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wookash

How remortgage works? (WARNING! for dummies)

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I would like confirm my understanding of refinance or remortgage of a BTL property.

I have simplified it as much as I could by excluding all the costs, fees, refurbs etc. Is this how remortgage works in principle? 
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Yes and No.

Yes - if you're taking out cash out of the property by increasing your borrowing to 75% LTV, then kind of yes. "Kind of", because they don't automatically give you £15k just because you remortgage - you have to ask for it, give the reason why you want this extra cash and still pass the lender's affordability assessment and/or rental stress test calculation.

No - the default option is that you don't take out money when you remortgage, so if the property value has gone up to £100k and your mortgage balance is still 60k (because it was on interest only basis and you didn't make any overpayments), then your equity in the property has increased from £20k to £40k. 

No - in neither of the options mentioned above you need to add an extra £5k deposit.

No - there is no such thing as £10k free money in your pocket as a result of the remortgage. Even if you remortgage with capital raising, i.e. you apply for and get approved for an extra £15k mortgage, it will be subject to interest payment, i.e. you don't get it for free, you pay for it every month.

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13 hours ago, lilla d said:

Yes and No.

Yes - if you're taking out cash out of the property by increasing your borrowing to 75% LTV, then kind of yes. "Kind of", because they don't automatically give you £15k just because you remortgage - you have to ask for it, give the reason why you want this extra cash and still pass the lender's affordability assessment and/or rental stress test calculation.

Let's assume the property is already on 75% LTV because it is BTL and my reasoning could be as simply as: 
I would like to release the equity on my property to re-invest, which means I could have a second mortgage. Would that convince the bank ?

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5 minutes ago, lilla d said:

Yes, that's fine. Not with every bank and subject to T&Cs, but fine.

Thank you @lilla d. I'm still quite new to it but I think good understanding of leverage and cashflow is essential in property investments.

I'm still not sure how to understand this:

Quote

No - the default option is that you don't take out money when you remortgage, so if the property value has gone up to £100k and your mortgage balance is still 60k (because it was on interest only basis and you didn't make any overpayments), then your equity in the property has increased from £20k to £40k

I'm asking because the investor I've met recently uses this strategy to release the the capital in order to re-invest. But I didn't have a chance to speak with him more about it hence I would like to understand the topic better before I approach him again. 

So even if value of my property has increased I'm not getting any money from the bank. But in the same time I still pay mortgage payments based on £75k loan ?

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Hi Wookash,

On ‎4‎/‎15‎/‎2019 at 10:45 PM, wookash said:

So even if value of my property has increased I'm not getting any money from the bank. But in the same time I still pay mortgage payments based on £75k loan ?

When your initial deal ends, let's say after 2 years, there are 3 options:

1) you do nothing and just revert to the lender's own interest rate called standard variable rate (SVR) - in other words, you don't take a new deal and don't change your mortgage balance, so you will continue paying the interest based on the £60k balance

2) you take a new deal from the current lender and possibly take out some extra cash, so in our example you take £15k and increase the balance to £75k, which means that from this moment you will pay interest on £75k

3) you take a new deal from a new lender and possibly take out some extra cash, so in our example you take £15k and increase the balance to £75k, which means that from this moment you will pay interest on £75k. In this case, the new lender's £75k will clear the original lender's £60k and give you £15k cash.

So, even if the value of your property has increased, it's not automatic that you get extra money from the bank - you have to ask for it. This is why I said that the default option is that you don't take out money when remortgaging. However, not to worry, you only pay interest based on the actual mortgage balance.

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