Almas Uddin
Founder and Mortgage Advisor
15 Sep 2020
Remortgaging to purchase a buy to let property is a popular option with investment landlords.
In some scenarios, you can even remortgage a buy to let investment within just six months of the purchase.
Revolution Finance Brokers has created this guide to walk through how to get the best buy to let remortgage deals and to explore the most critical factors.
Should you be considering a BTL remortgage and be looking for the best deals on the market, contact our team at 0330 304 3040 or send us a message at [email protected] and we will help you identify the best lenders and the most competitive deals as they are released.
Why the Reason for Remortgaging Impacts your Borrowing
Lenders will need to know why you wish to remortgage, and the purpose of the borrowing will impact who you can apply to.
Reasons for remortgaging a buy to let can include:
- Releasing equity for home improvements.
- Raising cash for a deposit for an additional property.
- Switching to a better interest rate.
- Raising capital for other purposes.
Remortgaging to Release Equity from Investment Properties
You can remortgage a BTL to release equity, although the reason for the remortgage will dictate which lenders are most suited.
Some lenders will only consider a commercial remortgage application for specific purposes, whereas others will consider all scenarios.
Raising a Deposit Through a BTL Remortgages
Landlords looking to expand their property portfolio will often remortgage an existing investment property to raise the cash for the deposit.
This is a common reason for releasing equity, although rules apply that limit the options available.
For example, higher rate taxpayers or portfolio landlords owning over four investment properties may experience lenders with a maximum on the number of BTL mortgages they will consider.
Most buy to let mortgage providers are comfortable lending to landlords with four properties within their portfolio, and others who are used to working with professional landlords will have ten properties as their maximum.
Revolution Brokers also work with specialist lenders who will extend a mortgage offer to landlords with ten or more properties.
As an alternative, you can also remortgage your existing residential property to raise a deposit for a BTL investment.
Whatever the reason you wish to release capital from a property, contact the team who can advise on the most advantageous terms and rates available. We work with clients who are looking for full remortgages, partial remortgages, second charges and portfolio mortgages to support their BTL investment aspirations.
Raising Capital for Property Improvements
If a rental property would benefit from property refurbishment or improvements, remortgages are a common way to raise capital to carry out this work.
Many lenders are happy to consider remortgage applications for this purpose since it will increase the value of the property that their lending is secured against.
Should you own rental properties in an area that is increasing in demand, this is an even better prospect, as rising rent levels will make a recently improved property more profitable.
Remortgaging for Debt Consolidation
Another common reason to remortgage is to consolidate debts. In this scenario, some lenders will have a maximum loan to value ratio that they can offer against a property.
Some lenders are reluctant to offer a remortgage term for debt consolidation because of the perceived risk level associated with a landlord who has other borrowings.
However, this is an excellent way to reduce your overall outgoings, consolidate your debts into one more manageable payment, and can save you a significant amount of money in the long-term.
If you remortgage an investment property to consolidate other debts, there is a risk factor in that you may be converting unsecured debts into a charge against a property. It is therefore vital to be able to keep up with the repayments to avoid getting into more serious problems.
Remortgaging for a Business Buyout
When buying out a partner, releasing equity from an investment property to buy out their shares is possible.
Most BTL lenders will accept this kind of application. However, it will need to be a new remortgage application even if you're remortgaging through your existing lender since they will need to run affordability checks on the higher level of borrowing.
The standard LTV ratios will apply - a typical benchmark is 75%, with some lenders offering up to 80% LTV. Revolution Brokers work with specialist lending providers who will lend as high as an 85% LTV.
Remortgaging for Commercial Opportunities
Some landlords might apply to remortgage a BTL property to raise cash for a business opportunity - this could include investing in a commercial property, or undertaking a new adventure.
This sort of remortgage is likely to only be possible through a select number of lenders since many find it challenging to extend lending against the uncertainty of another commercial venture.
In this scenario, contact Revolution Brokers to discuss the best options.
Remortgaging BTL Property for a Better Interest Rate
As with any mortgage, buy to let lending often has a fixed term, after which it switches to the standard variable rate (SVR) of the lender, which is often significantly higher.
Many landlords choose to remortgage when their fixed term comes to an end, which enables them to take advantage of the best BTL remortgage rates on offer.
