What is refinancing and how does it work

Refinancing a property is a strategy used by professional property investors and is a very clever way of raising finance and being tax efficient. At first the logistics can be a little daunting, but once you understand the process, as a fulltime property investor it becomes almost a no brainer in many scenarios, mostly for growing your portfolio.

How does it work

In essence it is simply going to the bank and asking for them to re-finance your property in order to pull money from the property, but in order for this to work the value of the property has to be much higher than the current mortgage on the property.   Financial example:

1. You have a property with a valuation of £1,000,000
2. You want a loan of £500,000 form the property
3. You have an existing loan where you still own £250,000 (you may also owe nothing in the property, but for this scenario we will use £250,000)
4. The Bank gives you the £500,000. You now have a loan of £500,000
5. Use the £250,000 to pay off half the £500,000
6. You now have £250,000 to spend on a new property.

The Process to refinancing (in steps).

 

1. Firstly, you will need to know that you can pull money from your existing property. This will largely depend on the success of your property growth, which is determined by a number of factors from capital growth to refurbishment and development work you have had done to the property.

 

2. Once you have your property value you can then go to the bank. You can use the same bank that gave you the original loan or any other bank of your choosing. At this point you will need to clearly state what the purpose of the loan is. The bank will want to know it is making a good investment. In an investors case it will be, buy another property or to refurb an existing property be it a different property or the same property.

 

3. Spend your new cash amount on your next property.

What are the benefits to re-financing

 

1. Tax free loan. So, in our previous example where we asked for a loan of £500,000, paid off half of it and were left with £250,000. This money is technically a debt where no tax is payable. If we were to sell the property and were to make £250,000 profit, then the £250,000 will be subject to capital gains and/or corporate tax.

 

2. You still own the property and so will still benefit from rental payments.

 

3. You still have the option to sell one day.