An increasing number of landlords are opting to release equity to renovate their existing properties rather than expanding their portfolio. So what are the pros and cons of doing up over trading up?
Since 2016, the number of landlords opting to remortgage in order to finance home improvements has tripled, data from Countrywide shows.
Which? explains the buy-to-let remortgaging trend and whether this could be a good option for your property investment.
Buy-to-let owners opting to renovate
Rising property prices over the past few years have enabled many landlords to release equity in order to grow their property portfolio.
In current market conditions, however, a growing number of buy-to-let owners are instead opting to put capital into doing up their existing properties.
In the past 12 months, Countrywide data shows that 9,523 landlords remortgaged to finance home improvements. This is more than three times the 2,967 who did so in 2016, and the numbers were even smaller in the wake of the financial crisis.
As a proportion of all landlords who remortgage, around 5.6% are doing so in order to renovate – up from 1.9% in 2016.
Our graph shows how this trend has changed over time.
- Find out more: buy-to-let mortgages explained
Where are landlords withdrawing the most?
The trend towards renovating can be observed across the country, but the amount landlords are spending varies significantly by region.
Perhaps unsurprisingly, high-value growth in London means landlords are releasing on average £35,470 in equity to pay for their letting make-over. At the other end of the spectrum, landlords in Yorkshire and the Humber withdrew just £11,150 by remortgaging.
Renovating was most popular in the East of England, where 6.9% of buy-to-let remortgages were to fund property improvements. By contrast, just 2% of Scottish remortgagers went for this option.
You can explore the regional trends on the map below.
Renovating versus buying
Deciding whether to invest in your existing properties or to grow your portfolio will come down to your individual circumstances and wider market trends.
Regulatory changes in recent years, particularly the 3% stamp duty surcharge that was introduced in 2016, have made buying a property much more expensive for landlords.
Other changes, including mortgage-interest tax-relief reductions, a change in the wear-and-tear allowance and new licensing regulations, have also added to the costs of running a buy-to-let property.
- Find out more: 12 things buy-to-let landlords need to know in 2018
At the same time, Countrywide reports that average rents are increasing, with seven out of eight regions seeing an increase over the past year. UK-wide, the average rent on a new let climbed from £935 to £951 per month in the past year, a 1.7% increase.
Even so, some regions have seen property values begin to level out. The UK average house price rose by 4.4% in February 2018, according to recent Land Registry data.
But in many regions, prices seemed to peak in September-October last year. From October 2017 to February 2018, the average price has fallen in the majority of regions, including London, the South East, South West, North East, Yorkshire and the East of England.
For some landlords, this may mean that trying to squeeze more rent out of their existing properties could be more profitable than buying a new one. Renovations can significantly improve the rental value of a home, while simultaneously increasing its resale value.
Bear in mind, though, that not all types of renovation project will add to your property value. Make sure you consider who your typical tenants are and what they’re looking for in a property. Also, avoid over-capitalising; putting in a pool, for example, may seem luxurious, but you’ll struggle to recoup these costs in increased rent.
- Find out more: becoming a landlord
How to finance renovations through remortgaging
If your property has grown in value, remortgaging could be one way to free up cash.
You may be able to borrow against a single property, or against your whole portfolio – although if you own more than four properties, the lender is required to assess each property individually when considering your application.
The process you go through, and the amount available to you, will depend on a whole range of factors. For example, current mortgages, rental performance and your ability to service and repay the additional loan will all be taken into consideration.
David Blake from Which? Mortgage Advisers has the following tips for landlords considering this strategy:
- Think long-term. Buy-to-let investment should generally be treated as long-term strategy and value growth is generally the reason behind investing – so weigh up whether eating into your equity is the right choice.
- Understand exactly what work is required. Having a clear scope for your project will ensure you’re able to cover all the costs – and keep you from going over-budget.
- Plan for periods of rental void. During renovations, your property might be empty, so make sure you can afford to cover your costs, and factor this into your calculations.
- Evaluate the rental income once the work has been completed. It’s important to understand how much additional rent you might be able to charge, and whether this can justify the expense of the work you’re undertaking. A letting agent may be able to help you understand what tenants in your area want and what they’re willing to pay.
- Seek tax advice. Receiving a lump sum in equity could have tax implications, so make sure you understand how this will affect your bill.
- Speak to a mortgage adviser to understand your borrowing options and the costs involved. Remortgaging can be complicated, so it’s worth having an expert weigh in.