While remortgaging can be a great way to release some equity in your home, there are still significant costs to consider before deciding if it is right for you.
With such poor returns on savings accounts right now, it makes sense to look at ways to make more from your money. But 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.
Many property owners invest most of their savings into buying their first home, then have to pay monthly mortgage bills afterwards. That can make it difficult to save up enough money to get a deposit together for a second property. That’s why remortgaging can often seem like a sensible step to purchasing a buy-to-let property.
When you remortgage, you switch your current mortgage over to a new deal – possibly with a new provider. Your new mortgage pays off the old mortgage, and you now make monthly mortgage repayments on the new mortgage.
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, which can be put towards a buy-to-let property or a deposit.
But you don’t have to just cover your existing loan with a new deal.
If you have breathing space built up, either thanks to rising house prices or as a result of the money you’ve already paid back on your old loan, you could increase the size of the mortgage on your existing property.
That could leave you with a large amount of ready cash to use as you wish – for example, as a deposit on a new property – although it does mean your monthly repayments on your loan are higher.
That breathing space is often called equity – it’s the gap between the size of your mortgage and the value of your property.
One of the simplest ways to access the equity in your home is to sell your property. When looking for extra cash, many homeowners decide to sell and downsize to a smaller or cheaper home.
With the cash left over, they might have enough for a deposit on a more expensive home or a buy-to-let property.
The equity in your home may be enough for you to borrow more money and buy a new property altogether.
For example, if you have £100,000 left on your mortgage, and your home is now worth £250,000, your equity is £150,000.
When you get a remortgage deal, you are asking the bank to essentially lend you enough to pay off the whole mortgage. 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 – provided you are earning enough to cover the repayments.
This means, in the above example, you could potentially borrow an extra £100,000 to purchase a new buy-to-let property outright. You would still owe the original £100,000 to pay off your mortgage, plus the £100,000 extra used to purchase the new buy-to-let property or use as a deposit for one.
The key to making this work is if the rental income on your new property covers the extra cost of your new, larger mortgage once the costs of buying and running a buy-to-let are deducted.
There are a few things to look at before you apply for a larger mortgage. These are areas lenders pay attention to when deciding whether to approve you for a mortgage. They include:
How much equity you have in your current property
Your savings and investments
Your credit score
Any debt you have
If you are able to release enough equity to fund a new property purchase, it could be a good way to get started with property investment. However, there are some downsides to remortgaging for a buy-to-let property. It’s important to do your research before committing.
Firstly, consider the costs associated with leaving your mortgage for a new deal. Many mortgage providers charge a fee for switching and you might have to pay an early repayment fee.
Secondly, raising enough money to fund the purchase of a buy-to-let property depends on the equity in your home. You should get your property valued and assess whether or not you could get more equity by simply staying with your mortgage provider and paying off the debt for a little while longer.
If you decide to borrow against your existing equity, you could be faced with higher interest rates on your original loan.
That’s because the more equity you still have in your home, the cheaper the mortgage rate you can get.
This is also true on the buy-to-let mortgage you take out on the new property – the bigger the deposit, the lower the rate.
That leaves you with a fine balancing act to perform, to try to ensure you get the cheapest deal possible on both.
Essentially, the smaller the loan on the new buy-to-let property, the bigger returns you can make. But the larger the loan on your existing property, the more your original loan will cost you.
In this situation, it can make sense to talk to a financial adviser to ensure you know all the implications of your decision. A few hundred pounds spent on professional advice could save you thousands in the long run.
Legally, you’re not allowed to live in your buy-to-let property, so if you did want to move in, you would need to change the mortgage. The mortgage would need to be transferred to a residential mortgage and you’d need to change anything else set up specifically for buy-to-let purposes, such as your home insurance.
Changing your mortgage involves a range of costs, including legal and mortgage fees. It’s important to calculate all of these – combined with the interest rate you’re paying – before signing on the dotted line.