At PropTechPioneer, we are not mortgage brokers or financial advisers or regulated under the Financial Services and Markets Act. This article represents our own personal opinion and you should always seek advice from independent mortgage brokers or financial advisors.
You may find yourself in a scenario where you have bought a property with cash, but later decide that you want to release equity and get a mortgage after buying with cash. But how easy is this to do?
Process to Mortgage after Purchasing a Property
The good news is that obtaining a mortgage after purchasing a property for cash is relatively straightforward. However, the bad news is that you will probably need to wait for at least 6 months after your property has been purchased.
Most lenders will require at least six months to have passed since you completed on the property before they are able to offer you a mortgage.
If you’re not able to wait for six months, you may find some deals available but you will most likely find the options are limited and have less favourable terms. You should always speak to a specialist mortgage broker to help.
It is generally simpler to re-mortgage a property you bought with cash, rather than a mortgage because there is no initial mortgage to replace.
There will be several factors that affect whether you can re-mortgage. These include:
- The reason you want to mortgage – there will be different Loan to Value (LtV) requirements depending on the reason for the mortgage
- Whether the property is for investment or your main residence
- The type of property – is it new build or second hand (there may be LTV restrictions if it’s new build)
- What are your own personal and financial circumstances – what monthly repayments are you able to afford
The benefits of mortgaging if you’re an investor
If you’re an investor, you may want to mortgage after buying with cash. The use of debt is an interesting concept for investment, as on the one hand debt is a valuable tool and can allow you to quickly expand your property portfolio. However, on the other hand, debt creates additional risk.
Generally, you will want to capitalise on using high levels of debt (a larger mortgage) in the following situations:
- Low rates: When interest rates are low, you can lock in lower interest rates. In some scenarios, it may well be better for you to lock in at long-term rates even if they are at higher levels if there is a risk of rates climbing quickly throughout the fixed term.
- Expanding portfolio: If you are looking to expand your portfolio, debt is a useful tool. However, it will reduce your net income as your debt costs are higher. Hopefully, your property will increase in value and will amplify your capital appreciation.
- Market Growth: When the market is likely to grow in the early part of the market cycle, debt is a good tool to use to fund property purchases
- Interest rates are tax-deductible: When interest is deductible it can be a highly effective tool for investors because its cost can be used to reduce tax liabilities. Beware, interest isn’t fully deductible for property located in the United Kingdom.
- Amplify returns: Returns can be amplified with debt because it is the cheapest form of capital, so it can help the investor obtain a greater return from their equity.
The risks if you’re an investor
When appropriately used, leverage can be an effective tool for you to increase the return on your investment. The key is to avoid making decisions without proper consideration of your risk. Consider the following:
- Counting on high levels of capital appreciation: Many real estate investors assume what has happened in the past will happen again. Just because property prices have rapidly increased in the past does not mean they will in the future. If property prices have rapidly increased it is unlikely they will continue at the same trajectory. Hope for high levels of capital appreciation but do not bank on them. When you plan out your leveraged real estate investments, look at three scenarios: best, worst, and most likely.
- Ending up with too high a payment: It can seem like a great idea to mortgage a property with a very low deposit payment. And it is easy to fall into the trap of looking at the numbers and seeing a high return on investment due to a very low cash outlay. The problem arises with the higher payments that come with higher leverage. The more you borrow, the higher the monthly payment. If the market softens or your properties experience higher-than-expected vacancies or rents are not as high as what you expected you could find yourself unable to maintain the mortgage payments. If you are unable to make the monthly payments, your investment is in jeopardy.
- Cash flow is king: Errors in calculating income or expenses will impact your cash flow. Cashflow is King! If you do not generate enough cashflow each month to pay your expenses, including your mortgage, then you will have to top up the payments from your own money.
- Debt capacity: Debt capacity is something which many people will not give a great deal of consideration, but it should be an important consideration. Essentially, the more debt you have the less additional debt you will be able to take on through future borrowing. Whilst loading up on debt may seem like a good idea, it will also mean that you will be restricted in what you can borrow in the future.
- Increasing interest rates: Interest rates go down, but they also go up! So, when looking at re-mortgaging with particularly high levels of debt, you need to consider a situation where rates go up considerably. You need to assess how you can service the mortgage in these situations, as when interest rates increase it is likely because the economy is overheating. So do not count on putting the rent up or having a tenant.
Important notice: Proptech Pioneer and its associated companies seek to provide real estate investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.