Landlords might need extra funding for many reasons, but breaking into your savings isn’t always possible. Discover the common reasons property investors do this and the three main ways you can release equity from existing property.
Why do landlords release equity?
One of the (many) great things about property investment is that once you’ve built up some equity in your property (or properties), you can utilise the cash almost however you want. For many landlords, this is preferable to using personal or business savings all the time.
Typically, landlords release equity built up in their existing investment properties to use as deposits for new property investments or to refurbish and update current buy to let properties. With the upcoming changes to EPC regulation for rental properties, we’re now seeing more clients raising capital to make energy-efficient improvements to their existing portfolios.
Here are the three main ways you can raise capital from or against existing property:
The most common method of raising capital is during the remortgage process. Increasing your loan to value (LTV) when you remortgage can release a portion of the equity for the uses mentioned above.
Landlords will mainly do this when their existing fixed mortgage term ends, and they need to secure a new rate anyway. While it is possible to remortgage during a fixed term, you may have to pay Early Repayment Charges (ERCs), which can be expensive. However, if timed correctly to correspond with the end of the existing term, it reduces the amount of associated fees and avoids any ERCs. Plus, it’s less paperwork!
Your buy to let mortgage lender will want to know why you’re releasing equity, as different lenders have different rules about what you can use the money for. It’s best to speak to your broker, as they’ll be able to guide you to the correct lender based on your plans.
A further advance is an additional loan based on the value of your property. The loan is separate from your existing mortgage, usually with a different interest rate, but provided by your existing mortgage lender.
Typically, borrowers will use this facility to raise funds when locked into a fixed rate with ERCs. Depending on how much your ERC bill will be, this can be a cheaper way of raising capital when you need it, rather than waiting for your fixed term to end or ERC period to elapse. Lenders will generally organise it so the further advance term finishes at the same time as your existing mortgage, so that you can re-finance the two loans back into one facility, on one interest rate.
Further advances offer borrowers more flexibility, especially if you favour long-term fixes or unexpectedly need the cash. However, while further advance rates are usually quite competitive (although not as low as standard buy to let mortgage rates), not all mortgage lenders offer them. You’ll need to check with your broker or directly with your lender if you want to check if this is an option for you.
Second Charge Mortgages
In principle, second charge mortgages are similar to further advances; it’s an additional loan secured against the value of a mortgaged property. However, the critical difference is that second charge mortgages are from a different lender than that of the existing mortgage.
Typically, borrowers use these secured loans when their existing mortgage lender doesn’t offer further advances. Like further advances, a second charge allows you to avoid costly ERCs and usually ends when your existing mortgage is due for remortgage so you can consolidate the loans.
However, only a handful of lenders offer them in the buy to let lender space. Furthermore, not all BTL lenders will allow you to have a second charge mortgage on a property that is already mortgaged with them, so you’ll need an experienced broker to help investigate whether this is a viable option for you.
Why is securing funds important right now?
You may be aware that interest rates are rising, and fast. While many property investors are locking into long-term fixes for security, keeping your options open is essential. As mentioned at the start, there are many reasons you may want to release capital, and some lenders will allow you to do so without a specific time limit of when you need to use the money, meaning you can keep it just in case.
However, delaying any of the above processes will mean rates increase, and the mortgages will cost you more over time. So, we strongly advise that you secure now, even if it’s a little earlier than you planned, to benefit from more competitive rates and favourable affordability calculations.
Call 0345 345 6788 or submit an enquiry to discuss your plans with an expert broker today.
6th July 2022