What is Remortgaging?
Remortgaging involves replacing your existing mortgage with a new one, often with more favourable terms or releasing equity tied up in your property. Many people remortgage if they naturally come to the end of an existing mortgage rate, are looking for a better deal than what their current lender can offer or are planning to borrow money against their property.How Can it Affect my Ability to Fund a Buy-To-Let Property?
A typical deposit needed to secure a buy-to-let property is 25%, which is difficult to come by with a mortgage and household bills, this is why many people will choose to remortgage their current home or another investment property to release equity. Equity is the difference between the value of your property and how much you owe on the mortgage, for example, if your property is worth £250,000 and you have £100,000 left to pay on your mortgage, your equity is £150,000. By remortgaging, you have the option to release this equity, essentially re-borrowing the money you have already repaid, with any natural gain from any rise in property prices on top.Factors Affecting Remortgaging to Fund a Buy-To-Let
There are always considerations when it comes to releasing equity by remortgaging, as you are essentially re-borrowing money. You will need to fulfil the criteria of the buy-to-let mortgage as well as your remortgage unless you have used the equity to buy the property outright. Your lender will also need to assess your financial situation just as they did when you took out the first mortgage on your property, to ensure that you can keep up with repayments. They will investigate:- Your credit score.
- Your income and outgoings.
- How much equity you have in your current property.
- If you already have buy-to-let properties, taking the number, their value, and how much you owe on them into account.
- Assuming you’re only borrowing enough for a deposit, they will look at how much your buy-to-let mortgage repayments will be.
How do Lenders Determine How Much I can Borrow?
Your financial circumstances play a big part, but apart from this, how much you can borrow will depend entirely on how much equity you have in your property. Most lenders will limit their LTV (loan to value) on borrowing at around 75%, this is because increasing your borrowing reduces the equity. This therefore increases the LTV of your borrowing but it is possible to find some lenders that will lend slightly higher, depending on your circumstances.Is Remortgaging to Fund a Buy-To-Let a Good Idea?
Again, your circumstances play a big part in this, however, it is important to understand the positives and negatives, as with every type of money borrowing. Remortgaging is a great way to purchase a buy-to-let as an investment property, as the equity can be used as a deposit, making it much more cost-effective as buy-to-let mortgages have typically higher interest rates. It is also possible that in some areas, the interest on a buy-to-let mortgage may be tax deductible. Considerations may include:- Whether you will need to pay ERCs (early repayment charges) on leaving the deal of your current mortgage if you are within a fixed period. These apply to most mortgages.
- If you cannot afford to pay for a buy-to-let property outright with the equity released from your current mortgage, you will be paying 2 mortgages. A mortgage on your current property and a buy-to-let mortgage.
- Your current property may not have enough equity to fund your investment.
- You could be faced with higher interest rates on your original mortgage by borrowing more against your existing equity.
