Following a few years of high interest rates and uncertainty in the mortgage market, the cost of borrowing is now coming down again. And with property bargains to be had in areas all around the UK - particularly where other landlords are selling up as they reach the end of their investment journey – you might be thinking of expanding your portfolio.
If that’s the case, it’s well worth reassessing the financing of your properties to see whether it could make sense to release equity to help fund a new purchase.
Even though there are concerns about the impact of some of the changes in the Renters’ Rights Bill has passed, buy-to-let remains a very worthwhile investment option for good landlords investing over the long term.
JLL has forecast average house prices to rise by 20% over the next five years, driven by a continuing lack of supply versus demand and more competitive mortgage rates. And with the Government expected to fall well short of its housebuilding target of 1.5m new homes by 2029, continuing pressure on supply should keep pushing prices and rents up.
Borrow more to increase your returns
One of the big benefits of borrowing money via a mortgage is that if the property grows in value, you get to keep all the profit (less tax, of course!). Even though you might only have funded 25% of the cost of the purchase, you benefit from growth on both your capital and the bank’s loaned funds, this typically gives you a better return than if you’d paid for the entire property yourself.
As a simple example:
You buy a property worth £300,000 with cash and over 5 years the price rises by 20% (if JLL forecasts are correct!). You’ve made £60,000, which is a 20% return on the capital you invested.
But if you buy the same property with £75,000 of your own money (25% deposit) and borrow the rest, that £60,000 growth is now an 80% return on your capital. Of course, the monthly mortgage payments will reduce your ongoing profits from rental income, but if you managed to buy three or four properties using the same £300,000 cash, the total rental income profits across the portfolio could match or exceed those from just one property owned outright.
Do seek independent, expert tax advice however, as not all of this will be pure profit – and property values can go down as well as up.
Four things to consider before remortgaging to release equity
- Will increasing your mortgage leave enough monthly profit?
Ensuring you have sufficient cashflow is a key part of being a successful landlord. So the first thing to do is carefully check your income and outgoings, making sure you factor in things like potential void periods, future investment in maintenance and what would happen if interest rates rose again. Before you speak to a broker, work out the maximum monthly mortgage payment you could afford that would still leave you with a comfortable financial ‘cushion’.
- Will a new purchase make you a ‘portfolio landlord’?
If you have four or more properties, you’re classed as a portfolio landlord and lending criteria becomes tighter. That includes:
- Total borrowing across your whole portfolio can’t exceed 75%
- The lender may require a higher level of rent cover
- The loan may be ‘stress-tested’ at a higher interest rate
- There may be a limit to the number of properties you can own in one postcode or area
- Capital gains tax is calculated on the whole increase in value NOT remaining equity
Whenever you release equity it’s important to remember that when you eventually sell or pass on the property, CGT will be due on the difference between the original purchase price and the current valuation or sale price. So if you are remortgaging and releasing capital, it’s wise to work out what the CGT bill would be today and make sure there is at least enough equity left in the property to cover that.
- More properties means more work, unless you use a qualified agent
If you currently have one or two properties that you manage yourself, consider whether you have the time and resources to take on more. It may be worth using an agent who can easily coordinate all the ongoing tenant and property management – particularly with the new changes that will come into effect when the Renters’ Rights Bill passes.
If you’d like to discuss the pros and cons of releasing equity for reinvestment and find out whether it might be a good option for you, our team of buy-to-let mortgage brokers is here to help. Get in touch with us via online chat, by completing our enquiry form or by calling 0800 144 4744.
