Remortgaging a Residential Mortgage to a Buy to Let
Anthony Moore from The Mortgage Broker joins the Mortgage and Protection Podcast as part of a mini series on remortgaging. This time we’re exploring Residential Mortgages to a Buy to Let.
Remortgaging a buy to let property maybe the only way to keep your rented property profitable.
Can I switch my residential mortgage to a Buy to Let?
Yes, you can – subject to the terms and conditions of the lenders you’re switching to and from.
The first thing to consider, though, is your early repayment charge. Let’s say, for instance, you’re on a two year fixed rate with one year left. Chances are, you will have to pay a penalty to come out of that deal. It’s really important to understand where you are, what the penalties are and whether it’s better to wait until that charge period ends.
It might be that your objectives are more important than the charge – it’s really about assessing that and making sure everybody understands their position.
The other things to consider is how much the property will rent for, how much borrowing will be needed to replace the residential mortgage and whether those figures stack up – will they satisfy the criteria of the new lender? Obviously, that’s something a mortgage advisor can help you with.
Is it easy to change to a Buy to Let mortgage?
It’s essentially a remortgage process, so that means looking at the usual things such as the eligibility of the property and the applicant. The lender will look at the value of the property and the ‘loan to value’ ratio, the rental calculation and rental valuation. The rental payment is important in working out the maximum loan amount.
At the moment, remortgage times are longer than they have been historically. It used to take between four to six weeks, but because of all the volatility in interest rates those timescales are anywhere between six to twelve weeks. But I think once things settle down, the standard four to six week time period will probably resume.
Is it illegal to rent a house on a residential mortgage? Do I need to tell my mortgage lender if I let my property?
Yes, you do need permission from your mortgage lender, otherwise you will be contravening the terms and conditions of your contract. It could be deemed as mortgage fraud. In the worst case scenario there could be extra charges and interest, you could be forced to fully redeem the mortgage, or you could have a negative credit rating which could make it very difficult for you to be able to get a mortgage elsewhere.
In that scenario, you could be stuck on the standard variable rate – which may not be affordable and lead you to sell your property. The consequences could be quite severe.
Is a Buy to Let mortgage more expensive?
Historically yes, because Buy to Let mortgages have always carried a slightly higher risk. If you look at the rate of repossession it has traditionally been higher on Buy to Let mortgages. Today, that difference is a lot closer.
A lot of landlords now run their Buy to Let business via a limited company, because changes in the tax laws make it slightly more tax efficient. Limited companies will find the premium is a little bit higher, typically around about 1% higher than a standard Buy To Let mortgage.
Our job as a mortgage broker is to source the market for the best options for you. Our experience and depth of knowledge can help you to secure that all-important mortage at the best rate we can.
What is Consent to Let?
Consent to Let or Permission to Let mean exactly the same thing. This an arrangement with your existing lender to let out your property on a temporary basis, normally up to two years.
After those two years it will need to be reassessed – there might be an extension to the agreement or it may change to a full Buy to Let mortgage.
Some examples of where this might apply would be if you had a work placement overseas, you had to move into a relative’s home as their carer, or perhaps you want to go travelling around the world. In these cases you could get Consent to Let.
It’s important to know that whilst your mortgage is under Consent to Let, you can’t do any further borrowing on that mortgage, or switch interest rate. If you fall into the standard variable rate, it will have to stay on that rate until such time when you move back into the property and the arrangement can change.
How quickly can you get Consent to Let?
Consent to Let is a lot easier because there’s no legal process or physical valuation process. It’s just a quick application checking the reasons why you want to do so. It’s really down to how quickly the lender can process the application. Anywhere between one to four weeks is typical.
How soon can you remortgage to a Buy to Let?
If you recently purchased the property, most lenders will want you to wait six months until you’re able to remortgage due to money laundering rules. Some lenders will allow it from day one, however. An example where you might want to let from day one is where you inherit a property.
Alternatively, investors may buy properties at below market value and refurbish with perhaps an extension, a new kitchen, a new bathroom, and then want to remortgage to take their money out of the property and build up their portfolio.
Some specialist lenders that allow you to do that from day one, provided, they can see evidence of the work that you have completed.
How much equity needs to be left in the property for a Buy to Let?
With a Buy to Let mortgage, there needs to be a minimum of 25% equity left in the property with most lenders. Some lenders will go up to 20%. One or two might even go to 15%, but generally speaking, it’s 25%.
