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Consolidating debts with a buy to let remortgage

Regularly switching loan to save on interest rates is a sure fire way to bolster your yield

We often talk on this site about the benefits of remortgaging. Regularly switching loan to save on interest rates, particularly while rates are so low, is a sure fire way to bolster your yields and help keep your business in the black.

Remortgages have other uses, too. If you have a healthy chunk of equity in a buy to let property you can use a mortgage to release cash – this can be used to renovate your property and increase its value, or perhaps invest in property elsewhere if you want to expand your portfolio. Another, less common use for cash released with a buy to let remortgage is consolidating debts.

How does it work?

Any of the four million or so debt consolidation ads you may have seen on the telly, or e-mails you may have had drop into your spam folder, pretty much offer the same thing – a loan. If you have a lot of debts, you can repay them all with a loan and then have only one, bigger, debt.

Consolidating debt with a buy to let remortgage involves using one to release equity and then using the released funds to repay your existing debts.

The advantage of using a remortgage to do this is that it’s a secured loan. This means the rates will be more favourable than many of the sky-high figures you’ll see for unsecured debt consolidation loans. This strength is also a big weakness, however; because the loan is secured against your buy to let property, your lender may repossess this property if you don’t keep up with your repayments.

Debt consolidation buy to let mortgages – pros and cons

There are pros and cons specific to remortgaging a buy to let property, rather than a residential one, for this purpose.

Pros

  • If you have more than one rental property, you have a choice of which one to remortgage and can choose the one best suited for it (i.e. the one that has the most equity).
  • There’s less personal risk involved servicing additional debt on a property that’s not your main home.
  • Buy to let mortgages aren’t usually calculated based on affordability, so provided the property can fetch a decent rent, you might be able to borrow more, even if you have a low income.

Cons

  • As a landlord, you have your yields to consider. Taking on additional debt might mean higher mortgage repayments, which will eat into your profits.
  • A buy to let loan is usually considered a commercial loan and won’t be regulated. This means that, if you fall behind on your payments, it’ll be easier for the lender to repossess your property.
  • Though your income isn’t likely to be a factor, the rental income is. If the rent you’re getting won’t cover the new mortgage repayments by a certain amount (usually around 125%), you might have to remortgage for a lesser amount or not be able to remortgage at all.
  • Buy to let mortgages aren’t available for higher than 85% LTV, so you won’t be able to release as much money as you might with a residential mortgage. The interest rate might also be higher.

Avoid mortgage fraud

Sound advice, I’m sure you’ll agree. Only some lenders offer debt consolidation buy to let mortgages, so your adviser will need to know exactly what the loan is for.

A lender is going to see your credit file at some stage, which means that they’re going to see your outstanding debts. If that figure happens to be in the region of the size of the remortgage, it’s not going to be a big leap for them to assume that the loan is actually to consolidate debts. Even if this isn’t the case, you can save yourself a lot of aggravation by giving as full and accurate information as you can when applying for a buy to let remortgage.

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.