It is no secret that home prices are increasing in an overwhelming matter across the nation. It’s becoming more and more difficult to finance real estate investing.
Many real estate investors are looking into remortgaging as means of financing the purchase of a second rental property – either for a deposit, or outright buying the property.
Remortgaging is a great method to finance such an investment. However, it is not for everybody. A mortgage is known to be a man’s largest debt and biggest commitment in the real estate world, and must not be taken lightly. So we’ve put together a list of the best situations or times to consider remortgaging. It is not the easiest step to take, so read through to find out when you should remortgage to buy a rental property.
Related: Buy a rental property using a mortgage or cash?
When Should You Remortgage to Buy a Rental Property?
You Should Remortgage To Buy a Rental Property When You Could Save Money
One of the most common reasons people choose to remortgage is to save money on monthly payments. When you remortgage you are essentially switching your debt from one provider to another under a better offer. It is often recommended that if the cost of switching is lower than the saving amount, then you should consider a remortgage to buy a rental property. Once you’ve done that, you can save thousands of dollars that and direct them towards buying a rental property, or paying the mortgage for that rental property.
At the end of it, remember that remortgaging depends on your outstanding mortgage. If you’ve paid most of it, or if the term is almost up, switching costs may be higher than the amount saved – and remortgaging may not be sensible.
Related: The Best Time for Buying Real Estate Investment Properties
You Should Remortgage To Buy a Rental Property When You Want To Release Equity
You already know that equity is the current market value of your property minus any mortgage payments you have to make. In this equation, if the value of your home has gone up, or if you’ve managed to pay large sums of your mortgage, you’ll be able to cash out large sums on equity. One problem, you are unable to sell your property and you still need the equity release. What do you do? Remortgage to buy a rental property by borrowing against your current equity.
Remember, remortgaging is a savvy move in this context only if the value of your property is high. If not, remortgaging may not release the desired equity to finance a new rental property.
You Should Remortgage To Buy a Rental Property When a Remortgage Deal is Better
If you’re stuck between the option of remortgaging versus the option getting a buy-to-let mortgage, weigh out the costs and benefits of both like you would when making any decision. If the interest expense of remortgaging is less, go for a remortgage to buy a rental property. Moreover, if remortgaging allows you to downright buy another property, then go for it. Many times, remortgage rates for a residential property are lower than those for by-to-let properties. So if the deal is better, that’s when you should remortgage to buy a rental property.
Still, remortgaging is not always the most ideal option, so make sure to look into both possibilities thoroughly and study the size of your current mortgage, remaining term, among other factors to make the most calculated decision.
Things You Should Look Out for When You Remortgage to Buy a Rental Property
While remortgaging is not a too complex of a process, there are some things you should look out for when considering a remortgage to buy a rental property.
For one, remortgaging usually comes at a cost. Most of the time, you will have to pay an exit fee, remortgage fee, which includes the fee for switching providers. You will also need to tend to the legal matters before you remortgage to buy a rental property. What are the terms and conditions of your current mortgage? Do they allow you to remortgage your property?
Another important factor you must also pay attention to is equity. Remortgaging highly depends on the equity on your property. Make sure to value your property and calculate whether remortgaging is a smart option. Also note that sometimes, interest rates may be higher if you remortgage against your equity.
While a great tool to finance an investment, remortgaging may not always provide you with sufficient funds to buy a rental property outright. It may allow you to put a down payment on the new property, but you’ll need to plan the next steps to complete your payments. Make sure you can afford to remortgage, otherwise you may risk foreclosure.
There are also other risks that come with your decision to remortgage to buy a rental property. Vacancies are another example of these risks. If you are relying on rental income to make your mortgage payments, vacancies can be problematic. Make sure to keep vacancy rates at their lowest, and always have a backup plan to make your mortgage payments.
Related: 7 Tips to Avoid a High Rental Vacancy Rate
Overall, you need to do some research regarding your outstanding mortgage, and look around for other deals. Compare the current mortgage you have against others. If you need help searching for properties, use Mashvisor’s predictive analysis tools for insights on occupancy rates, CoC return, cap rate, property comps and much more to make the best investment. And remember, remortgaging doesn’t necessarily work for everyone, so don’t push your luck!