How much can I borrow on a Buy to Let mortgage?
The amount you can borrow is not just based on the equity left in the property. It’s also a calculation based on the rent that the property can generate. The lender will do a valuation on the property as well as the rental valuation. That information is used to work out the maximum amount of lending you can have – subject to it being up to the maximum loan to value of 75%, or 80% with some lenders.
What costs are involved? Do you pay stamp duty on a Buy to Let?
You don’t pay stamp duty if you are remortgaging, but if there is any transfer of the equity in the property then there might be a stamp duty liability. For example, if you’re adding someone to the mortgage and the equity changes, stamp duty may apply. But on a general remortgage from residential to a Buy to Let there wouldn’t be any stamp duty implications.
What is a Let to Buy mortgage?
This is when you want to move to another property while retaining your existing home and letting it out. In other words, you’ll end up with two properties.
Arranging this is subject to the terms and conditions of the lender and there are different ways it can be structured. For example, you can raise money on your first property to use as a deposit on the new property. Incidentally, we have completed another podcast all about Let to Buy so do give that a listen if that’s something you’re interested in.
How can a mortgage broker help with remortgaging to a Buy to Let?
A broker can guide you through the process and give you advice on your current situation, especially looking at early repayment charges. We’ll explore your current circumstances and find a lender to match in terms of mortgage criteria. It’s all about finding the most suitable mortgage for you.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate some Buy to Let Mortgages.
How does remortgaging work?
The first thing to be aware of is the terms of your existing deal. Some include exit charges and fees, and these could negate the benefits obtained by switching. Many people decide to hold off changing to another deal until their existing one ends. As that date approaches, it is a good idea to start looking at the potential to switch. This can be done with our no-obligation assistance.
The next step is to make sure you can access the largest quantity of available deals on the market. It’s easy to search online for deals from familiar High Street lenders. However, there are many more lesser-known lenders to consider as well. Hence why our advisers can provide you with a far more in-depth selection of available options. They have the experience to dip into the wider marketplace, potentially finding deals you never would have found alone.
When you find a deal you like, your lender will obtain a valuation of your property. This rarely involves entering the property; instead, only a street-based view is typically used, along with other evidence that can be obtained from other sources. This means there is a risk the lender could provide a valuation you believe to be lower than it should be. Watch out for this and don’t be afraid to query it if you’re unsure. The lender should be able to tell you what you need to do to support your case for them to reconsider.
What are the benefits of remortgaging?
The biggest benefit for many is a monthly saving that could range from £15 to £120 per month. That may not sound like much or even seem worthwhile, especially when compared to your actual monthly payment. For example, you’re not going to save £120 off a £300 mortgage; savings of that kind are more likely where bigger monthly payments are concerned.
However, this is where many people go wrong and end up making the lenders richer. Take a moment to add up those potential monthly savings over the lifetime of the loan – or even over the space of two or three years. It doesn’t take long to realise how much could be saved by switching loans. These monthly savings can make life easier for people who wish to reduce their outgoings.
There is also a possibility of changing loans and continuing to pay the same monthly amount you are currently paying. This may sound odd, but there is a logic to doing so. If the new loan allows regular overpayments to be made, the borrower could continue to pay whatever they are at present. For example, let’s say you have a monthly repayment of £500 at present. A remortgage is arranged that offers a reduced monthly payment of £470. However, it allows for overpayments, and you can afford to continue at £500 per month.
It may not seem like a huge difference, but over time those additional £30 monthly payments would reduce the length of your mortgage. They would also result in paying far less in interest over the life of the loan. Worth thinking about if you’re looking to switch.
Is remortgaging a good idea?
In some cases, yes, and in other cases, no. The trick is to consider the effect of any fees that would be incurred if you did switch. In some cases, the savings made through switching would far outweigh any fees you may then be obliged to pay.
However, this will vary for everyone. It’s one of the reasons why you should always consider your current deal and compare the pros and cons of that deal to the other deals currently available.
You also need to weigh up the risk of being on a variable rate deal for the foreseeable future, compared with the security of being on a fixed rate deal for two or more years. If you can secure a fixed rate deal while interest rates are low, you could protect yourself against potential rate rises within the next few years. This buys peace of mind alongside the potential for monthly and yearly savings. Quite a potent mixture.
Sometimes, seeking professional advice is the only way to get the full picture. Since our advisers can access far more deals across the whole market, you stand a chance of finding options you would otherwise have missed.
