What to consider before remortgaging your home to invest in property

Four questions to ask before using home equity to finance property investment

If you’re considering investing in property, you may be considering remortgaging your own home to do so. After all, the equity it has built up since you bought it is sitting there doing nothing. It’s like leaving a wedge of cash in the bank earning zero interest.

If you bought your home just five years ago, the chances are it has increased in value by around 26%. That’s how much the average house price has increased in the UK during this time. You could be sitting on £40,000 or £50,000 or even more of ‘dead money’. If that were cash in the bank, would you allow it to sit and fester, or would you put it to good use and let it work for you?

By remortgaging your home, you could release this equity. By using this equity as a deposit and investing in property, you could exploit the benefits of leveraging in property investment. You could be making money on other people’s money, taking advantage of investment property as the best asset for inflation-beating wealth.

Before you remortgage your home, you should consider whether investing in property will produce the returns that make the risk of increasing your residential mortgage worthwhile. I believe it does. The underlying dynamics that drive UK property values have rarely ever been more positive:

  • There is massive central government investment in infrastructure.
  • Local authorities and private developers are spending tens of billions on regeneration schemes around the country.
  • Housing supply cannot keep pace with demand.

However, I don’t have a crystal ball. Here are some questions you should consider before remortgaging your home to invest in property.

Are you investing in the right location?

The key to investment success is finding the right property in the best places to invest in property UK. It means you need to do your research and invest where the property fundamentals are strongest. It may not be your hometown.

Factors to consider here are shops, schools, transport links, major employers and major investment. Where these are all present, the potential is strongest for sustained demand to push property values and rental prices higher.

Are you investing in the right property?

Now that you have found the best place to invest, you’ll need to find the best property for investment. There are two considerations here:

  • Who is the target tenant?
  • Should you buy new or existing property?

Speak to local estate agents, and research the local census statistics to discover your target tenant. You should invest in a property which will have the highest demand and the least competition. If most renters in the area are young professionals, buying a four-bedroom family home is probably not the best strategic decision to take.

Consider the type of property you should buy. An existing property is cheaper to buy but the running costs are higher. There is likely to be more maintenance and repair needs, and perhaps full-scale refurbishment. It will eat into your investment profit.

New build properties are generally more expensive to buy, but don’t come with the maintenance baggage of existing properties. Running costs should be cheaper. Because it’s new with all new appliances, fixtures and fittings, demand from tenants should be higher – as should the rental price you can charge. All big positives for your cash flow position.

You could invest in an off-plan property, buying at a discount to today’s market value and putting down a deposit of around 10% to 20%. When you complete, if the value has increased you bank the discount amount and the increase in market value as profit.

What will be your cash flow position when you invest in property?

Your cash flow is the amount of money remaining from your rent after all your property expenses are deducted. If you are remortgaging your home to invest in property, don’t forget to take this into consideration.

If your rent is higher than all your expenses, then you have positive cash flow. It could be a valuable stream of passive income, and one that should grow over time as you increase rents.

If your expenses are more than your rental income, then you are in a negative cash flow position. You’ll need to subsidise this from other income. Can you afford to do this? Is the expected capital growth worth the money you are spending to subsidise the investment every month?

Should you buy an investment property outright?

You may able to release enough equity from your home to buy an investment property with a buy-to-let mortgage. If your home is valued at, say, £500,000 and you owe £200,000 on your mortgage, then you may be able to borrow as much as £300,000 to invest.

A remortgage of your home could be cheaper than a buy-to-let mortgage. However, the cash flow questions remain the same. You may not be able to use mortgage interest tax relief to reduce your income tax liability, either. You’ll need to consider your cash flow projections very carefully and the effect of the tax on your income before remortgaging to buy an investment property outright. Other questions that arise with this strategy include:

  • What happens if you lose your job? Could you afford the mortgage payments on your home?
  • If the investment property remains untenanted for an extended period, would you be able to keep up with the mortgage payments on your home?

In conclusion

There is a lot to consider before remortgaging your home to invest in property. But if you have a substantial amount of equity in your home, it is not working as hard as it could for you. It’s money that could be used to move you towards your financial goals faster. An investment in property could be the perfect way to use your home equity and power you towards the lifestyle you desire.

Contact one of the Gladfish team today on +44 (0)207 923 6100, and we’ll help you decide if remortgaging your home will be the profitable strategy it has proved to be for so many property millionaires.

Live with passion,

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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