How remortgage works? (WARNING! for dummies)

[Wookash]

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? 

 

[Lilla D]

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.

[Wookash]

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 ?

[Lilla D]

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

[Wookash]

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 ?

[Lilla D]

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.

[Wookash]

@lilla d Thank you for the explanation, it is helpful!

[Tiffany B]

Hi, I just wanted to jump on this with a question.

If not to release equity to re-invest in a new project/purchase, then why would you re-mortgage? Say it wasn't an interest only mortgage either - would this change things?

[Wookash]

On 4/23/2019 at 6:41 AM, tiffany b said:

Hi, I just wanted to jump on this with a question.

If not to release equity to re-invest in a new project/purchase, then why would you re-mortgage? Say it wasn't an interest only mortgage either - would this change things?

To add the value to your property, perhaps? Extension, garden a garage refurb etc. I think this even has to be an 'official' reason for re-mortgage, am I right ?

[Lilla D]

Hi Tiffany,

With reference to my post above on 18 April, when your initial deal ends, the default option is that you do nothing and just move onto the lender's standard variable rate (SVR). However, this rate tends to be higher than what you could get by remortgaging, so if you want to keep your monthly payments down, then you're likely be better off by remortgaging even if you don't want to release cash.

Hi Wookash,

You're right that when someone releases cash during the remortgage process, a reason/explanation for this extra cash will have to be given to the lender.