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You need at least 25% equity to remortgage a buy to let with most lenders, because 75% loan to value is the usual ceiling. On a property worth £300,000 the maximum loan is £225,000, so £75,000 of equity has to be in the property before the lender will look at it. A few lenders go to 80% and one on my panel goes to 85%, but the majority stop at 75% and the widest choice of products sits there.
Equity alone does not settle the matter. The lender also runs a rental cover test, and if the rent does not support a loan of £225,000 the lender offers less, however much equity you have. The two tests run side by side and the lower result wins.
How is equity in a buy to let calculated?
Equity is the value of the property minus the mortgage secured on it. A flat valued at £300,000 with £180,000 outstanding has £120,000 of equity, which is 40%. The value is the lender’s valuation at the time of the remortgage, not what you paid or what a neighbouring flat sold for, so the figure can move in either direction between application and offer.
Why does the 75% cap matter so much?
Because it defines how much you can borrow when you switch lender and how much you can release if you want to take money out. The full process is on my buy to let remortgage page and the wider criteria are on the buy to let mortgage hub. The sections below cover the arithmetic and what happens when the equity is short.
Most lenders cap a buy to let remortgage at 75% loan to value, so 25% equity is the usual minimum
On a £300,000 property the maximum loan at 75% is £225,000, which needs £75,000 of equity
A product fee added to the loan can push borrowing above the 75% cap and cause a decline
How does the equity calculation work on a buy to let remortgage?
Start with the valuation. Say the surveyor values your rental property at £300,000 and your current mortgage balance is £210,000. That is 70% loan to value with £90,000 of equity, so a like for like remortgage at 75% is straightforward on the equity test. The most you could borrow is £225,000, which would release £15,000 before costs.
Now the rental test. The lender takes the monthly rent, applies a notional rate and a cover ratio, and works backwards to a maximum loan. Cover ratios are commonly 125% for basic rate taxpayers and 145% for higher rate taxpayers, with the notional rate set by the lender and often higher for two year products than for five year ones. If the rent is £1,200 a month, the lender might support a loan comfortably above £225,000 or well below it, depending on those settings. You can see how the figures fall on my buy to let maximum mortgage calculator.
Where the rental test gives a lower figure than the equity test, the rental figure applies. A property at 60% loan to value with a low rent can be declined for the loan the owner wants while a property at 75% with a strong rent sails through.
How can a product fee push you over the cap?
This one catches people out. Many buy to let products carry a fee of 1%, 2% or occasionally more, and the fee can be added to the loan rather than paid up front. On a £225,000 loan, a 2% fee is £4,500. Add it and the loan becomes £229,500, which on a £300,000 valuation is 76.5% loan to value. Some lenders allow the fee to sit above the maximum, some do not, and where they do not the case is declined or the borrower has to find the fee in cash. In my experience the fee added to the loan is one of the most common reasons a remortgage that looked fine on paper comes back short.
What happens if the equity is short?
If the valuation comes back lower than expected, or the balance is higher, the loan to value can drift above 75% and most of the market disappears. There are four routes.
The first is a lender that goes to 80% or 85%. There are fewer of them, the rate on the product is higher and the rental test is harder to pass because the loan is larger, but for a property with a strong rent it can work.
The second is a product transfer with your current lender. Product transfers do not always need a new valuation, some lenders do not apply the rental test in the same way to an existing borrower who is not increasing the loan, and the loan to value at the time of the original loan may be what counts. This is always my first check on any remortgage, before I look at a switch of lender.
The third is to reduce the loan. Paying a lump sum off the balance to bring it under the cap is sometimes cheaper than the difference in rate between a 75% product and an 85% one over the fixed period.
The fourth is to wait. If the shortfall is small and the fixed period has not ended, paying the lender’s standard variable rate for a few months while the balance comes down or the market moves can be the least bad option, though it is rarely the cheapest.
Can you release equity from a buy to let at the same time?
Yes, subject to the same two tests. The loan can be increased up to the lower of 75% of the valuation and the figure the rent supports, and the difference between that and your current balance is what you can take out. I cover the reasons lenders accept and the ones they do not in releasing equity from a buy to let.
What I see in practice
Landlords who come to me for a remortgage fall into two camps. The professional landlord wants to take the loan to the maximum loan to value to fund the next purchase, so the equity test is the one that decides their case. The hobby landlord with one or two properties usually wants the opposite and is looking to pay the mortgage down, so equity is rarely the issue for them and the rental cover test is what I check first.
Speak to an expert
If your buy to let product is ending, send me the current balance, the rent and a rough value, and I will show you whether a product transfer or a switch of lender works at the equity you have.
What should you check before applying to remortgage a buy to let?
Check the balance first. Your current lender’s annual statement or online account gives the exact figure, and if the mortgage is interest only it will be the same as the day you took it out.
Then form a realistic view of the value. Recent sales of similar properties on the same street are the closest thing to what a surveyor will use. An optimistic figure from a lettings agent is not.
Look at the rent against the lender’s cover ratio for your tax band. A higher rate taxpayer needs more rent to support the same loan than a basic rate taxpayer with most lenders, and a property that passed the test five years ago as a basic rate case may fail it now if your income has gone up.
Check the early repayment charge on your existing product. If it has not expired, the charge is added to the cost of switching and may wipe out the saving.
Ask your current lender what product transfer options they will offer, or ask me to, because the comparison in product transfer versus remortgage on a buy to let is the decision most landlords are really making. Which route is right depends on the equity, the rent, your tax band and how long you intend to keep the property. Your home may be repossessed if you do not keep up repayments on your mortgage.
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