Interest rates are always subject to change, and so regularly reviewing your mortgage is an ideal way to stay on top of the most competitive deals as they come onto the market.
Revolution Brokers are a whole of market broker, which means we have access to all mortgages and lenders, without being tied to any particular products or brands.
We scour the market for new deals and rates as they become available, and often work with landlords continuingly to provide recommendations about the best time to remortgage.
Remortgaging Investment Property for Other Purposes
There is no restriction on remortgaging a BTL property for any reason - such as wanting to buy a car, pay for education costs, or renovate your own home.
Where there are restrictions is in knowing which lenders are happy to remortgage for the purpose behind your application.
Can I Remortgage my Residential Home to a BTL?
You can - it is possible to remortgage your property as a buy to let residence. This often happens when you buy a new home, but wish to keep your existing property as a source of rental income, or move in with a partner and want to let out one of your properties rather than selling it.
In this situation, you must inform your mortgage provider that you wish to rent out your property, as residential and buy to let mortgages are different.
Either:
- Request 'consent to let' from your existing mortgage provider.
- Remortgage the property under a buy to let mortgage.
What is an Accidental Landlord?
Becoming an accidental landlord is where you find yourself with a rental property, but hadn't planned for the resident to become a buy to let.
This is unusual, and if there isn't a viable reason why you have failed to inform your mortgage lender that you are letting out a home that is mortgaged as your residence, the consequences can be severe.
Lenders can even demand a full repayment immediately of the entire balance of your mortgage, which can carry long-term financial implications.
If you decide you would like to use a residential property as a rental, it is, therefore, vital to contact your lender before you make any changes.
Remortgaging a BTL as a Main Residence
The same situation can occur in reverse; you might own a rental property, and decide to make it your primary residence.
This can occur because you decide that you'd like to live in a property rather than letting it out or have sold your existing home and need to find somewhere new to live.
Another common reason for this type of remortgage is that you wish to downsize and sell a larger residential property or want to rent out your bigger home and are comfortable living in a smaller property that you have previously let out.
The fastest and most stress-free option is to contact Revolution Brokers on 0330 304 3040 - we'll explain all of the options, and the pros and cons to each so you can make an informed decision about the best action for you.
Does Owning Investment Property as a Company Impact Remortgaging?
Lots of landlords choose to manage the ownership of properties through a limited company structure. This offers tax benefits and considerable savings for higher rate taxpayers.
Limited company mortgages are also most suitable for groups of investors working together since it is simple to split ownership between shareholders. They are also popular with landlords wishing to reduce their personal exposure should any issues with the rental business occur.
Company structures are treated differently from individual landlords when it comes to remortgaging applications.
Usually, if you wish to buy a rental property as an incorporated business, you will need to produce at least two years worth of accounts showing the company income and profit margins. Many lenders also require personal guarantees from the registered directors.
If you own an SPV (a type of limited company called a Special Purpose Vehicle), then you have different mortgage options but are still likely to be asked to provide a personal guarantee.
LTV Rates on Buy to Let Remortgages
The loan to value ratio (LTV) is the amount of borrowing you wish to apply for, in relation to the value of the property.
Lenders vary significantly in the LTVs they can offer, and a lot depends on the total value of the property, and how much you wish to borrow.
As an illustration, if you take out a £100,000 mortgage over 25 years against a property valued at £250,000 and with £200,000 equity value, your LTV is 40% and a low ratio most lenders will be happy to lend against.
However, if you borrowed £160,000 against the same property with the same value and equity, you'd be applying for an LTV of 65%.
Most lenders will extend remortgages as high as 90% depending on your affordability assessment.
Revolution Brokers are a whole of market broker, and so have access to every mortgage lender. This allows us to find the best mortgages for your specific borrowing requirements to ensure you can move forward with your remortgage quickly and confidently.
Can I Remortgage a BTL Property with Bad Credit?
Our team regularly works with landlords who are struggling with a bad credit history.
Mainstream lenders very often reject these clients. They may have tried applying for remortgages online, resulting in more marks appearing on their credit file and making the application process even harder.
There are all sorts of reasons investors may have experienced bad credit, such as:
- Low credit score
- Mortgage arrears
- Bankruptcy
- Repossession
- County Court Judgements (CCJs)
- Adverse credit overview
- Debt Management Plans (DMPs)
- IVAs
It is always much more problematic as an individual landlord to secure borrowing against a BTL property if you have a bad credit history.
