Remortgage for Income
Another reason someone may consider remortgaging is to release cash to buy another property for investment purposes.
Homeowners with very little pension income or the realization that they will be left with a miserable pension post-retirement are looking at alternative avenues to supplement their future pension income.
This is how remortgaging for pension income works in practice:
Emily Flowerpot, 35, is an HR manager and has a residential property valued at £310,000 with a mortgage of £82,000 with Lender red. Her monthly mortgage cost is £476.
Emily does not have a robust pension pot and is looking at how she can increase her income post retirement.
Emily decides to purchase two investment properties. Emily has about £25,000 in savings, which she is willing to contribute towards this project. The investment properties will cost about £225,000 apiece. Emily wants to put down at least 25% deposit on each property. As such, she needs £56,250 x 2 = £112,500. Emily is prepared to cover the balance of her deposit, stamp duty, and legal fees from her existing savings.
Emily decides to remortgage and capital raise £110,000, which means her mortgage will increase to £82,000 + £110,000 = £192,000.
Emily commences her remortgage search to borrow £192,000 on a property value of £300,000 (64% LTV).
Emily obtains a 5 year fixed rate of 2.39% with Lender blue.
Term: 25 years
Capital & Interest
£856 per month
Broker fee: £499
Emily’s solicitor pays off the £82,000 owed to Lender red, and the balance of £110,000 is transferred into Emily’s bank account to use to fund her pension income. Emily has a new mortgage with Lender blue for £192,000.
At this point, some of you reading this will be appalled that Emily has increased her mortgage from £82,000 to £192,000. You may have a mindset that believes this is unwise and reckless, and that Emily (and every mortgagor) should endeavour to pay off their mortgage ASAP, retire at 65 with no mortgage debt, and live happily ever after. If this is your world view, then you are 100% correct and there is absolutely nothing wrong with this view. As such, read no further and enjoy your retirement.
For those of you who want to follow Emily’s remortgage for income story, I will continue…
And I am fully aware that some of you think that £110,000 is a lot of money and genuinely believe that mortgages should be paid off as soon as possible and not increased, but you are open minded to see how the story pans out. As such, it’s important that we tackle this £110,000 financial conundrum head on before proceeding.
The £110,000 is the seed that is planted to grow your pension pot. Millions of people, like yourself, make a contribution into a work pension or personal pension plan every month. Here you are making a one-off lump sum payment into your pension fund. You can either continue to pay a certain amount into your pension every month or make one massive payment and forget about it. A pension fund cannot grow without a seed of some sort planted at the outset. You got it! It could be £20,000 or £50,000 that you start with. Whatever you can afford. I’ve just used £110,000 in this example. I hope we are on the same post now.
Emily finds a 2 x 2 bedroom flats in North London at £235,000 each.
Service charge: £1300 per annum/£109
Ground rent: £120 per annum/ £10 pm
Estimated monthly rent: £1200
Her offer of £225,000 is accepted.
Emily’s broker arranges a 5 year fixed rate at 3.89% with a BTL Lender, Green Mortgages.
Green Mortgages agrees to finance both properties.
Purchase price for each property is £225,000.
BTL Mortgage: £168,750
Rate: 3.89%
Interest Only (acceptable as BTL)
Monthly mortgage cost: £548
Monthly service charge + ground rent: £119
Monthly cost = Mortgage cost, service charge and ground rent): £548 + £119 = £667
Net cash flow: £1200 (Rent) – £667 (Monthly cost) = £533
Each flat generates £533 per month x 2 flats = £1066 pm
£1066 pm x 12 months = £12,792 pa
Emily has two Buy to Let (BTL) properties generating £1066 per month and existing equity of £110,000.
Yes, of course Emily will have to pay tax on her rental income. But this is not a post about taxes.
Seven years later
Emily has enjoyed her landlady experience. Her properties have been well maintained and, most importantly, there have been no long rental voids. Her rent has also increased from £1200 to £1400 per month and her mortgage costs have increased by an extra £160 pm.
Her monthly cost per property (mortgage, service charge & ground rent): £708
Rent: £1400
Net cash flow per property: £1400 – £708 = £692
Each flat generates £692 per month x 2 flats = £1384 pm
£1384 pm x 12 months = £16,608 pa
Not only has her rent gone up and she is now making more money, but the value of each property is now £335,000. In essence, she has equity of £335,000 – £168,750 = £166,250 x 2 = £332,500.
