When Should You Refinance an Investment Property?
December 6, 2021
Refinancing an investment property can help you release capital for the next purchase, but that doesn’t automatically make it a good decision. The extra money has a cost, the borrowing adds risk, and fees can take a surprisingly large bite out of a small release.
My starting point is to ask four questions: what will the borrowing cost, what will I use the money for, what are the fees, and what extra risk am I taking? If I can’t answer those clearly, I’m not ready to decide.
In my December 2021 video, I used examples from our own properties to explain that process. Mortgage rates and fee illustrations in that video belong to that period. The method remains useful, but a decision today needs current quotations and a fresh assessment of the property’s rent and value.
You can watch my original explanation of when to refinance alongside the examples here.
What releasing equity actually involves
Imagine you bought a property for £100,000 with a £75,000 mortgage. Some years later, a lender accepts a valuation of £200,000 and is willing to lend up to 75% of that value. The potential new mortgage is £150,000.
If the old mortgage balance is still £75,000, the difference is £75,000 before fees and any other costs. That’s the amount the simplified example could release. The actual amount available depends on the lender’s criteria, rent cover, property and your circumstances.
The important point is that the money comes from additional borrowing. It isn’t rent, and it isn’t profit from selling the house. You keep the asset while owing more against it.
You also own the whole property and owe the whole mortgage. If the property falls in value, the lender doesn’t automatically reduce the debt alongside it. That asymmetry is why I want the numbers and the risks to make sense before increasing borrowing.
Start with the purpose of the money
I wouldn’t refinance simply because a valuation has increased and I can get some cash out. I’d first establish what that cash is supposed to achieve.
It might help fund another property, a renovation or a different investment. It might also be better left where it is. Available equity doesn’t come with an instruction that you must borrow against it.
In the video, I compared the cost of borrowing with the potential return from the next use of the money. That comparison is useful, but it needs to be made on a consistent basis. A projected return after some costs isn’t directly comparable with a borrowing rate if other costs and tax have been ignored.
I also want room for disappointment. Paying a certain interest bill in pursuit of an uncertain return is very different from exchanging one guaranteed return for another. A tiny expected margin wouldn’t persuade me to take on substantial extra work and risk.
The refinance that released too little after fees
One example in the video came from a conversation with my wife. A property bought for £100,000 had been refinanced at £110,000. At 75% borrowing, that increase in value supported another £7,500 of mortgage debt.
The fees were around £3,500, leaving about £4,000 in cash. In my view, that was a poor use of the refinance because so much of the additional borrowing disappeared into the transaction costs.
The fees represented almost 47% of the gross £7,500 release. That doesn’t mean the interest rate was 47%; it shows how expensive the transaction was relative to the cash being raised. Those are different measures and shouldn’t be confused.
There could be other reasons to change a mortgage, such as avoiding an expensive follow-on rate. But if the main aim is to extract useful capital, I’d want to question a transaction where nearly half the release goes straight to other people.
Compare a refinance with a product transfer
A new deal from the existing lender may sometimes avoid some of the work and expense involved in moving to another lender. In the video, I described occasions when rolling onto a new product made more sense than paying for a full refinance to release a modest amount.
That isn’t a rule that product transfers are always cheaper. The rate, fees, eligibility, borrowing amount and lender’s processes all matter. Some new-lender deals include legal or valuation benefits; some existing-lender products have their own fees.
I’d ask a broker to compare the actual options over the period I expect to keep the deal. The lowest headline rate doesn’t necessarily produce the lowest overall cost, particularly where the loan or release is relatively small.
If you need the basic lending framework first, my buy-to-let mortgage guide explains why the rent and lender’s assessment matter alongside the deposit or equity.
Write down every cost before deciding
The original video used examples of legal fees, valuation costs, product fees and broker charges. Those were illustrative amounts from 2021, not a fee schedule to copy today.
For a current decision, I’d request the actual costs in writing. I’d also check the existing mortgage for early repayment charges, exit fees and any other conditions that could affect the timing.