It may also depend on how long you’ve had your loan for. If you took out your existing deal when interest rates were much higher, it would be sensible to find a new fixed rate deal now if doing so meant you could enjoy a much lower interest rate. In this case, the savings could be significant.
How does remortgaging release equity?
While many people switch home loans to reduce their monthly outgoings, others do it purely to unlock equity in their property. The longer you’ve had your mortgage for, the more likely it is you could have substantial equity in your home.
Equity is the term given to the amount of the property you own. For example, if your property is worth £300,000 and you have a mortgage outstanding of £260,000, that would mean you had £40,000 equity in that property.
Now, if we apply this to the idea of remortgaging your property, we can see how taking out a larger mortgage to replace the existing one would release some of that equity. Given the above example, you may wish to unlock £20,000 of the equity to complete some home improvements. This might mean a loft conversion or new kitchen, or perhaps a selection of smaller improvements. If your plans could lead to an increased property value, this could turn out to be a good investment in your home to take advantage of in future, too. (However, there is often a ceiling value for properties in a specific area, so bear this in mind.)
Of course, if you are considering doing this, you should make sure you can afford the higher repayments that may be incurred as a result of the larger mortgage. That said, if your current fixed rate deal is about to end, there is a chance you could find a better fixed rate deal for the larger loan amount. Again, the trick is to search as much of the market as possible – something that is far easier to do with the help of one of our professional advisers.
What happens when remortgaging?
First, check the conditions of your current deal and see if any costs would be involved in switching. You should also check whether a lender would charge you any costs for moving to them, and if so, how much these amount to. This will give you a much better idea of whether it is even worth switching.
If so, the modern marketplace often allows for an Agreement in Principle to be obtained online for convenience. Also referred to as an AiP, this gives you an opportunity to see in theory if you could get the deal you would like. The good thing about this is that no credit check is required. However, it is possible you could get a yes in theory and then find you’re turned down when you officially apply.
Once you’re ready and you’ve found a mortgage deal you like, you’ll need to apply for it. This is much the same as the process for applying for any home loan that allows you to buy a property to start with. The major difference is that you’ll be asked to provide information about your existing mortgage as well. The remaining steps are much the same as applying for the original loan too.
The amount of time the process takes from start to finish would vary according to the complexity of the case. However, a good rule of thumb is to expect it to be completed within four to eight weeks.
How much can I borrow with a remortgage?
The process of assessing affordability is much like the process you went through when taking out the mortgage you have at present. However, there are some differences.
Firstly, you now have a property that forms part of the equation. The value of the property should be considered, especially as it is likely to have increased in value since you bought it. Secondly, the loan to value ratio (often seen as the LTV ratio) is important. This is the percentage of the loan compared to the value of your home. Not only does this reveal the size of the loan compared to the property, it also reveals the equity currently held in the property.
Loan to value is an important element to think about. The lower the LTV is in your case, the more likely it is you’ll be offered better deals. For example, a 60% LTV is likely to have much better interest rates than a 90% LTV, because you are putting down a lot more as a deposit. The longer you’ve had a loan for, the more chance there is of achieving a lower LTV.
Of course, while your property is worth a lot, you won’t own all of it if you still have a home loan attached to it – only a percentage. This forms part of the picture; your income forms another crucial part. You need to be able to prove you can afford your new repayments if the lender in question agreed to furnish you with your desired loan.
You should also consider how much equity you are going to try and release, if indeed you have reason to do so. Clearing other debts with a home loan offering a much lower interest rate is a good move, but it does mean you’re likely to have a longer mortgage term instead. Either that or you’re going to see higher monthly repayments before you can clear your loan.
How much does remortgaging cost?
A remortgage deal that incurred no costs at all would be a rare thing indeed. It’s best to assume some costs are involved, but the exact nature of them would depend on your situation.
The first charge to be aware of is an Early Repayment Charge or Fee. Also known as a redemption fee, this applies to the mortgage you currently have. It will only be triggered if you leave the product early, before the end of the fixed rate period, for example. The small print for your existing deal should highlight any such fees you would be subjected to. Oftentimes it is best to wait until this period has expired before switching deals. The cost of exiting often outweighs the savings you could make by switching to something with a cheaper interest rate.
There are also potential charges you may encounter that relate to your new mortgage. One of the more common ones is a product fee. There are two ways to pay this. You can either pay it at the start of the term (or just before it begins) or you can add the fee to the amount you are borrowing. The second option may seem tempting but beware – it means you’ll pay interest on that too. This in turn would increase the total amount repaid for that loan. It could skew your figures when looking for the most affordable deal.