Emily’s £110,000 investment has now generated a pension pot of £332,500.
What does Emily do next? Emily decides to buy two more BTL properties. She has about £30,000 in savings to contribute towards these purchases.
This time she sources two BTL properties at £150,000 and needs to put down a 25% deposit on each house. Therefore, Emily needs to raise £37,500 per property x 2 = £75,000.
Emily remortgages her two BTL properties and decides to raise £30,000 on each property. The mortgage on each property increases from £168,750 to £198,750. As such, she is able to raise £60,000 in total. Emily could raise more but wants to keep her borrowing under 60% LTV, to secure the best BTL mortgage possible.
Emily’s broker remortgages and arranges a new mortgage with another BTL Lender, Black Bank at 3.59%. The lender agrees to finance both properties.
The open market value of her BTL property is £335,000.
BTL Mortgage from Black Bank: £198,750
Rate: 3.59%
Interest Only (acceptable as BTL)
Monthly mortgage cost: £595
Monthly service charge + ground rent: £135 (increased from eight years ago)
Monthly cost = Mortgage cost, service charge, and ground rent): £595 + £135 = £730
Net cash flow: £1400 (Rent) – £730 (Monthly cost) = £670
Each flat generates £670 per month x 2 flats = £1340 pm
£1340 pm x 12 months = £16,080 pa
Emily’s solicitor receives £198,750 from Black Bank; they pay off the £168,750 owed to BTL Lender, Green Mortgages, on each of her BTL properties, and the balance of £60,000 is transferred into Emma’s bank account to use to fund her next BTL properties.
Emily sources two BTL terraced properties for £140,000. These properties can generate a monthly income of £800 per month. She will need to put down 25% deposit on each property.
BTL properties 3 and 4:
Purchase price: £140,000
75% mortgage: £105,000
Deposit: £35,000
Rate: 5 year fixed rate at 3.59%
Interest only
Mortgage cost: £315
Rent: £800
Net cash flow: £800 (Rent) – £315 (Mortgage) = £485
Each house generates £485 per month x 2 = £970 pm
£970 pm x 12 months = £11,640 pa
To conclude, Emily now has four BTL properties. When Emily gets to retirement age at 65, she expects that the property values would have increased. Historically, on average, UK property prices have doubled every seven years. She is 42 now, so what will be the property values after 22 years?
BTL 1: £600,000 with a mortgage debt £198,750
BTL 2: £600,000 with a mortgage debt £198,750
BTL 3: £240,000 with a mortgage debt £105,000
BTL 4: £240,000 with a mortgage debt £105,000
£1,680,000 with a mortgage debt of £607,500
Equity of £1,072,500
Emily’s investment of £110,000, 22 years ago, has generated a potential pension pot of £1m (before taxes).
Emily would have paid off her residential mortgage at this point.
Residential property: £700,000 with no mortgage
Emily’s net worth is £2,380,000 less £607,500 = £1,772,500
What does Emily do next?
Emily sells two BTL properties and uses the funds to pay off the mortgages on the two remaining BTL properties. Emily is left with two unencumbered properties (no mortgages on the property) and uses rental income to supplement her existing private pension.
Which two does she sell: BTL 1 and BTL 3?
Sell all four properties and move abroad and live the life of a millionaire?
What about the capital gains tax?
Seek to refinance all four properties by finding a BTL lender that will extend beyond the age of 80. Then buy two more properties?
Answer: Arrange to speak to an Independent Financial Adviser and a tax specialist to advise her on the best way to maximise her assets to fund her retirement.
The bottom line: Emily has options! She has sufficient assets that allow her to fund her retirement. Do you?
Please bear in mind that there are other forms of remortgaging, e.g., Emily could have requested a further advance as opposed to remortgaging. I have simply used a remortgaging strategy for you to understand the concept of how remortgaging can be used to create wealth. For more information, go to the remortgage section.
Mortgageintellectual.com is not recommending that you invest in any specific property. You must conduct your own due diligence before investing in property. Property prices can rise and fall in value and past performance of the UK property market is no guarantee to future performance.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.
