Remortgaging a Buy to let Property

Malcolm

Hi, it's Malcolm with my colleague Wayne here and we are going to talk about buy to let remortgaging. This is where you've got an existing buy to let mortgageas a landlord and you're looking to swap lenders.

Wayne, do you come across mainland landlords that are on just the standard rate of interest?

Wayne

Not too many. I think the key thing with any mortgage is it's there to be reviewed, whether it's a buy to let or even your residential, it's there to be reviewed. If you understand the variable rate, you probably could get a better rate. So why not review it?

Malcolm

I suppose some of the more historic buy to let's might have dropped onto a tracker rate rather than a standard variable rate.

Wayne

At the time that we're speaking, your bank base rates are very low, so that might not be a reason to switch it, but again, it's still worth the review because it's always worth checking what else is out there.

Malcolm

In terms of a buy to let remortgage then, many landlords get involved this way perhaps to refurb the property, or it's gone up in value and they want to gear up against that investment possibly to buy subsequent properties.

Wayne

Exactly. The professional landlords particularly are looking to extend their portfolio, and having equity sitting in a property is not really much use to them. They would rather release that equity because then they can use it to fund a further purchase and increase the revenue from additional rents.

Malcolm

What about a buy to let remortgage for home improvement? Maybe you’ve had this property for a while, your tenants haven't been great and it's starting to show its age.

Can you then remortgage to fund some home improvements on the property in question?

Wayne

Yeah. It's not as common with all lenders, because one of the things that a lot of lenders want you to be able to show is that you can let this property from day one. If you're going in there to do a refurbishment, you're not going to be letting from day one.

That being said, there are some specialist lenders that do a specific refurb-to-let where they'll build that into the product. That gives you the opportunity to be able to do the improvements that you want to do.

Malcolm

When it comes to calculating affordability on a buy to let remortgage then, most lenders tend to use the rental income as their assessment of the affordability.

Wayne

Generally speaking, yeah. Lenders don't just want you to be able to show that the rent will pay the Mortgage. They want you to be able to show that the rent will pay the Mortgage and still have extra income to spare, even if Mortgage rates went up.

They use what they call stress tests. Different lenders will use different stress tests and that's where our job comes in. We will monitor that and make sure that what you want to do fits the stress test that the lender uses.

Malcolm

They all apply different kinds of rates of interest and the higher the value of the property sometimes the more difficult it can be for the stress test.

Wayne

Landlords typically need to get that balance between it being a nice property to own, but also being able to generate enough money to pay off the Mortgage. Sometimes the lower value properties actually generate a better return on capital because you can still get a good rent and you don't need as big a Mortgage.

Malcolm

That's right, but then possibly question marks about the types of tenant you would get in the lower value.

Wayne

Yeah. Also, the other question mark is if one of your intentions is high capital growth, those properties might not grow by as much in the long run. I guess it comes down to getting a good balance in your portfolio between the different types.

Spread your risks, spread the different types, have some that are going to give you more capital growth and some that are going to give you more income.

Malcolm

That's an interesting one isn't it, on spreading the risk? In a way, if you've got 10 properties and you happen to have a void, that means you've lost your tenant in one or two of them. The rent coming in from the other eight would be sufficient to cover all of your Mortgages.

Whereas, if you've got one buy to let and you lost your tenant, you've got a one hundred percent exposure.

Wayne

The other thing is different areas as well. If you've got 10 houses all next to each other in one terrace, lenders are going to be a little bit worried about that. That's because if that area gets blighted, all your buy to lets go down at the same time.

So, spreading areas, different areas, different types of properties, different risk elements, might work in your favour with the lender. As you touched upon thought, it’s important that you’re not relying on just one big investment.

You've got a lot more chance of money coming in if you spread that money between 10 properties.

Malcolm

I've actually had that happen before where a lender has declined because a customer had too many houses down the street. So that's a genuine example.

If you're a landlord looking to remortgage your buy to let, or you're releasing money from your portfolio, please don't hesitate to get in touch and we'll be happy to help you.