How to Refinance Investment Property
Property remains a sound investment in the UK, with prices rising and demand for homes as high as ever.
Most interest in property investment is in the residential sector, where rental yield or resale value can be attractive. However, commercial units are just as valuable and many investors have found a mixed portfolio offers the best return.
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Whichever route you choose, both residential and commercial property will require some form of finance to support your growth journey.
Very few owners fund property purchases with cash, even if they can afford it, as commercial mortgages offer the opportunity to spread out costs and minimise the impact on your cash flow.
However, you don’t have to settle for the terms offered by your initial agreement. In fact, it’s highly unlikely you’ll have the same agreement in place even two years after your initial purchase. For most investors, refinancing as soon as possible is the optimal way to grow their investment.
What is refinancing?
Refinancing means switching from one type of loan to another, usually with a new lender. The lender takes on your old debt and offers a new finance agreement based on more up-to-date factors. This means any increase in the value of your property, any strengthening of your position as a lender or even any market improvements can all result in better loan offers.
For investors, the ability to refinance is crucial to maximising the value of your property. Loans taken out in the short-term, such as a bridging loan, can be refinanced into more suitable commercial mortgages or buy-to-let mortgages, which can provide equity release, better interest rates, longer repayment periods and decreased costs.
Investment vs buy-to-let refinancing
Buy-to-let mortgages are just one type of loan product offered to investors who want to let out properties they purchase. In the context of this guide, we’re exploring the full range of ‘investment’ property and how refinancing can be used to switch between product types like buy-to-let and commercial mortgages, as well as to reduce rates or extend terms to suit your long-term property goals. Read our specific guide around refinancing buy-to-let style mortgage properties here, or continue to delve into investment as a wider topic.
While buy-to-let properties are typically monetised through rental yield, property investment as a whole tends to involve upgrading or renovating property in order to add value. All property, however, tends to rise in value over time – even those which have no renovation work done tend to increase in value as demand for housing continues to rise.
How to refinance investment property
To refinance your investment property, you’ll need to approach a lender, discuss refinancing and then negotiate the right agreement to suit your needs. This is easier said than done, which is why Rangewell operates on your behalf to take care of the heavy lifting and direct you to the most suitable lenders for your needs.
If you go it alone, you’ll need to ensure you have the right level of equity built up in a property or meet any other terms demanded by your existing lender (most stipulate six months before you can refinance). You’ll need to prepare documentation that justifies your application, which will include a business plan, as well as any evidence you have that shows growth in your property’s value or rental yield.
You’ll then need to identify the right lender from mainstream and challenger banks, then begin negotiating with them. In most cases, you’ll need to pay any exit costs and new fees from your existing and future lender. Again, if you work with Rangewell we’ll help you understand the full process and guide you through it painlessly.
Why refinance investment properties?
Most properties bought for investment undergo some form of development or refurbishment work in order to increase their value to tenants or buyers. As their owner, you must balance the cost of any development against the projected return based on the finished value of the property.
Refinancing helps you balance these costs by allowing you to access different loan types compared to your initial agreement. If you purchased the property at auction using short-term business loans or bridging finance, you’ll be facing steep short-term repayment rates.
Can I borrow more money against my commercial property?
Yes. You can borrow more money against your commercial property, depending on how much equity you have. Any new agreement will also factor in the increased value of the property and can therefore offer a sizeable cash injection if you’ve added value to the property.
Refinancing investment property advantages
The world of refinancing unlocks lots of opportunities depending on your current position and the status of your property. Changes in value can lead to generous refinancing offers that make it far easier for you to manage your cash flow, thanks to reduced interest rates or longer payment terms that allow you to spread the cost.
Alternatively, you can also refinance to switch loan type – which is often worth exploring if you’ve taken on previous loan agreements that were not as favourable just to make your purchase and get the property underway.
The following are all benefits that refinancing can bring, but their usefulness and applicability will depend on your current position.
Debt consolidation for portfolio landlords
If you’ve got multiple investment properties under different loan types, you know the hassle of managing repayments, monitoring interest rates and corresponding with each provider. Debt consolidation sees one lender purchase your other debts so that you have a single repayment to make each month.
This is not only more straightforward, it may even lead to cheaper repayments, provided you can spread the costs across a longer repayment term. Alternatively, if your overall portfolio’s value has increased, you can leverage this with a lender who may then offer a more favourable repayment rate that reduces the cost of your overall loan.
