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Is remortgaging always a good idea?


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Ok so I was listening to a podcast and there was a touch upon something I don't fully understand and I'm hoping somebody can clarify this for me.

The subject is remortgaging or refinancing and if it is always a good idea because if I would like to release some equity I would then have to borrow more which means more monthly payments right? so what if this puts me in a situation where my borrowing is so much that the profit I earn from the house I have remortgaged is basically non-existent? Do I still do it because it will iron itself out eventually or do I have to find another way to raise the funds for a second, third, forth place...

Thanks for your help! 

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so what if this puts me in a situation where my borrowing is so much that the profit I earn from the house I have remortgaged is basically non-existent? 

 

Hi Martin,

 

If the above statement is true then it's highly unlikely you will get lending. Most lenders look for the rent to be at least 125% of your mortgage payment.

 

Are you looking at interest only mortgages, as that will improve your cashflow?

 

Cheers

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Hi Martin

 

That's where the 'Great Idea Remortgaging' comes undone in my view. Yes, you can go and buy another property with the finance you free up, but it carries its own fees and mortgage. And you have just added to the debt in another property. Add the debts together and does the income from the new property cover them both and give a sensible return or yield?

 

Hard work when you throw in either high initial mortgage fees or higher interest rates.

 

I've never seen remortgaging as a way to access cheap capital. It's not and you need to do the sums carefully.

Jason McClean

The Property Insurer

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Hi Martin

 

Some good tips made already here, so how could I add to this I thought...

 

I would say do these calculations:

 

ROI - that's return on investment on your own invested cash - on both properties

Net monthly cashflow - again on both properties - you should have a minimum level of net monthly cashflow (allowing for things like voids & maintenance too)

 

Does it get over your 'hurdle' rate in either case? If yes, then it works but if not then at least wait until it does

 

One final point is to keep in mind your average loan to value across your entire portfolio...set a safe maximum here and so always look at that when taking decisions on individual properties. This maximum should probably flex depending on where you are in your personal property investment cycle (acquisition, consolidation or exit)

 

ROI measures the upside and tells you if it is worth it or not

Net monthly cashflow & average LTV across the portfolio measures your risk exposure (the downside)

 

Examine both sides and then you can make an effective judgement is what I would suggest.

 

I address the issue of KPIs and deal criteria in next week's episode of my new podcast, so it is kind of top of mind right now ;)

 

Best

Richard

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

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Crude assessment of the question posed -

 

If equity release is available and enables you to add to your portfolio in a consistent manner with your initial strategy then the only reason for this not to be profitable is if you are investing in properties which have extremely poor rental income or you predict that the BoE interest rate is set to shoot up dramatically in the next couple of years, which would put you at odds with most speculators on fiscal policy(or if you predict a serious downturn in the housing market which would bring into question why you would be investing in property at all).

 

Obviously, raising cash by saving is great but if you're a property investor and you want to make the most of the resources at hand it seems pretty logical that refinancing to enable further investment is a good move as it improves the gearing position, i.e. increases it, of your portfolio.

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This is something I mention on The Property Podcast next week too - it's important to look at your monthly cashflow figure after remortgaging as well as the ROI.

 

For example, after remortgaging you could end up with a seemingly fantastic 50% ROI...but that could amount to £50 profit per month because you've only left £1,200 cash in the deal! Obviously from that position it wouldn't take much of a shift in interest rates or any other aspect of your cost base to tip the balance negative.

 

So I'm a fan of getting as much capital back out of an investment as I can, but only if the rental income supports it. As Richard says, ROI and net cashflow are the numbers to look at to decide what's appropriate.

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Hi Martin - as mentioned above, you need to ensure rental income on re-mortgaged property supports higher lending, and the 125% rule is a good rule of thumb, but also work back the way taking loan payments and MOE into account and ensuring you still have a "net profit" to cover voids and other unplanned costs. 

 

Re-mortgaging will also incur costs, some of which you may be able to add to loan but others you will need to fund up front.

 

Typically, makes sense to consider if market value has increased significantly, or you have improved the property, as then releases capital to fund further investment.  But there is another rule which says only re-mortgage once, then hold till sell.

 

Allan

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