Time to Remortgage Your Buy-To-Let?

Over the last few months I've had more discussions with investors who are considering re-mortgaging their buy-to-let property. This seems an opportune time to consider the issues and discuss the pro's and con's of remortgaging now.

Let's start by getting very clear about why you might consider this option. There are only two valid reasons to remortgage:

• To release more equity that can be better utilised elsewhere, or
• To reduce your repayments by getting a better deal

Whilst you might fall into one of these categories, it may still not be possible, or desirable, to remortgage.

Are You In A Position to Remortgage?

What might stop you? A 'lock-in' to a fixed rate with large penalties for early repayment, or a lack of equity in the property following the recent fall in prices.

With the general shortgage of capital available in the market following the credit squeeze, it's really only possible to remortgage at 75% LTV (loan to value) and many of the best deals are reserved for investors requiring LTV's at maybe 70% or even lower at 60%. So if you purchased your investment property at a high LTV around the top of the market then you could find yourself with not enough equity to remortgage.

An exception to this is our new commercial facility which will allow you to remortgage at 85% of open market value! The interest rate is high, but for property where there is a strong yield but low equity then this could be a godsend.

Another potential issue is where you have sufficient equity but low rental income. So although you qualify on the basis of equity, there is not enough rental cover to meet the lenders requirements.

Talk To Your Lender

Some lenders will alllow you to remortgage your existing property and may offer a better deal than going elsewhere. After all you have a track record and payment history with your existing lender. This can be cheaper and quicker than going to a new lender. You may also be able to get a 'top up' on your existing facility, although more and more lenders are not allowing this unless you replace the entire existing mortgage - usually at a less favourable rate!

Is It Beneficial To Remortgage?

If you have recently come off a fixed rate to a lenders SVR (standard variable rate) you could find yourself with a much reduced payment. It varies considerable by lender, but Mortgage Express (for instance) has a very competitive SVR whilst Northern Rock has remained subbornly and unfairly (at least in my opinion) high!

The challenge is that most remortgage offers are not at the SVR, but will force you into a fixed or tracker rate which almost universally is higher than the SVR! This is a complete reversal of the situation pre the property crash, where introductory offers were almost always better than the follow on SVR!

You are going to have to do very careful sums to check that it's beneficial to remortgage before making the move, including checking any repayment penalties you are likely to experience and also to evaluate the potential future interest rates on your existing product versus the new product.

Locking in Fixed Rates

The universal view is that interest rates can only go upwards. I think this is an oversimplification. I'm sure that bank base rates can only go upwards, but I am less sure that it is guaranteed that the rates we will pay will necessarily increase at the same pace.

The reason for my doubt is the huge margin that banks are currently making over base rate. Back in the time when finance was freely available and the marketplace highly competitive, banks were working on as little as a 1% margin over base. When the credit crunch hit that suddenly changed to around a 5% margin. Even now competition has not fully come back into the market and many buy-to-let borrowers are paying a 4% margin to the lender.

As base rates rise, and hopefully finance availability increases, I think it is entirely reasonable to assume that margins will begin to fall.

Suppose base rate rises to 2% over the next 2 years. I can see the situation where borrowing is still available at around 4-5% because the lenders have reduced their margins.

If I am right, then locking in now to a fixed rate may not prove to be so important, or indeed beneficial. To be honest it's challenging to read the crystal ball and I admit I could be completely wrong. We are all going to have to make our own minds up.

Remortgage to a worse product!

There are times when you might deliberately accept a higher interest rate and a worse product! Why? If it enables you to release a chunk of capital with which you can do something better.

For example, suppose you could release£20,000 and that enabled you to invest in another two UK properties with £30,000 of immediate equity in each, plus positive cash flow. The benefit of purchasing the two additional properties will massively outweigh paying an extra 1% (for example) on your current mortgage.

The Axis commercial facility that offers 85% lending but at a  relatively high interest rate falls exactly into this category.

Is Remortgaging For You?

You'll see from this article that remortgaging is often a complex decision - more so now than previously. Whilst we all expect bank base rate to increase that may not be reflected in lending rates, at least for a while.

Start with getting very clear about why you are considering remortgaging and then look carefully at the detailed options.

If you want to release a high loan to value ratio and have good rental cover, then talk to Axis about our commercial facility which offers up to 85% against market value.

Have you tried to remortgage recently? What's your experience? Let us know in the comments below.

Live with Abundance

Rod Thomas FCA

Posted in Finance & Money

4 responses to 'Time to Remortgage Your Buy-To-Let?'

Post a comment

Name *

Email address* (will never be published)

Website URL (optional)

Comments *


Enter validation code

Where next?