Remortgaging your home to raise buy to let deposit
If you’ve been thinking about taking the plunge and have decided that 2017 is your year to enter the buy to let market or you are considering what else, you could do to compensate for the record low returns on cash investments and savings, the following paragraph may help you decide and the rest of the article may just get you started…
Or not, there’s so much to consider!
According to MoneyFacts, the average monthly interest rate on a cash ISA was a lowly 1.04% in 2016, the lowest rate for five years. Yet in October 2016, the Association of Residential Letting Agents (ARLA) recorded an average of 34 potential tenants registered per letting agent and that property rents would be up by a quarter by 2025.
The outlook for savers is certainly depressing and yet property investment seems to be one area that has held up well despite increased regulation, tougher stress tests and a supposed supply shortage.
In many instances it regularly out-performs most other investments. So, if you have sufficient equity in your home it could be worth considering using it to raise a deposit for a buy to let, particularly when residential mortgage rates are so very low. It’s probably the cheapest way to raise finance.
That said, and in the interest of a balanced opinion, is a buy-to-let property a good enough investment to risk taking on more mortgage debt against your own home? In my view – yes, but without the benefit of a crystal ball it's impossible to predict the future.
A rental property may be better as a part of someone's overall portfolio rather than their sole investment, and would-be investors should think carefully about what they expect from a buy to let. It should most definitely be viewed as a long-term investment, and remember, from a property finance perspective, it costs you to get in (lender arrangement fees, valuations, surveys, broker fees, legal fees, stamp duty and stamp duty surcharge, etc.) and it will cost you to get out (selling fees, potential mortgage redemption penalties, capital gains tax).
Then there are letting agency fees and maintenance costs to factor in.The list goes on… It probably goes without saying that you must do lots of research before taking the plunge.
To qualify for a buy to let mortgage typically you need a minimum deposit of at least 25% of the price of the property. You will need around 40% or more to find the very best deals but with average house prices reaching £309,122 in October 2016 (according to Rightmove), that means you might need a deposit of £75,280-£123,650 - which probably puts buy to let out of reach for all but the most frugal or fortunate of savers.
That’s where remortgaging your home comes in… but is it the best way to free up cash?
It’s obviously important to remember that with remortgaging your home to finance a buy to let, you’re borrowing more - and you'll pay interest on that borrowing.
And, if you're remortgaging to raise a deposit on buy to let you may well be putting yourself in a position where essentially you're borrowing 100% of the buy-to-let property's value (split between your home mortgage and the buy to let mortgage).
If you have sufficient equity, you could of course go the whole hog and raise the entire purchase price of the buy a buy to let so that you own it outright because a home remortgage deal works out cheaper than the buy to let options. In this regard, residential mortgage interest rates are generally lower than buy to let rates.
Plus, you would avoid paying BTL lender arrangement fees which are usually higher than residential loans, typically 0.5% to 2% of the loan amount.
Remember, you will also need to check carefully if your existing residential mortgage has an early redemption charge. Your own home would, of course, be at risk of repossession if you couldn't meet the mortgage payments, but you would own the second property outright.
As you can see there’s a lot to consider including some potential pitfalls. However, there are many, many lenders out there which will let you remortgage your home to raise a deposit for a buy to let mortgage.
And of course, there are many buy to let mortgage products available too all with different terms and criteria, and different suitability based on everything from the type of property, your experience, the type of tenant and even the location.
So if after every consideration, you think this could be the investment solution for you, do get in touch to talk through the options.
I can be contacted directly on 01732 471613.
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13th December 2016
