Remortgage lending is far more prevalent in the buy-to-let sector than in the mortgage sector as a whole. In 2014, some 28% of the £204 billion advanced to mortgage customers was to borrowers switching their loan ; this is compared to 52% of gross buy-to-let advances .
That half of all buy-to-let lending is for remortgaging should come as no surprise when interest rates are as low as they are. Running a successful business is all about ensuring that one has adequate cash flow, and by switching product every time their initial deal comes to an end, landlords can help to keep their payments down and boost their operating income.
But is remortgaging always a good idea?
Buy-to-let is a numbers game, like any business, and whether or not it is a good idea to remortgage boils down to simple arithmetic.
Switching a buy-to-let mortgage comes at a cost. Lenders will often levy fees and charge for legal costs, though either may be waived or reduced (legal fees in particular are often cheaper when you are not making a new purchase). Some fees can be added to the loan, but they will then accrue interest and add to your monthly repayments, eating into your potential savings. There are also early repayment charges to consider if you are exiting your previous mortgage before the agreed-upon date.
A simple sum you can do to help decide whether it is worth switching is as follows: divide the total switching costs (lender fees, broker fees, legal fees, ERCs and so on) with the amount you will save each month on your new interest rate to see how many months it would take to recoup the expense.
Another calculation involves adding up the money that you will save during the entire deal period (or the period that you reasonably expect to be paying your new mortgage) and divide this by the total switching costs. This will give you a rough idea of the return on your extra investment as a percentage; anything less than 100%, and you will not be making a saving.
Remember, these rough-and-ready sums don’t take absolutely everything into account. Tracker mortgages, for instance, are popular because they tend to come with lower fees and less punishing early repayment charges; however, the interest rate may rise during the term, which will reduce and even potentially eliminate your savings.
Of course, remortgaging isn’t always about finding the best rates. Another reason some landlords regularly remortgage is an aggressive, high-risk method employed to build as large a portfolio as possible as quickly as possible.
‘Recycling’ deposits involves regularly releasing equity from properties that you already own in order to pay for deposits on new properties. What money is left over is reinvested into the portfolio in the form of value-increasing renovations. This entails constantly topping up your levels of debt, increasing your repayments and eroding your income. Though the number of properties from which you obtain a rental income grows, so does the burden of your overall operating costs.
This is a popular strategy with professional investors, but once again, it is important to ensure that the decision to remortgage is justified, both in terms of the return on your investment and maintaining a healthy cash flow. Most lenders will not grant finance unless the rental income will meet the cost of the interest repayments by 125–130%; however, this may not be enough to meet the combined costs of your mortgage, rental arrears, voids, insurance premiums, and your ongoing obligation to keep your tenant’s home in good repair.
As with any business decision, there is no straight answer as to whether or not it is appropriate to remortgage: it all comes down to you, your business model, how much free capital you have to cover emergencies and how much risk you are prepared to take on.
1 – Table MM23: Gross lending by type of purchase [XLS]. Bank of England. Retrieved from www.cml.org.uk on 23 Apr 2015.
2 – Table MM17: Buy-to-let gross advances [XLS]. Council of Mortgage Lenders. Retrieved from www.cml.org.uk on 23 Apr 2015.