Similarly, when you’re refinancing multiple debts into one, any increase in value means you’ve probably built up equity in your properties that you can draw down on to raise more capital for further expansion.
In summary, you may be able to refinance your portfolio’s multiple loans into a single repayment that is often cheaper and can even help you fund new acquisitions by releasing equity.
Lower interest rates
Most refinancing agreements take place at the end of any fixed repayment period a lender has given you. As you face a sudden spike in rates, it’s natural to consider refinancing. However, you can refinance at virtually any time (usually, the only limit is the first six months of any loan), so why settle for poor interest rates when you can shop around?
If you can identify a supportive lender who is willing to consider any increase in value or any personal advantages you can provide (such as being able to demonstrate a profitable history as an investment landlord since your initial loan), you may be offered superior interest rates compared to your current offer.
Spread your loan across longer terms
Investment property is a mixed proposition – some opportunities are worth owning outright as soon as you can, whilst others are better managed as 100% interest mortgages where you have no intention to own the property.
Regardless of whether you want to extend or shorten your repayment period, refinancing allows you to open a conversation with a lender and negotiate on the overall length. Shortening the term means paying it off sooner but facing higher repayments, whilst extending it is more popular as it allows you to spread costs further but delays ownership.
Release equity to fund further expansion or development
If your investment property has increased in value during your current loan’s term, you can refinance against some of the equity you’ve built up in order to fund further works. This is known as cash-out refinancing, which sees a lender granting a lump sum alongside new mortgage terms based on the equity you’ve built.
If you’re planning on renovating a property, developing a new one or even just putting money aside for retirement, refinancing using a cash-out refinance deal is a good idea.
Changing loan type
Most forms of business finance are simply a combination of loan amount, repayment terms and interest rates with a label placed on them. However, there are some specific types of loan that are built for certain scenarios – which you may have needed at the time but now force you into restrictive terms.
For borrowers, considering loans as something you can switch between helps free you from the assumption that you may need a specific type of loan for your investment. When refinancing, the lender that can offer the most suitable product for your future goals is usually the right option.
In real terms, this may mean switching from a short-term product like a bridging loan to a buy-to-let mortgage once you’ve purchased a property and begun welcoming tenants. In this case, you’d be able to access better terms as the lender will deem it less risky.
Knowing which product to ask about is half the battle when switching loan types. If you’re not aware of bridging loans, development finance, asset finance, commercial mortgages, buy-to-let mortgages and other named products, you won’t know the best choice for your business.
Work with Rangewell and we’ll build an understanding of your investment portfolio and where you want to go with it, then help you decide on which lender to choose and which loan product type is right for you.
How to use refinancing to your advantage
In the realm of property investment, there’s lots of scope for maximising the value of your investments provided you approach them the right way. When you refinance, the extended term or reduced repayments should mean you’ll have more cash to use to grow your investment. Here are just a few routes to do just that:
- Increase your rental yield
Use refinancing to switch to a loan more supportive of landlords such as a buy-to-let mortgage, or refinance your existing buy-to-let and access better terms. Use your capital to improve the rental space you have or even consider expanding it via conversion work. HMO properties are now extremely popular in city areas, so it may be worth considering refinancing into development finance to create an HMO.
- Finance portfolio growth
If you use a cash-out refinance deal to access a cash payout, use that cash to fund the deposit on a new property and then once you have purchased it, consider refinancing again to consolidate your debts and manage a single repayment despite now owning multiple properties.
- Consolidate multiple debts
Debt consolidation is incredibly valuable for all investors, as it enables you to cease balancing multiple loans and focus on a single repayment plan – which in turn, allows you to plan for growth more efficiently.
Refinance your investment property with Rangewell
Whether you’re a landlord looking to access better interest rates, an investor with a number of commercial units who needs to consolidate debt or anything else, Rangewell can help you refinance to unlock your potential. We know each UK lender inside and out and can quickly work with you to assess your existing portfolio, discuss your growth or retirement plans and then advise on the right decision for a beneficial refinancing deal.
In an industry where risk is vital to your offer, why take chances? Don’t go it alone – use Rangewell to help you refinance, and we’ll access the best deals that will enable you to take your investment property in whatever direction you want.