Some costs may be added to the loan rather than paid from your bank account. That doesn’t make them disappear. It can mean paying interest on them as well, so include them when comparing what the transaction costs over time.
The FCA’s mortgage support guidance recommends speaking to a broker or lender if you need advice on a new mortgage. For an investment property, I’d want a broker who understands the relevant buy-to-let market and an accountant where ownership or tax treatment affects the comparison.
The size of the release changes the calculation
A few thousand pounds in fees is significant whatever you’re doing. But it has a very different impact on a £7,500 release compared with a £100,000 release.
For a simple illustration, £3,000 of fees leaves £4,500 from a £7,500 gross release. The same £3,000 leaves £97,000 from a £100,000 release. That doesn’t prove the larger transaction is wise; it explains why fixed costs can make small transactions unattractive.
I’d calculate the net cash available rather than making plans with the gross number. Then I’d ask whether that net amount is sufficient for the next investment, including its buying costs and reserves.
There’s little benefit in paying to release money only to discover it still leaves you short of what you need. Equally, borrowing far more than you have a sensible use for can create an unnecessary interest bill while the cash sits waiting.
Test the existing property’s cash flow after refinancing
The next investment shouldn’t be the only property in the calculation. The property providing the equity must still work after its mortgage increases.
I’d recalculate its interest, management, maintenance, insurance and void allowance using the proposed borrowing. If the new loan leaves very little surplus, an ordinary repair or empty period can become a problem.
For example, adding £50,000 of interest-only borrowing at an illustrative 6% means another £3,000 a year, or £250 a month, before fees or tax effects. You need to know where that money will come from, including while the next investment is being bought or renovated.
A lender’s willingness to lend isn’t the same as my own comfort with the risk. I’d want a plan that works for the household and portfolio, not just a calculation that passes an application.
Allow for a lower valuation or slower next project
The value you expect and the lender’s valuation may differ. A refinance model that requires the most optimistic end value is vulnerable, especially if you have already spent the money on a renovation.
The next project can also take longer or cost more than expected. In the video, I was clear that more complicated strategies bring additional risk. A potentially higher return from a conversion doesn’t mean the return is certain.
I’d run a version of the plan with less cash released, a longer period without rental income and a higher cost of borrowing. If that version causes immediate difficulty, I would revisit the scale or timing of the refinance.
My article on how property wealth can unravel explains why equity on paper and the cash needed to meet obligations aren’t interchangeable.
Don’t build a lifetime plan around one lender’s terms
The original discussion included examples of the borrowing ages and products available at the time. Those details can change, and the availability of a product to one borrower doesn’t establish that it will be available to somebody else decades later.
I favour long-term ownership, but I still need to understand mortgage maturity, repayment obligations and the possibility that refinancing becomes harder. Interest-only debt doesn’t repay itself because I’ve held the property for a long time.
That means reviewing the portfolio as circumstances change. A level of borrowing that suits a growth phase may not suit a later stage when stable income and lower risk matter more.
I don’t see that as contradicting the use of leverage. It’s recognising that the purpose of the portfolio changes, and the borrowing should serve that purpose rather than dictate it.
Our property refinance calculator puts the potential release and additional borrowing cost side by side. It deducts entered fees and can apply an indicative rent-coverage limit. The model holds the existing debt balance constant and compares interest-only payments, so repayment loans need a separate assessment.
My decision comes back to four questions
Before refinancing, I’d put the interest cost, net cash released, intended use and additional risk on the same page. I’d compare that with keeping the current borrowing or choosing another available mortgage option.
If the fees consume too much of the release, the next investment is uncertain or the existing property’s cash flow becomes uncomfortable, waiting may be the better decision. If the figures are robust and the money has a clear purpose, refinancing can be a useful tool.
It’s a decision to calculate, not a milestone to chase simply because property values have risen.
If you’d like to talk through your wider portfolio plans, book a free 30-minute call. You can also explore the Starter Club or learn about Done For You.