A rental property may have increased in value since it was purchased, while the outstanding mortgage balance may also have reduced. Together, these changes can create equity that could potentially be released through remortgaging.
For some landlords, that equity can provide the deposit for another property, finance essential improvements or strengthen the reserves available to the property business.
However, equity is not free money. Releasing it increases the mortgage debt secured against the property and can increase the interest paid, monthly commitments and financial risk.
The decision should therefore begin with the purpose of the borrowing—not simply the amount a lender may be prepared to offer.
How much equity could be released?
Equity is broadly the difference between the property’s current value and the outstanding mortgage balance.
For example, imagine a rental property is valued at £250,000 and has a mortgage balance of £125,000. The landlord has £125,000 of equity, but that does not mean the complete amount can be withdrawn.
If a lender is prepared to lend up to 75% of the property’s value, the maximum mortgage would be £187,500. In theory, this could release £62,500 before arrangement fees, valuation costs, legal expenses and any early repayment charge are deducted.
The lender’s valuation is crucial. An estate-agent appraisal or online estimate does not determine the amount available. If the lender’s valuer produces a lower figure, both the maximum mortgage and releasable equity may fall.
Loan-to-value limits also vary according to the lender, property, applicant and proposed borrowing purpose.
Using equity to expand a portfolio
A common reason for releasing equity is to provide a deposit for another rental property.
This can allow a landlord to expand without waiting several years to accumulate the complete deposit from rental profits or personal savings. It can be particularly useful where a landlord has identified a strong opportunity and already owns properties with relatively low borrowing.
However, the decision links the existing property to the success of the new investment.
Before proceeding, the landlord should calculate:
- The increased payment on the existing property
- The mortgage and running costs of the new property
- Stamp Duty Land Tax or the applicable devolved property tax
- Legal, valuation and mortgage fees
- Refurbishment or compliance expenditure
- Likely rent and void periods
- A contingency allowance
- The effect of higher future interest rates
The new purchase should be capable of supporting the complete borrowing strategy rather than relying solely on continuing property-price growth.
Funding refurbishment and improvements
Equity may also be released to fund repairs, refurbishment or energy-efficiency improvements.
This can be commercially sensible where the work should protect the property, improve its rental appeal or increase achievable rent. It may also help a landlord bring an underperforming property back into use.
The expected benefit should be compared with the complete borrowing cost.
A £30,000 refurbishment funded through a long-term mortgage could cost considerably more than £30,000 once interest is included. Adding arrangement fees to the mortgage also means interest may be charged on those fees.
Landlords should obtain realistic quotations, allow for unexpected work and avoid assuming that every pound spent will create an equivalent increase in the lender’s valuation.
Will the rent support the larger mortgage?
Having sufficient equity does not guarantee that the landlord can borrow against it.
A buy-to-let lender will normally assess whether the property’s expected rent can support the increased loan. This may involve an Interest Coverage Ratio and a stressed interest rate rather than simply assessing the mortgage at the initial product rate.
If the rent does not meet the lender’s calculation, the amount of equity available on paper may be greater than the amount that can actually be released.
Some lenders may consider personal income where the rent falls slightly short, but this approach is not universally available and can involve a fuller affordability assessment.
Portfolio landlords may also face assessment across all their mortgaged rental properties. The lender could request a property schedule, mortgage balances, rents, values, business plans and cash-flow information before approving additional borrowing.
Releasing equity to pay a tax liability
A landlord may consider remortgaging to meet a tax bill, particularly where cash is tied up in property.
This requires considerable care.
Using long-term secured borrowing to pay a short-term or recurring liability can turn one tax payment into many years of mortgage interest. If the underlying cash-flow problem remains unresolved, another liability may arise while the landlord is still repaying the previous one.
The lender must also accept the proposed borrowing purpose. Criteria vary, and not every lender will approve capital raising for every reason.
Tax treatment depends on the landlord’s ownership structure, the purpose for which the borrowing is used and individual circumstances. A landlord should obtain advice from a qualified accountant or tax adviser rather than assuming that the interest will receive a particular form of tax relief.
Do not overlook the complete remortgage cost
The new interest rate is only one part of the decision.
Possible costs include:
- Early repayment charges on the existing mortgage
- Product or arrangement fees
- Valuation fees
- Legal and administration costs
- Broker fees where applicable
- Interest charged on fees added to the loan
- A higher payment on the increased balance
- Early repayment charges attached to the new product
A low headline rate accompanied by a large percentage-based fee can be particularly expensive on a substantial buy-to-let mortgage.
The landlord should compare the total cost over the intended deal period, not simply the initial monthly payment.
Could another route be more suitable?
A full remortgage is not the only possible way to raise funds.
Depending on the circumstances, alternatives might include:
- A further advance from the current lender
- A product transfer combined with additional borrowing
- A second-charge loan
- Short-term bridging or refurbishment finance
- Using retained rental profits or cash reserves
- Delaying the project while additional funds are accumulated
Each option has different rates, fees, criteria and repayment risks. Retaining a competitive existing mortgage may sometimes be more valuable than replacing it purely to release capital.
Start with a clear purpose and repayment plan
Before releasing equity, landlords should be able to answer four questions:
- Exactly how much is required?
- What will the money be used for?
- What financial return or practical benefit is expected?
- Can the increased borrowing remain affordable if costs rise or the property is empty?
NetRent Mortgage Solutions can help landlords assess potential borrowing, compare remortgage and further-borrowing routes and understand how different lenders may treat the property, rent and proposed use of funds.
To discuss releasing equity from a rental property, contact NetRent:
Telephone: 01352 721300
Email: mortgages@netrent.co.uk
Beginning the review several months before the existing mortgage deal ends can provide more time to compare the options and avoid unnecessary early repayment charges.
NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.
Tax treatment depends on individual circumstances and may change. Appropriate mortgage, financial, legal and tax advice should be obtained before increasing secured borrowing.
The property may be repossessed if mortgage payments are not maintained.