Pay the debt down or release the equity?

[Victorian33]

Firstly, thank you Rob & Rob for all that you do for us property addicts!

 

I am about to remortgage two BTL'S and toyed with the idea of maybe pulling capital out to purchase more properties, my hesitation in extracting cash out by remortgaging is purely down to the fact that I like to decrease my debt rather than increasing it which would reduce the good cash flow on that particular property, yes...I could buy more property and make up the cash flow that way but I aim to save further deposits to purchase instead, this avoiding eating into the tied in capital, the buffer to protect against any future increased interest rates or void periods. My property goal is to become financially independent to live off the rent but living off the rent knowing that each house isn't stretched out relying on low interest rates and no void periods, thus been stress free. I know it is down to preferred preference and individual planning how they want to invest but are there any experienced investors out there that have been in the game for a long time who may shed some light on the subject, to release capital to increase portfolio or if able save to buy and pay down the debt....is better to have less houses with low debt or more bricks with greater risk? this topic has always been a difficult choice for me but would like to hear what other investors prefer, I am risk averse but there is something unorthodox about pulling capital out to purchase more debt..good debt?

 

Ady

[Robert]

Ady

 

If you're that risk averse then stick to your comfort level. You know what your own goals and time scale is. 

 

Im quite the opposite. Id leverage the toaster if i could buy more property. Im holding forever, so I'm quite happy for inflation to erode my debt to the point of being laughable. 

 

As long as the cash flow is positive, ill sleep well.

 

Rob

[Victorian33]

Rob, 

 

I guess that's good point- inflation would erode the debt if I was to hold forever

 

I think for now I'll rely on saving further deposits whilst I have the option, with the aim of releasing capital to further my portfolio in the future when I have a better grasp on investing and if there is less income coming in.

 

If the aim is to remortgage after a period what would be the best type of mortgage? I tend to set up 2 year fixed, interest only.

 

Ady

[Victorian33]

Richard,

 

Thanks for your post, was an interesting read and will browse through your blogs as I enjoyed your article fixed rate or variable.....

 

I have been lucky with my remortgaging recently, having been with TMW as a customer for a while and having properties with less than 60% LTV I have been able to source out 2 year fixed products with good rates with no set up fees, but this may not be the case 2 years down the line and I can see your point that after a long term of remortgaging every couple years could be expensive...never thought of it that way, thanks for the pointer.

 

I have read beyond the bricks and thoroughly enjoyed it, I will need to revisit the book and absorb it a tad more.

 

LTV is something to consider, I do tent to feel comfortable with 50%-60%, like you said it would be 'sufficient to ride out most market' corrections'.

[Victorian33]

Richard, 

 

When it comes to pulling out equity to further purchase on a 5 year fixed, do you wait until the fixed term is finished or would you commit to paying the penalty fee? Fixing for 2 years to me is less of a commitment if I did decide to withdraw money out at the end of the fixed term but have been tempted to go for longer....there is so much to think about at times which can have a knock on effect on the investment especially at the early stages.

 

Here's an interesting one, I'm in the process of purchasing a BTL, the offer has been accepted at a very good BMV price. All was looking good with the hope of exchanging contracts early as both myself and the vendor are chain free, until the surveyor decided that the property was not in a good enough condition to be let....this halting the process, basically the property requires minor renovation before the lenders will hand over the cash. I am currently going through a new thing for me, by getting an agreement written up with an exchange of contract happening but with the lenders retaining the loan until the work is completed by me, and then resurveyed for inspection....if passed the loan will be released. I would really like to hear if anyone has been through this type of agreement before and are there any areas I need be concerned about?thanks.

 

Ady

[Victorian33]

Richard,

 

Thanks for sharing your knowledge and plans...

 

I suppose I am willing to take risk in a good purchase but tend to be a bit careful with my cash-flow....but I am coming around to maybe pulling the equity out 2 years from now when I remortgage( Depending what the market is doing) time will tell. 

 

I'll update on the recent creative property purchase once the contract is complete,in case anyone is interested and find themselves having to take this route.... hoping to complete mid-January.

