various lenders to see what prices, terms, and rates are available.
It may be advantageous to start preparing your mortgage repurchase request six months before the time when you want to switch to a new offer.
If you are nearing the end of your current contract, this will provide you with a sufficient buffer period to put everything in place so that you don’t risk switching to your lender’s higher standard variable rate.
It also gives you time to gather all your documents and pass all the relevant checks. As with applying for a rental mortgage, refinancing can be a long and complicated process.
That’s why it’s important to give yourself plenty of time to prepare and get unbiased financial advice from a mortgage broker to help you make the best decision.
Do you have questions about refinancing your rental property? Let us know in the comments below.
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