Remortgaging your rental property is a common process for landlords looking to lower the costs associated with their buy-to-let investment. Some landlords remortgage to get a better deal, especially in recent years with the Bank of England base rate at an all-time low (though that could be about to change); others come to the end of their initial fixed-rate period and switch providers to avoid a hike in their interest payments. Then there are those who want to borrow more to fund another investment.
Whatever your reason for remortgaging, it's helpful to know how to find the right product and ensure you get the best deal. With that in mind, we've put together this guide for buy-to-let landlords with everything you need to know about remortgaging an investment property.
What does it mean to remortgage a property?
Remortgaging is the process of moving the mortgage on your existing property from one lender to another. If you bought your buy-to-let with a mortgage, there would likely come a time where you need to remortgage. It might happen after the first 2, 5 or even 10 years of your initial mortgage deal.
The procedure is essentially the same as getting a mortgage, and you will need to go through the process of submitting personal and financial documents as well as undergo a credit check. The average remortgaging process takes around eight weeks, though every case is different.
When should you consider remortgaging?
Most mortgages last for 25 years, but there's always an initial period where you're either a fixed-rate or tracker payment plan. A fixed-rate mortgage has an initial interest rate that doesn't go up or down and lasts for a set period, often between 2 and 10 years.
When the fixed rate ends, you will go onto the standard variable rate (more on that in a bit) with much higher interest rates. At this stage, you can remortgage the property to get a more competitive rate, either with the same lender or a new one. Doing so will give you a new initial rate for a set time, keeping your payments down in the process. All the while, the overall remainder of your mortgage term will continue to decrease.
If you're on a tracker mortgage, it will set an initial rate but follow the BOE base rate, meaning it goes up if the base rate increases and goes down if the base rate decreases. Like fixed-rate mortgages, tracker mortgages last for between 2 and 10 years.
Why should you consider remortgaging?
Finding a better deal (especially at the end of the fixed-rate period)
Most people remortgage because their fixed rate is about to end. Landlords generally don't want to go onto the lender's higher rate (SVR) and will look for cheaper options, with interest payments possibly even lower than at the initial rate they had.
Remortgaging at the end of your initial fixed-rate period won't cost extra. But if you decide to switch to a new plan during your fixed-rate contract, you may have to pay an early repayment charge. This is typically set at a percentage of the fixed term length – e.g. if you remortgage 3 years into a 5-year fixed rate, you will need to pay 3% of the mortgage value as a repayment charge.
Another reason landlords remortgage is so that they can raise capital to invest in more property. It may be that your buy-to-let property has increased in value since its initial purchase, and you want to release equity by borrowing more against it. Let's say you bought your property for £200,000 with a £50,000 mortgage, and it's now worth £275,000 with the same mortgage. Many lenders would permit you to borrow an additional £156,250, which would take the amount borrowed to 75% of the property's value.
How to find the best rates
There are plenty of mortgage comparison sites showcasing the best rates available. You can search for mortgages available according to your specific requirements and see which options come back. Compare The Market, Money Saving Expert and Go Compare are just a few of the comparison options available online.
Speak to a broker
Most landlords prefer to use a broker as it means an expert does the research for you. A broker will take your details and look for the most suitable mortgage on the market tailored to your specific needs. They have expert knowledge of the market and can find several options that fit your criteria. Some brokers are free, while others charge for their services.
What is the BoE base rate, and how does it affect the mortgage market?
The Bank of England sets the level of interest all other banks charge borrowers. Due to concerns about rapidly rising inflation, the base rate recently rose from 0.1% to 0.25%, bringing to an end a period of historically low interest rates.
If the base rate is 0.25%, unfortunately this it doesn't mean your mortgage will be that low. Lenders add their interest on top of the base rate to cover the cost of lending. As a rule of thumb, the lower the base rate, the lower the lender's rate.
What are the benefits of remortgaging your rental property?
There are several reasons why landlords remortgage a property, and there's more than several benefits to seeking a new deal. Some of the most common advantages include:
- Reducing your monthly repayments
- Securing a better interest rate
- Borrow more to invest in another property
- Borrow more to renovate the property
- Pay off debts, such as credit cards and loans
Some people remortgage to pay off their debts. However, you should only do this if it means saving money in the long run. Otherwise, it's better to carry on paying off your debts rather than load them onto the mortgage. If you're unsure, speak to Citizens Advice or someone qualified to help with financial matters.
What are the most important things to consider when switching to a new mortgage?
Before taking the plunge, make sure that you're getting a better deal than the one you're currently on. There's no point switching onto a higher rate as it defeats the purpose of switching mortgages. Make sure to investigate the real and full cost of the mortgage, which includes factors in addition to the interest rate, such as the lender's arrangement fees.
Check with your current lender to see if there's an early repayment charge or an exit fee on your current mortgage. Most mortgages have an exit fee, which is usually reasonably low. If, however, you're remortgaging halfway through your existing fixed or tracker rate, you could end up paying a percentage of the mortgage as an early repayment charge. Sometimes paying the charge is worth the amount you’ll save on the new mortgage, but it’s always worth doing the maths first.
What is LTV and SVR?
LTV stands for loan-to-value and describes the ratio of the amount you borrow for a mortgage compared to the cost of the home and the deposit you pay. For example, if you bought a property worth £350,000 with a deposit of £87,500, the mortgage amount would be £262,500 – 75% of the property’s value.
Most buy-to-let lenders offer up to a maximum of 75 per cent of the home’s value, though some may lend as much as 85 per cent. The higher the amount borrowed, the more expensive the monthly payments on the mortgage interest.
The SVR, otherwise known as the standard variable rate, is what you will be transferred to when your fixed or tracker mortgage ends. Each lender sets its own standard variable rate, which is considerably higher than the initial rate in the fixed or tracker.
If you can, you want to avoid going onto the SVR as you could end up paying hundreds more each month. It's best to start the remortgaging process between 2-3 months before your fixed or tracker rates end so that you don't go onto the SVR.
Summary: remortgaging your buy to let
Remortgaging is a standard practice in the world of buy-to-let property, and you may end up doing it a few times during the lifecycle of your investment. If you're looking for the best rates available, head over to Home Made's free Finance Hub, which helps landlords to deals tailor made to your circumstances.
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