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Monday, January 18, 2016

Why I'm remortgaging

I'm sat here in bed waiting for a nice cheque of about £35,000 to land on my doorstep.  In times gone bye the prospect of such a relatively large amount of money hitting my bank coffers would have got me jittery with excitement.  These days I take it a little more in my stride.  In a sense it's not real money....but just numbers, which leads me onto why I have chosen to remortgage now.

Why am I remortgaging my BTL now?

Like a lot of things in life it's a combination of push and pull.  My current mortgage on the one bed apartment in question is a repayment mortgage which has dwindled nicely to a mere £20,000.  I could leave it to run it's course and pay the whole thing off over the next few years.  However, I do now have better things to do with my capital.  I'm paying a mere 2.25% interest currently but I'm mindful that interest rates will not stay at there current levels for ever.  I'm therefore looking at locking into the current extraordinary low rates.  By seeking the advice of a good BTL mortgage broker I've managed to find a 5 year fixed rate with the Mortgage Works that gives me 75% of the current £75,000 valuation  and as I've said should leave me a nice fat cheque of £35,000 even after all the legal and set up fees.  Why the Mortgage Works? Well this is on the advice of my mortgage brokers who very helpfully highlighted the fact that the Nationwide BS owned specialist lender will lend without you having to go through all the hassle of providing 3 years proof of earning backed up by your SA302.  Given that as ever I'm going to be doing my tax return right up to the last minute. I will not have the SA302 for 14/15 until probably next week.  No good if I need to remortgage now.

Lets be honest I need the money

Some would say it is not prudent to remortgage my buy-to-let when it's ticking along nicely and I'm now swapping for a higher rate.  They may be right but as is the case for all landlords we all have our own personal financial goals to meet.  This is what makes the sector so varied and exciting. When looking at my calculations even with a 75% LTV I am still covering my repayment costs on the loan even at the higher rate of interest and higher gearing.  The reality is I'm actually expanding my property portfolio for the first time in over a decade so in simple terms I need the 'cash' to finance the purchase of another property. This is lucky because it's one of the few categories that lenders like when seeking a justification of why they are remortgaging.  It's not a good idea to tell a prospective lender that you need the cash because you want to blow it on buying a Ferrari or once in a lifetime holiday.

So when `I say I need the cash it's a business decision where I'm recycling my assets into a new set of mainly property assets which will earn me way more than the 4.09 % I will have to pay in annual interest payments.  It's a pain that my cost of borrowing will go up in the short term but given the projections on future interest rates then my current cost of 2.25 % was likely to rise shortly anyway.

Should landlords remortgage now?

It's a classic dilemma for many landlords at the moment of whether to try and lock in the currently historically low interest rates.  Let's be honest many forecasters have been wrong to date with their forecasts of rapidly rising mortgage rates.  For me it's clear cut because having the capital is more important than paying the absolute minimum on interest charges.  Not all landlords are in this position and therefore for them it may be wiser to sit on their current historically low rates until mortgage rates make a dramatic movement.  The difficultly here is that the attractive longer term fixed rates would start to disappear way before rates do start to move.  There is as always when it comes to being a landlord no clear right or wrong answer.  Happy landlording!

Buy-to-let mortgages explained


Unknown said...

But what about the fact that cost of borrowing will not be a business expense in the coming years?

I am thinking of selling a property to lower gear everything so I can atleast get the benefit from the income I need to pay tax on!!

scanners said...

You are crazy to get rid of your very cheap rate. Are you aware high a rate over base you will be paying after the end of the fixed rate term? I'll bet it is at least 2.8% over base.

Anonymous said...

You fail to mention the new rate you are getting, and the rate it will revert to after the 5 year deal ends.

Secondly, the tax implications could be huge for you, as you can not deduct these expenses from 2017.

Please explain.

Jasper said...

It's still only going to be a £55k mortgage and if that means he can buy another property and the repayments are still covered by the rent, fine.

The comments re interest being allowable are valid but not relevant unless you are a higher rate taxpayer.

If you are and you own a few properties, incorporate (not yet though). It's not the end of the world.

Unknown said...

The economic decision is based on lowering yield from one property to the long term benefits of having 2. I am about to remortgage a property I own out right. From £600 pcm profit to only £175 but the 4 properties I will aquire will clear £200 pcm profit each. I've converted 600 into 975 profit with 4 more properties to gain equity on.

Stoney said...

By 2020 you'll only be able to offset 20% of your interest costs. Pushing you into a neutral or negative monthly position - so will be relying on longer term equity growth

Unknown said...

I own 2 properties in South Wales but thinking of remortgaging to buy a flat in East London.
Any comments on the best way to do it and best rates?

Anonymous said...

Speak to an independent mortgage broker, they will get you the best rates and their services don't cost much

Anonymous said...

The 2020 projection is miles out. Removing the tax relief on the interest is a reduction in the profit margin but still greater than sitting one property and I will continue to make a greater profit with the forward investment than just sitting in one property. Once the mortgages are settled I have a gross income of £2400 pcm rather than £600 pcm at today's income levels.

Unknown said...

What people seem to overlook with the new income tax rules is that the whole rent is added to your income rather than just the profit. So "it doesn't apply if you're a basic rate tax payer" isn't as applicable as a lot of people will be pushed into higher rate tax suddenly

The Editor said...

A range of interesting comments here. Some confusion over whether remortgaging effects the proposed changes in the tax system which they are not. All this just highlights the individual nature of landlords finance. There is no one solution that suits every landlord. The essence of my decision is based around gearing. I'm increasing my gearing (amount of money loaned in relation to capital ) because I believe that with that borrowed finance I will make more money with it than without it. This is the essence of most investment decisions. Property investment is no different.

Anonymous said...

I've got 3 mortgages, all lifetime trackers. Two are 1% over base rate, and the other one is 0.28% over base rate.

I got them at a time when banks were falling over themselves to grab people's business, and they are such insanely good value that I can't imagine I'll be remortgaging any time soon, if ever.

Those were the days, eh?!

Stoney said...

Hmmmm even if you are a lower rate taxpayer - i think rent income (not only profit considered from 2020) is like to push most people into higher bracket. To incorporate would involve payimg stamp duty again and many other challenges

Stoney said...

Hmmmm even if you are a lower rate taxpayer - i think rent income (not only profit considered from 2020) is like to push most people into higher bracket. To incorporate would involve payimg stamp duty again and many other challenges