A lot of people ask me about remortgaging or refinancing property, so I decided to create a short guide on my YouTube channel. You can see the full video above and it is well worth watching if you are new to refinancing. Understanding refinancing is an important part of being a property investor and it is essential that you understand the process.
The video above contains all the details you will need as a beginner and explains the process from top to bottom. If you are new to property refinancing, make sometime to watch it. If you haven’t got time at the moment to watch the video, I will summarise the 3 key points about property refinancing here. Please share this article with your friends and family to help spread financial education to the masses.
1. What is property refinancing?
The first thing to say is that remortgaging and refinancing are the same thing. They are different terms for the same concept. When you buy a house, you typically get a mortgage to cover some of the cost of purchase. In the case of buy-to-let properties, this is normally 75% of the value of the property.
So if you are buying a house for £200,000 you will get 75% of the value of the property, i.e. £150,000 as a mortgage. Lets say the property doubles in value over the next 10 years. So that property is now worth £400,000. If you want to benefit from that increase in price without selling that house you will need to get a new mortgage. That’s what refinancing is, getting a new mortgage. The mortgage lender will now lend you 75% of the new value of the property. This will pay off whatever you owe the previous lender and the rest will go to you.
2. Why refinance a property rather than sell it?
If you sell the property, you no longer have the property. This means you will no longer have the rental income from the property. If you refinance, you keep the house and have money to reinvest in a new property. This is how the rich build their wealth over time.
Furthermore, if you sell a buy-to-let property you will need to pay tax on the profits you make. If you refinance the property, the money you get is debt. Debt isn’t taxed because it isn’t income or capital gains; it is something that you owe to someone else. This means you can reinvest the money without worrying about putting a big slice aside for the tax man!
3. How is refinancing different as part of the buy, refurbish, refinance, rent strategy?
If you are doing the buy, refurbish, refinance, rent (BRRR) strategy where you buy a property and try to uplift the value in a short amount of time, you shouldn’t get a mortgage when you first purchase the property. This is because mortgage lenders don’t like it if you remortgage soon after buying a property. There are fees and penalties if you do.
Therefore, you should buy the property on a bridging loan. A bridging loan is designed to bridge the gap between buying/refurbishing the property and getting a mortgage. With the BRRR strategy, refinancing therefore refers to moving from a bridging loan to a mortgage.