Unfortunately, mainstream lending often does not cater to individuals who fall outside of strict sets of criteria, and so it is essential to work with a specialist broker who has experience in this sector and can ensure you get the borrowing you need.
Why Does Personal Income Import BTL Remortgage Applications?
Most lenders will have a requirement that landlords must demonstrate a personal income of at least £25,000 a year to be considered for a buy to let mortgage.
Others have much less stringent requirements and will focus more on the rental cover provided by the property.
How each lender calculates your personal income varies; this always includes your salary or regular wage, and will often have other types of revenue such as:
- Investment returns
- Bonuses and commissions
- Dividend income
- Second employments
- Benefit income
As well as your income, lenders will want to know about your regular outgoings and will ask about costs such as:
- Average living expenses
- Education costs
- Regular charges such as phone bills
- Debt repayment
- Long-term liabilities
- Utility costs
Once all this information has been collated, the lender will calculate your available income, to help decide whether you can afford to keep up with the mortgage payments.
Buy to Let Rental Income & Remortgaging Applications
The amount of rent you expect to earn from your rental property is an integral part of the mortgage assessment process.
Your rent will vary depending on the location of your investment property, how large it is, and what condition it is in.
Lenders need to demonstrate affordability, so they'll look at your personal income, your regular outgoings, the value of the property, and the expected rental income it will generate.
As a benchmark, the usual requirements are that:
- Rental income is 125% or more of the monthly repayments.
- E.g. If your mortgage payments add up to £15,000 per year, you need to demonstrate rental streams of £18,750 to secure lending.
Lenders will also want to verify that you are realistic about what rent your property will command. You can look on local estate agent sites to see what similar properties are being let out for, or check websites such as Rightmove to gauge the average in the area.
A stress test is another aspect of affordability; interest rates fluctuate, and so a lender will want to make sure you would still be able to afford the mortgage repayments if interest rates rise. The typical rate used for a stress test is 5.5%.
For example, if you apply for a mortgage of £150,000, the lender will use a 5.5% interest rate (as a worst-case scenario). They then multiply this by 125% to show the minimum rental cover required, so will need to check that you could afford the mortgage if repayments increased to £859.38 per month.
The calculation for a stress test works like this:
- Mortgage value x 5.5% = total cost per annum
- Total cost per annum / 12 months = monthly mortgage payment
- Monthly mortgage payment x 125% = minimum rental income required
Changes to Buy to Let Mortgages
Recent changes to the tax relief available to buy to let landlords mean that some investors have found themselves paying higher rates of tax than previously.
Lenders have to ensure that your rental income can cover your mortgage payments, as well as other ongoing costs such as repairs, interest and agents letting fees.
On average, the cost of running a buy to let property has been estimated as £8,359 per year.
While the benchmark for rental cover is usually around 125%, many lenders will consider buy to let mortgages provided the rent makes up 145% of the mortgage payments.
How Do Your Tenants Impact BTL Remortgaging?
When you apply to remortgage a BTL property, the lender will ask about the tenancy situation. If you have the following types of tenants, you may find that some mainstream lenders will not consider your application:
- Students: some lenders are happy to finance buy to lets that house students, but many will not since students tend to cause more damage to a property, rendering it less valuable.
- Tenants on benefits: some tenants who rely on benefits can be seen as higher risk. Please note this does not include disability benefit recipients.
- House of Multiple Occupants (HMOs): these can be a higher risk given the volatility of having multiple tenants. However, if your tenants are professionals, the risk is considered lower.
- Sitting tenants: this type of tenant can cause a big problem in remortgaging a BTL property since they are legally entitled to remain in the property for life, and may transfer the tenancy to a family member when they pass away. This follows the 1977 Rent Act, which also dictates the 'fair rent' you can charge, which is usually much less than you would be able to achieve on the open market. Thus, many lenders will not remortgage a property with sitting tenants since the income potential is low.
Does the Type of Property Impact my Potential to Remortgage my Buy to Let?
It does; lenders prefer low-risk properties with a standard construction of brick walls and slate roofs. Non-standard properties can be considered a higher risk because the maintenance costs are higher.
