How Can You Remortgage to Buy-to-let?
If you want to acquire a buy-to-let property, it can be both exciting and challenging. One avenue that potential investors explore is remortgaging, a strategy that involves utilizing the equity in existing properties to secure the necessary funds for a new venture. In this comprehensive guide, we’ll dissect the intricacies of remortgaging for buy-to-let, exploring its processes, potential benefits, and factors that influence success.
Understanding Remortgaging for Buy-to-Let:
- The Equity Advantage:
To delve into remortgaging for buy-to-let, it’s crucial to comprehend the concept of equity. Equity represents the difference between a property’s value and the outstanding mortgage amount. For instance, if your property is worth £250,000, with a remaining mortgage of £100,000, your equity stands at £150,000.
- Remortgaging Basics:
Remortgaging involves switching your current mortgage to a new deal, whether with the existing provider or a new one. The process allows you to release equity, essentially borrowing funds you’ve already repaid and leveraging any appreciation in property value.
- Borrowing Limits:
The amount you can borrow through remortgage hinges on the equity in your property. Lenders often impose a maximum Loan-to-Value (LTV), typically around 75% of the property value. However, some lenders may offer slightly higher LTVs for specific purposes, such as buy-to-let investments.
- Property Type Considerations:
It’s essential to note that not all lenders permit the use of equity from a residential home for commercial purposes, like funding a buy-to-let purchase. While some, like Halifax, accommodate this, others, like NatWest, may have restrictions.
- Buy-to-Let Remortgaging Factors:
Several key factors influence the success of a buy-to-let remortgage:
- Income Assessment: Lenders reassess your income to ensure you can cover repayments.
- Equity Evaluation: The amount of equity in your current property is a pivotal consideration.
- Credit Score: A thorough credit score examination is conducted.
- Buy-to-Let Mortgage Repayments: Lenders assess repayments on the new mortgage, considering only the amount borrowed for the deposit.
- Existing Portfolio: If you own other buy-to-let properties, lenders examine their number, value, and outstanding balances.
Strategies for Accessing Equity:
- Selling Your Home:
Selling your property and downsizing to a cheaper home is a straightforward method to access equity. Profits from the sale, not used for the downsized property, can serve as a deposit for a buy-to-let property.
- Remortgaging Your Residential Property:
While it’s less likely to purchase a new property outright, remortgaging your residential property can provide the equity needed for a buy-to-let deposit. The key is ensuring the rental income covers the increased mortgage costs.
- Remortgaging a Buy-to-Let Property:
Portfolio landlords often opt to remortgage existing investment properties to expand their portfolio. This strategy minimizes risk as personal homes are not used as collateral.
Considerations and Challenges:
- Early Repayment Charges (ERCs):
Potential drawbacks include early repayment charges if still within a fixed period. ERCs apply to most mortgages, excluding those on the lender’s standard variable rate.
- Equity Adequacy:
Success depends on the available equity in the existing property. In some cases, the property’s current value may limit the feasibility of financing a buy-to-let property.
- Dual Mortgage Repayments:
Unless equity is used to purchase the new property outright, managing two mortgages becomes a reality. Repayments on both the remortgage and the buy-to-let mortgage must align with rental income.
- Impact on Original Mortgage Rates:
Borrowing more against existing equity may lead to higher interest rates on the original mortgage. The amount of equity retained in the home often dictates the available mortgage rates.
Deciding to remortgage for a buy-to-let property hinges on individual circumstances, with benefits and drawbacks to consider. While it offers a pathway to finance a buy-to-let venture, careful evaluation of early repayment charges, equity sufficiency, and potential dual mortgage repayments is paramount. A strategic approach, considering rental income and adherence to lender criteria, can turn remortgaging into a valuable tool for realizing your buy-to-let aspirations.