Ever wondered why, once someone has their foot on the property ladder, they seem to increase their portfolio quicker?

They are most likely investing in properties that are increasing in value and therefore leveraging the equity release of those properties to invest in other properties. So how can they do that?

What is Leveraging via re-mortgaging?

Once you have secured your first property, leveraging via re-mortgaging is an excellent way to add further properties to your portfolio.

Essentially, over time once the value of your property will rise and so you can re-mortgage to release equity which you can then use as a deposit for a buy to let mortgage to purchase another property. In some cases, depending on the value of the equity you are releasing or the type of property or area you are investing in, you may even be able to purchase the additional property in cash!

What factors impact a remortgage of one house to buy another?

The equity in your property is going to be a significant factor in your remortgage application, but also important considerations are your income, credit status and affordability. Track record also goes a long way.

Your current home equity

Equity is calculated by taking the current value of your property and then taking away the total value of any loans secured on it (the current mortgage). If you had a property with a market value of £300,000 and the balance on your mortgage stands at £200,000 then your equity would be £100,000.

When you look to remortgage a property, you have two options – to either get a full remortgage that replaces your original mortgage, or a second charge mortgage which is a separate loan secured on the home.

In all cases, the total loan-to-value (LTV) you can leverage against your home will be between 80% and 95% (depending on the lender’s terms).

Your income

The size of your mortgage will be determined by your income. Lenders typically allow for a mortgage of 4x your income, while others will be able to look at 5x and a few stretch to 6x.

Your income doesn’t just mean your salary, though. Mortgage providers are willing to look at your entire regular annual income, including everything from reliable bonuses and dividends through to tax credits, maintenance payments and child benefit.

Credit status

If you have a poor credit history it will impact your mortgage offers.

Affordability

Your affordability is determined by looking at your current income and deducting your outgoings. This is especially important when looking at remortgages and second mortgages, as you will be placing a significant extra financial responsibility on top of your current situation.

Mortgage lenders must be responsible and will be keen to see strong affordability before being willing to increase the size of any existing mortgage or evaluating you for a second. Simply put, if you can’t show that you can afford the additional expense, your application will be rejected.

But will I end up with Multiple Mortgages?

Unless the remortgage on your first property is large enough to cover any outstanding mortgage and leave enough remaining to buy a second property in full, something to bear in mind is that you are going to end up with two or more mortgages, with the equity released by the first property forming the deposit for the second and subsequent purchases.

The Loan-to-value rates on your second mortgage will probably not be as large as for your first mortgage, so you will be looking to secure a deposit of at least 20% for the new property out of the equity in the first.

Your mortgages may also be of different types. If your second property is a buy-to-let, for example, then your remortgage on your family home will remain a repayment residential mortgage.

Isn’t it bad to take on debt?

Debt is commomly perceived as a bad thing but it is important to make a distinction between good debt and bad debt.  A bad debt is something like credit card borrowing where you are just using it to buy desired objects or experiences. These are going to depreciate or where it is an experience such as a holiday, once it is over that’s it.

However, debt in the form of a mortgage is something that you’re taking on very deliberately because you know you can make more money as a result of taking on that debt. You are going to use that money to buy an asset which will potentially generate an income for you and appreciate over time.

Think of it as buying power.  What it really does do is maximize your buying power and maximize your return on investment. So, in other words, you are taking your own money and you are amplifying the effects of the return that you get by using the mortgage lenders money.  In the short term it is going to eat into your profits because you have got interest payments that need to be paid, but over the long term when you get capital growth you get a greater Return On Investment (ROI).

Things to consider before leveraging via re-mortgaging

• Make sure that you are realistic in your expectation of property value appreciation and rental income. It’s much safer to plan for the worst when you are calculating whether your investment is viable.
• If you purchase an investment property to rent out, you need to understand your obligations as a landlord and also  factor in the time and costs associated with being one. This includes the cost of void periods and property management fees.
• When purchasing rental properties it is important to look for areas where there is a demand and also to look for an area where similar properties have risen in value over time. You will still need your asset to generate cash flow, so when choosing your properties, remember that it will need to generate positive revenue while you own it.

If you are looking to buy an investment property we would be delighted to assist and help you with a ready made team. Call direct on + 44 (0) 207 993 4081 or simply send an email for a fast response.