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If you have a mortgage on your investment property, then it is highly likely that you will consider moving to another lender at some point.
The main reason for this is because you will be trying hard to find a better mortgage deal!
As interest rates have been falling over the past few years, more and more people have been re-mortgaging their investment properties to capitalise on the better deals and to help grow their property portfolios.
Below are some pointers about re-mortgaging.
Interest on Re-Mortgages with Another Lender
If you re-mortgage your outstanding mortgage with another lender, then you can still offset the interest repayments.
Example:
Timothy has an outstanding mortgage balance of £50,000 on his investment property. He decides to move his mortgage from the Nat West to Lloyds as they are offering a lower rate of interest. Timothy can still offset interest charged by Lloyds on the £50,000 re-mortgage.
Re-mortgaging a Property for a Different Value
If you re-mortgage for a lower amount, then you can still offset the whole mortgage interest.
Example:
Imagine the same scenario as in the previous example, where Timothy has an outstanding balance of £50,000 on his investment mortgage.
However, he inherits £20,000 from a family member, so he decides to use this toward lowering his mortgage liability. Therefore, he only re-mortgages to the value of £30,000 with Lloyds. Again, the interest charged on the £30,000 can be offset against the property income.
Releasing Equity on your Investment Property
If you re-mortgage for a greater amount, then generally speaking you can only offset the additional amount if it is used for the purpose of an investment property.
As property prices have sharply risen over the past few years, investors have been re-mortgaging their properties for higher values. This is known as releasing equity.
If you have released equity or are considering doing this, then you need to follow the guidelines given above regarding the interest charged on personal loans.
You need to ask yourself, ‘Is the additional equity release being used for the sole purpose of my property business?’ This can be illustrated through the following example:
Timothy has an outstanding balance of £50,000 on his investment mortgage.
However, his property value has appreciated considerably, so he decides to re-mortgage with Lloyds for £80,000.
This means that he is releasing additional equity out of his current property to the value of £30,000.
He decides to use the equity release in the following way:
£20,000 is used to fund a new property investment, and it provides the deposit for his next buy-to-let investment. £10,000 is used to pay for a new car for his wife.
Now, Timothy can only offset the interest charged on both the outstanding mortgage balance of £50,000 and the £20,000 he is using as a deposit for his next purchase.
This is because this combined amount of £70,000 is used ‘wholly and exclusively’ for his property investments.
However, he cannot use the interest charged on £10,000 for buying the car as this cost is not associated with his property investments.
Releasing Equity from a Main Residence
Generally speaking, because it is possible to obtain a lower rate of interest on your residential mortgage, more and more investors are deciding to increase the borrowing on their main residence and using this to reduce the investment mortgages.
Example:
Jack and Louise have a residential mortgage on their private residence for £100,000. The interest rate is fixed at 4.5%. They also have a BTL investment property. The outstanding mortgage on this property is also £100,000 but the interest rate is at a higher rate of 6.5%.
Because their main residence has a value of £300,000, they release £100,000 equity from their main residence, at the same rate of 4.5%, and pay off the outstanding debt of £100,000 on the investment property.
Again the interest charged on the £100,000 equity release can be offset against the rental income off the investment property.
