Remortgaging to buy a rental property, or buy to let property, could be one way to raise enough cash to get the deposit for a buy to let mortgage, or possibly to even buy it outright.
While remortgaging can be a great way to release some equity in your home, there are still some potentially significant costs to consider before deciding if it is right for you.
In addition to the remortgaging costs, it is worth remembering that investing in a buy to let property is a major commitment and could turn out to be more expensive than the expected return if you are not fully prepared.
When the interest on savings accounts are so low and the value of property and demand for homes to rent keeps rising, it is logical to want to invest any extra money that you have into becoming a buy to let landlord.
For many property owners who have invested most of their cash into buying their first home and paying monthly mortgage repayments, it can be hard to save up enough money each month to get a deposit together for a buy to let property. That’s why remortgaging can often seem like a sensible step to buying a buy to let property.
When you remortgage you switch your current mortgage over to a new mortgage provider. Your new mortgage provider pays off the old mortgage, and in return for a new cheaper fixed rate deal, and possibly shorter mortgage term, you make your monthly mortgage repayments to the new provider.
As you are likely to get a better deal from your new mortgage provider, the remortgage could save you in monthly mortgage repayments and free up more of your cash to get a buy to let property or enough for a deposit.
When you remortgage you can also borrow larger amounts based on the equity in your property. Equity is the result of calculating the portion of the mortgage you still owe minus the value of the property. This means if the property has increased in value since you bought it or you have paid off a large portion of the mortgage, then you are likely to have more equity.
How to access your equity for a buy to let property
One of the simplest ways to access the equity in your home and receive the cash is to sell your property. When looking for extra cash many homeowners who have had their share of the property’s equity increase have decided to sell the property and downsize to a smaller or cheaper home.
With the cash left over, they might have been able to put down a deposit for a more expensive home or a buy to let property. If you are unwilling to sell your property to get access to the cash, then you could do a remortgage deal, which will allow you to borrow against the equity in your home.
You may find that the equity is enough for you to borrow far more than what your current mortgage has left to pay and use it to buy a new property altogether. For example, say, you have £100,000 left on your mortgage and you have already paid off £100,000 previously.
The property’s value has also risen by £50,000, so your equity is now valued at £150,000 – that’s the sum of what you still owe minus the property’s new value.
When you get a remortgage deal, you will be asking the bank to essentially lend you enough to pay off the whole mortgage. So in this case that would be £100,000. However, if you wanted to borrow extra based on the equity you have in the home, you could do so but at the cost of giving it up to the bank until you have paid off the new remortgage mortgage deal.
This means, in this example, you could potentially borrow an extra £150,000 that could be used to purchase a new buy to let property outright. You would still owe the original £100,000 borrowed to pay off your mortgage, plus the £150,000 extra used to purchase the new buy to let property.
However, because you took out a remortgage deal, you may get a favourable rate for the first few years. Many of the banks offering remortgage deals try to offer competitive fixed rate deals and interest rates to entice customers to switch their mortgage provider, so it is always worth shopping around for the best deals.
Problems when remortgaging for a buy to let property
There are some downsides to remortgaging for a buy to let property, so do your research before committing to it and deciding if it is the right financial decision for you.
First of all there is the potentially expensive matter of leaving your mortgage to a new remortgage deal. Many mortgage providers will charge you a fee for switching to a new mortgage. Plus, because your new remortgage deal will have paid off the old mortgage, you could be required to pay an early repayment fee.
Before making any decision to get a remortgage, check the terms and conditions of your existing mortgage to see what the potential costs of switching your mortgage are.
Lastly, getting the most out of a remortgage – or at least enough to purchase a buy to let property – depends on the equity in your home. Get your property valued and assess whether or not you could have more equity by simply staying with your mortgage provider and paying off the debt for a little while longer.
Remortgaging for a buy to let mortgage deposit
If you decide to borrow against your equity you could be faced with slightly higher interest rates than what you might normally get from mortgage providers. On top of this, if you only get enough money for a deposit for a buy to let mortgage, rather than enough to buy the property outright, you could face more problems.
When remortgaging for a buy to let, you may not have a big enough loan to buy a buy to let property. Instead, should you still wish to proceed, you will have to put that money down as a deposit and take out a new buy to let mortgage.
Many banks and mortgage providers are unwilling to consider giving out a 100% LTV (loan to value) mortgage. This is essentially what you would be applying for if you used your remortgage loan as a deposit for a new buy to let mortgage, so you will be faced with tougher eligibility checks, and may find it harder to get approved for the mortgage.
Buy to let mortgages are also more likely to have a higher rate of interest than standard mortgages. Remortgaging for a buy to let property works out best when you don’t need another loan to complete the purchase, otherwise you will have multiple debts, and both could have a higher rate of interest.
- How to become a buy to let landlord – Investing in buy to let property has become popular in recent years, what do you need to know before you become a buy to let landlord?
- Remortgaging guide – Our guide to remortgaging can help you decide if switching from your current mortgage deal is right for you