 

Ady

[Victorian33]

Richard,

 

I'll keep a log on how the purchase goes through to completion, along with before after photos. I'll be in touch....hopefully finished mid-January.

 

Ady

[Kevin Wright]

Congratulations  Ady, you have hit one of the common snags investors are generally unaware of, until they experience it.

 

BTL lenders instruct their surveyors that any property has to be day one rentable to be granted a mortgage. The assumption is that is has to be habitable to be granted and whilst this is correct for a property you want to live in, the bar is raised higher for one you want to rent out. It is subjective in so far as it is the surveyors opinion but on every BTL survey the surveyor will consider if a tenant will pay good money to rent this, in comparison to other similar properties available to rent in the locality. In your case, the decision was, no they wouldn't.

 

Worth knowing that there are a couple of commercial lenders that offer light refurb mortgages. This means the surveyor will approve a mortgage confirming both the current and post refurb values. They will advance you money to complete the purchase, even though it is not rentable at that point, give you a few weeks to complete the refurb, send the surveyor back to sign off your work, release further money to you based on the value you have added.

[Victorian33]

Kevin,

 

Exactly as you say...I'ts not as straight forward as one would like it to be, though I enjoy the challenge of trying to tie down all the loose ends...i.e the building works, solicitors, completion dates so forth.

 

 

Ady

[Victorian33]

All,

 

We are almost at the exchange of contract stage...few days!! though a bit of a hiccup has risen in regards to us having requested an extension date to complete the refurb, the delay is purely incase there is any underlaying issues that may occur when carrying out the refurb & incase the survey failed and needed further work to complete. The sellers have refused the extra few weeks that we asked for, this making the timeframe extremely tight to complete the refurb...we have asked the builder if he may be able to start earlier but is unable, we may have to look for alternative contractors to carry out certain works this to try cut the time down to finish.

 

My understanding after talking with the solicitors is that if we do not complete the works on the date stated by the sellers solicitors we will loose the deposit and the moneys thats been spent on refurbing? does anyone have any experience in this, as in where do we stand if the work wasn't completed on time or even that the surveyor decided more work was required before the lenders can release the funds?

 

We have now asked the solicitors to put another proposal forward, a cash offer to try secure more time for completion.....failing this I may have to look at a bridging loan to purchase and get out this time restriction. If I was to purchase using a bridging loan and complete the works then get it rented out asap, would I be able to mortgage the property soon after to pay back the bridging loan?

 

I would appreciate any ideas, thank you.

 

Ady

[Kevin Wright]

Hi Ady

 

If you reach the agreed completion date and you have not yet finished the refurb, the vendors solicitor will issue a Notice to Complete, this gives you 10 working days (usually) to complete the purchase, or forfeit 10% of the purchase price plus any other costs incurred by the vendor as a result of your failure to complete. Of course you would also lose the money spent on the refurb.

 

You have already ascertained that your mortgage lender wont release funds to complete unless their surveyor is convinced the property is now in a lettable condition, so you are reliant on complete the refurb by the set completion date to achieve this method of funding.

 

You can of course complete your purchase by the use of bridging finance and you can arrange this toward the end of your refurb it if becomes clear you are not going to finish the work by the deadline date. Allow at least 2-3 weeks to put the bridging loan in place.

 

Once purchased with bridging, you will be then subject to the 6 month ownership restriction, meaning you cannot now apply for a mortgage for a further 6 months. So your current lender retaining the release of funds would be unlikely to then lend after completion. a couple of BTL lenders will lend within 6 months, as long as your are not trying to pull out all of your funds.

[Victorian33]

Kevin,

 

Thanks for your reply. 

 

Good to know that if it does go over slightly that a notice would be presented with an extra few days to complete. I am hoping that the sellers accept the extra cash to delay otherwise I think it may have to be a bridging loan- otherwise it will be a matter of taking a gamble and go for it with aim to complete on time.

 

Ady

[Victorian33]

Phew! extension to complete has been agreed for a small fee. There is now plenty of time in the bag to carry out the refurb, though I will keep the option of a bridging loan in mind in case there is any unforeseen issues that may delay the completion.

 

Ady