How to remortgage like a pro and get your property working harder for you
In our last article, we discussed ways to raise capital to invest in buy-to-let property. In that article, we were especially concerned with raising capital to fund the deposit. One strategy we noted was to remortgage your existing home. This strategy can also be used to expand your property portfolio – remortgaging existing investment property(ies) to release the deposit for another investment property.
In this article, we examine remortgaging more fully and consider how it can help to expand your property portfolio.
What is a remortgage?
A remortgage is a method of releasing built-up equity in a property in the form of cash. This cash can then be used as you wish; for example, as a deposit to invest in property. Of course, to release cash from a property, its value must be more than any mortgage outstanding.
How does equity build in a property?
There are three ways that equity in property rises:
- The first is because the value of that property has increased
- The second is that you have paid down some of the mortgages
- The third is by making improvements that increase its value
It could be that a combination of all three of the above has created equity. If you have paid off some of your mortgages, made improvements, and seen the value of your property rise because the market is rising, thousands of pounds could be added to the equity in your property very quickly. This is like dead money. It is doing nothing, or very little.
Imagine owning your own home. You bought it 10 years ago, with a 100% mortgage of £100,000. You’ve added a bedroom and an ensuite bathroom updated the kitchen and installed double glazing. You’ve also paid down £20,000 of your mortgage from bonuses you received from work. The property is now worth £220,000.
You have equity of £140,000. That’s like cash in the bank, earning nothing. By releasing some of that equity, you could invest in another property. Make your money work for you, achieving gross rental yields that pay the mortgage and more.
The principle is the same if you already own buy-to-let property. Remortgaging existing investment properties is one of the most common ways of raising capital to add to an existing property portfolio. It makes increases in value and widening equity work harder for you.
How remortgaging works – a real-world example
My award-winning 3+1 Property Investment Plan book describes how you could become financially independent by owning three buy-to-let properties, plus your own. It works on the basis that a third of the rental income will pay your mortgages, a third will pay taxes and costs, and the last third will replace your income.
For many investors, making the move from one investment property to two is a struggle. You need cash for the deposit. Remortgaging is a simple solution. Here’s how one of our clients has used remortgaging and is now looking forward to early retirement, though he’s long since broken through the 3+1 barrier.
Steven’s fast-track property portfolio
In 2009, Steven invested in his first buy-to-let property. He wasn’t even 30. His parents helped him with the deposit. Since then, he has used a remortgaging strategy to purchase properties into his portfolio.
Rising property prices helped Steven. He has invested only where there are good property fundamentals – near to shops, good schools, and with access to good transport links. This strategy has helped him to experience better-than-average increases in property values.
As the value of his properties have increased, he has remortgaged to release capital. He has used this capital to invest in further buy-to-let opportunities. He has been consistent in this strategy, reviewing his portfolio every six months to maintain momentum. He now owns 12 properties. He has repaid his parents in full.
He is a very ‘hands-off’ landlord. He takes advantage of professional property management, preferring to spend his spare time with his wife and children. His time is precious to him, and he doesn’t want to be travelling the length and breadth of the country monitoring and maintaining his properties and tenants.
He plans to continue a remortgaging-to-invest strategy and forecasts that he will be fully retired by the time he is 50, and living off the proceeds of his rental income.
How do you find the best remortgage product?
Whether remortgaging to fund your first investment property or to expand your property portfolio, it’s important to find the best remortgage product for you. The lowest interest rate does not necessarily mean it’s the best remortgage.
You will need to consider other costs, such as arrangement fees, property valuation charges, and legal fees. You might also wish to consider fixed-rate deals and early repayment penalties.
It’s worth shopping around for your buy-to-let remortgage. I’d recommend that when you’re searching for a buy-to-let mortgage or remortgage you should use a specialist mortgage broker. They know the market inside out and will be able to direct you to the best provider and product for your investment objectives.