Non-standard BTL properties include:
- Flats and apartment blocks
- Any high rise property
- Residences built with wooden or metal frames
- Solar panelled properties
- Homes with thatched roofs
- Stone buildings
- Properties with tin or felt roofs
This is a summary of the most common types of non-standard property, and whether the type of housing impacts your application depends on which lender you approach.
If you need to remortgage a non-standard rental property, give Revolution Brokers a call, and we will be delighted to match you with the right type of lender.
How Can I Get the Best Interest Rates on a BTL Remortgage?
Interest rates vary significantly across the buy to let remortgage market. The rates you are offered will depend on factors such as:
- How much deposit you have.
- Your income and credit history.
- The equity in the property.
UK Remortgage Rates for Buy to Let Mortgages
Interest rates are currently low, which means that BTL remortgage rates are also low. However, long-term planning requires you to consider future costs when interest charges may increase.
It is also essential to identify the ongoing running costs of owning a rental property. As a landlord, you will need to cover things like accidental damage, insurances, wear and tear, repairs, agents letting fees and income tax.
Your rent needs to be high enough that it covers all of these costs, plus your mortgage and interest payments.
There may be changes in the future to the lending criteria for mortgage providers to assess BTL remortgage applications against. In this scenario, having an experienced broker will become even more essential to ensure you apply to the right lenders and have expert support in putting your application together.
Buy to Let Remortgage Fees
Sometimes we see remortgage offers for BTL properties that advertise highly competitive interest rates. Unfortunately, these usually include additional fees, that make the mortgage more expensive than options with a higher advertised interest rate.
Likewise, a free setup charge usually means the interest rate is higher, so neither option is necessarily better than the other.
You should always look at the overall cost, and check whether any early repayment charges or exit fees apply.
Using a broker is vital to ensure you have adequate oversight of the deal as a whole and aren't likely to accept a mortgage offer which isn't offering you the most competitive rates when all the costs are taken into consideration.
Comparing BTL Remortgage Costs
In this example, we will look at two theoretical mortgage offers, to understand why low set up costs don't always offer the best deal - and indeed, this is a marketing tactic that brokers keep a careful eye out for, to secure the best possible deals for our client.
Option 1 - Two years fixed 3% interest rate with £1,000 in charges.
Option 2- Two years fixed 3.5% interest rate with £99 in charges.
When comparing these two options for an indicative remortgage of £105,000, this is how they contrast:
|
|
Option One
|
Option Two
|
|
Proposal
|
£105,000 + £1,000 fees at 3% interest
|
£105,000 + £99 fees at 3.5% interest
|
|
Monthly interest payments
|
£265
|
£307
|
|
Total cost
|
£7,360
|
£7,467
|
In this example, choosing the higher £1,000 set up fees will produce a saving of £107.
It is always advisable to work with a broker who can calculate the best deals for you, and calculate the 'tipping point' - the point at which one offer becomes more appealing than the other.
Choosing BTL Remortgages with Higher Setup Fees
Some lenders attract borrowers by advertising zero fees, which can be attractive, but if the interest charges are higher than it is essential to calculate a like for like comparison to avoid paying over the odds.
If you are looking to remortgage for a higher value, you can make significant savings by opting for a mortgage with a lower interest rate.
Let's look at the same proposal as above, but for a BTL remortgage of £200,000. In this case:
|
|
Option One
|
Option Two
|
|
Proposal
|
£200,000 + £1,000 fees at 3% interest
|
£200,000 + £99 fees at 3.5% interest
|
|
Monthly interest payments
|
£503
|
£584
|
|
Total cost
|
£13,072
|
£14,115
|
In this scenario, you would save £1,043 by opting for Option one with the higher setup fee, but the lower rate of interest.
It is easy to be tempted by proposals offering zero setup costs, or comparably low-interest rates, but both must be calculated to identify which is the best deal.
This is why most buy to let investors use a mortgage broker to secure their remortgage offer. An expert can calculate the costs for you, and provide examples of the options on the table with independent oversight about where you can make savings.
Revolution Brokers are experts in BTL remortgages and work with thousands of landlords to successfully secure borrowing at the most competitive terms on the market.
For more information about this guide, or any aspect of remortgaging a rental property, give us a call on 0330 304 3040.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.
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