All mortgages require a valuation to be conducted by the lender. While this is not comparable to a proper survey (it is often done via an external viewing from the road), it still incurs a fee. You should find out what this is before agreeing.
Are there any fees involved in remortgaging?
Many home loans involve fees. However, when you want to switch from your existing loan to a new one, it is easy to assume any fees will be attached to the new mortgage deal. In fact, you must also consider whether exiting your current deal would incur any further fees.
For example, you may be required to pay an early repayment charge to your existing lender if you remortgage. Your adviser will discuss this with you prior to a decision being made. This will ensure that if this course of action is suitable for you, a penalty charge would be avoided wherever possible.
If a penalty does need to be paid to leave your current deal and switch to a new one, the adviser will ensure you are aware of the effects of this, not to mention the cost. In many cases penalties can be avoided, but if not, the reasons for changing deals should be strong enough to make this move a good financial decision.
In cases where people discover there would be a fee involved for switching deals, they tend to wait until the end of the penalty period. At this point, the penalty would disappear, leaving them free to switch without these fees being part of the equation.
That said, even if a deal is advertised as fee free, you should look at the potential for other costs to appear. Legal fees may be payable for example. A proper comparison will allow you to look at different deals on a like for like basis.
How can I work out how much I can borrow?
Start by getting a rough idea of the value of your property. You can often find this information online, but you could also ask a local estate agent to give you an idea. You should also check the current amount left on your mortgage. Subtract the second figure from the first and you’ll get a rough idea of the amount of equity you have in your home at present.
You also need to consider two other important elements – your income and your monthly outgoings. Any lender is going to need that same information to help them decide whether to accept you for remortgaging. You need to know what your current repayments are each month, what they might be on the standard variable rate for that lender, and what you may be able to pay with a new deal. Yes, there are potential savings to be had, but you must be able to confirm you can afford the monthly payments.
If you alone are responsible for paying the mortgage, you can only use your own income as a guide. If you have a joint loan, you can use both sources of income to aid you in working out the possibilities. It’s important to note that your basic income and any guaranteed bonuses or overtime can be included. However, if you occasionally get bonuses you cannot rely on, these are often unable to be included in the calculations.
How do you calculate remortgage?
When the idea of switching loans first occurs to you, you may simply want a rough idea of whether it might be an idea to make that change. The easiest way to see whether it would make sense for you is to ask a broker as they deal with a variety of lenders or search for an online calculator. Many lenders offer a free remortgage calculator for customers and interested parties to use.
Simply go through the steps provided and you’ll be able to find out whether a change would be good for you. Most online mortgage calculators work fine for this purpose. You can look at your current deal and then compare different deals, noting whether a reduced interest rate would have a significant impact on your monthly outgoings. You can also find out whether overpayments could reduce the mortgage term you end up with.
It’s a good starting point, but nothing replaces expert no-obligation advice as provided by our team of experienced advisers.
Can you remortgage with bad credit?
A bad credit score can affect your ability to switch to a different product. As part of the switching process, the lender offering the new deal will check your score. If it is far from perfect, they may withdraw any offer they have made, or refuse to consider you for a remortgage.
That said, some lenders may still accept you. You’ll likely have fewer deals to choose from, and interest rates may be higher than someone with a good credit rating would get, but it’s not impossible to get a different deal.
It may be worth looking at what you can do to improve your credit rating before applying to change loans, though. Get a copy of your credit record and make sure there are no errors on it, for starters. You might be able to take other steps to improve your score too.
Does remortgaging affect credit rating?
Your credit rating is an important element to consider when you’re thinking of remortgaging your property. If you have a low score, you are far less likely to be accepted for a new deal. In fact, it is worth checking your credit history prior to doing anything else. If there are any simple errors there, you can resolve them beforehand.
So, your credit rating won’t directly be affected by switching products, but it could be affected if you do not maintain a good repayment history. Keeping on top of all your loans and bills will help raise the odds of finding a good deal if you do decide to switch.
Contact The Mortgage Broker Limited for more information today
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If your payments are going to increase, and even if the deal your lender is offering you seems attractive, why not get a free no obligation quote from us to make sure you are indeed getting the most suitable deal? There could be an enormous potential saving to be made compared to your existing deal. With the complete application process being processed and handled by our team, requiring very little effort from your side, you really should investigate.