Jun 17, 2020

When Should Landlords Re-mortgage?

With interest rates at the lowest they’ve been for a while, now could be a great time to re-mortgage, but for landlords it can take a lot of time and effort to find the right deal. Given that interest rates could increase at any time and that the available deals are always changing how do you know when it’s the right time to re-mortgage your rental property?

In this post we’re going to look at the reasons you might re-mortgage, things you need to look out for when you do and how you should go about doing it.

Reasons to Re-mortgage

In reality there are loads of motivations for re-mortgaging your rental properties. Here are the most common reasons and the pitfalls you should look out for.

Your Existing Deal has Ended

If you’ve previously had a fixed term mortgage deal and that has now ended it may be time to at least shop around. The chances are you can find a mortgage with a lower interest rate. Even if you have an interest only mortgage a cheaper mortgage rate will mean lower monthly payments.

Lower rates are attractive, and everyone loves lower re-payments, but the key considerations if you’re re-mortgaging for this reason are the new terms you’re signing up to. Check to see how long the new rate applies for (especially if it’s fixed term) and make sure the terms and conditions don’t differ from your previous product. Some lenders will refuse mortgages to landlords who let short term or to those who let to tenants on benefits, so if you have anything other than a standard AST with an employed tenant the terms and conditions are important.

You Want to Release Capital for Refurbishment

From time to time your properties might need a re-fresh or an overhaul. If you’re struggling to let your property you might want to spend some money refreshing it with a new bathroom, kitchen flooring – just anything to modernise the property and make it attractive again. Not many landlords will have a few thousand pounds lying around that they can drop on such pursuits and that’s where a re-mortgage comes in.

Remember that refurbishment costs are usually capital in nature and so you won’t ordinarily be able to benefit from tax deductions for these until it comes to selling the property. When choosing your lender make sure there are no terms and conditions that will preclude you from making the changes you want.

You Want to Change Your Business Model

Nothing stays the same forever. It might be that when you first invested in your property there were plenty of your ideal tenants around and it was easy to get the property let. Over time that initial pool of tenants will grow older and the area your property is in might change.

Maybe now you need to rent to older and more professional tenants. Maybe students have left the area and you now need to be thinking about short term lettings. Or perhaps you want to break into the young professional HMO market if the area is starting to see some regeneration. Either way pivoting your business model may not come cheap. You may need to spend significant sums converting your property or making structural changes to accommodate your new business model. Where this is the case, a re-mortgage can give you the capital you need to make these changes.

Where you re-mortgage for this reason, make sure your lender will accommodate the change of business. Some lenders won’t provide mortgages for short term lets and if you’re pivoting to an HMO strategy you may find that you’ll need a specialist lender to avoid breaching terms and conditions.

Think about how long you’re entering into the mortgage deal for and how long it will take you to recoup the costs of the interest you’ll be paying. If you need to pivot your strategy again within the lifetime of the mortgage it could end up being quite expensive.

You Want to Release Capital to Expand Your Property Empire

A common reason to re-mortgage is to release capital to use as a down payment on a new property. For many landlords (who know what they’re doing) this is a sound strategy that can help them grow their portfolio.

The major pitfalls to be aware of when using this strategy are over indebtedness and lending terms and conditions.

Taking a re-mortgage on one property to put a down payment on a new property (which you’re probably going to have to get a mortgage on) can be a risky strategy. There are a lot of moving parts here and you’re essentially opening yourself up to more debt. A lender who lends to you for this purpose is going to want to know that you can afford the re-payments and you’re going to have to be honest with yourself about what you can afford now and what things will look like if the situation changes in the future. If you go down this road, will you be able to manage if interest rates suddenly spike and you’re not on a fixed term deal?

All lenders have terms and conditions that you must agree to, so you may find some lenders are reluctant to let you re-mortgage for the purpose of putting a deposit on another property. When you’re asked by the lender why you want to re-mortgage it’s always best to give an honest answer. If you fall foul of the terms and conditions your financing can be refused and you can also be refused future financing as well.

How to Re-mortgage

There are a few different ways you can go-about securing a re-mortgage on your rental properties, here we’ll look at the most common reasons and the pros and cons of each.

Speak to a Mortgage Broker

A mortgage broker is a qualified specialist who can compare different mortgage deals on your behalf to find the ones that best suit your needs. A broker will take your details and the details of your property and will then set about finding you the best deals. Some brokers charge an up-front fee for this service, others will provide the service for free but will receive a percentage of the mortgage sum that you get.

The advantages of using a broker are that they are privy to deals and incentives that aren’t available on comparison engines online. They also save landlords a lot of time because they do all the shopping around on your behalf. A qualified broker can be trusted to find the right mortgage for your specific needs and property set-up, and are often worth the money for the amount of time they save and the amount of money they can save you in the long run.

Call Different Lenders

Another way to secure a re-mortgage is to call around different lenders yourself. Usually, bycalling one bank or building society you can speak to an advisor who will instruct you on the best products for you from their range. If you staunchly only want to bank with the big 4 then this is a pretty straightforward task, if you’re open to banking with smaller and more independent firms though (and why wouldn’t you be? How else do you find the best deals!) then this is going to take a LOT of time.

Use Online Comparison Engines

Just like arranging a new insurance provider there are online comparison engines for mortgages too. They are fast and convenient and can show you a number of products at once. They tend to work fine for vanilla portfolios, but if you have anything even a little out of the ordinary this method may not be for you.

When these comparison engines give you their quotes they are often only valid for a few days or hours, so as soon as you get the quotes the clock starts ticking. The comparison engine will usually only give you high level details, so if you need to check the terms and conditions of certain products you’ll usually need to contact the lender directly or you’ll need to find the product’s terms and conditions online so you can search through them to make sure the product works for you.

While it’s simple to look up quotes online it’s best to use them as a guideline to the types of products and the standard deals available on the market.

We hope we’ve given you food for thought when it comes to re-mortgaging your portfolio.