Remortgaging a buy to let property

Buy to let remortgaging is one of the stepping stones to building a larger property portfolio; with the added benefit of saving the tax a landlord pays as well. Remortgaging a buy to let investment property releases capital and has the following benefits:

  • Any cash from the released can go towards the deposit or refurbishment costs of developing another investment property
  • The property investor can take back any cash input without triggering any tax liability
  • The property business can set off the interest payments on the remortgage to reduce profits

Most buy to let lenders are only too willing to let borrowers remortgage; as long as the total borrowing against each property stays within loan-to-value caps.

Loan-to-value is the percentage of the property value an investor can borrow. For example, if a home is valued at £150,000 and the lender's maximum loan-to-value is 75%, then the most a landlord can borrow is £112,500. If the mortgage is already £85,000, the new borrowing would release around £27,500 cash for new projects or to repay the landlord's initial investment.

Banks and building societies also restrict borrowing with rent cover; a formula that makes sure the rent received from tenants is enough to cover loan repayments. Typically, rent cover is 125% of the loan's monthly interest only payment. In this example, if the landlord wanted to borrow £112,500, the monthly interest payment at 5% would be £468.75, so rent cover at 125% would be £585.

One way for property investors who pay higher rate tax (40%) to make savings is to remortgage their buy to let to a comfortable level; say 65-70% of the total value.

Any cashed raised can go in to savings, like tax-free ISAs while mortgage interest can be claimed against rental profits. Because property business expenses increase, property profits decrease, so less tax is paid.

Meanwhile, the cash can be spent tax-free or saved in a reserve fund. If the cash is kept in savings, and mortgage interest rates rise or the property needs repairs; the money is available. And remember if it's spent in the business it reduces tax again.

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