Investing in rental properties can be a great way to generate passive income. However, financing investment properties often requires specialized loan products like debt service coverage ratio (DSCR) loans. As the end of your loan term approaches, you may be wondering whether you should renew your existing loan or remortgage to a new lender. There are pros and cons to both options that are important to weigh. This article will walk you through the key factors to consider when deciding whether to renew or remortgage a UK DSCR investment property loan.
What are DSCR Investment Property Loans?
DSCR loans are a type of financing popular with real estate investors. DSCR stands for “debt service coverage ratio” which refers to the ratio of rental income to mortgage payments.
DSCR loans typically come with lower down payment requirements and higher loan-to-value ratios compared to traditional mortgages. This makes it easier for real estate investors to leverage their money and purchase multiple investment properties.
When Does My UK DSCR Investment Property Loan Term End?
Most lenders will issue DSCR loans for a fixed term, usually between 3-5 years. As you approach the maturity date, you’ll need to take action to either renew with your existing lender or remortgage to a new lender.
Failing to act could mean the loan gets called due immediately so it’s important to start the renewal or remortgage process 6-12 months before your term expires. Check your original loan documents to find your exact maturity date. Mark your calendar so you have plenty of lead time.
Should I Renew My Current UK DSCR Loan?
Renewing or “rolling over” your investment property loan for another term with your existing lender has some potential advantages:
1. Avoid fees and costs of getting a new mortgage
Taking out a brand new mortgage often means paying lender fees, valuation fees, and legal fees which can add up. Renewing the loan may allow you to avoid most or all of these costs making it a cheaper option.
2. Lock in existing terms and conditions
If you were happy with the loan terms, interest rate, LTV ratio and other conditions of your current DSCR loan, renewing could allow you to extend those same terms for another 3-5 years.
3. Usually a faster and simpler process
For an existing customer, many lenders will offer a quick and streamlined renewal process. This avoids the lengthy paperwork and underwriting involved when applying for a brand new mortgage.
4. No need to re-qualify
With a renewal, the lender may not recheck your income, credit score or existing assets. This can avoid headaches if your financial situation has changed since you first got the loan.
5. Maintain relationship with existing lender
If you’ve been happy working with your current lender, it can be beneficial to maintain that relationship by renewing. Doing so keeps open the possibility of getting additional financing from them in the future.
What are the Downsides of Renewing My UK DSCR Loan?
While easier and cheaper in many cases, there are some potential disadvantages to renewing that are important to consider:
1. Interest rates may be higher than market
Your existing lender may offer a renewal interest rate that is higher than what you could get on the open market from a new lender. This is especially likely if rates have dropped since you first got your DSCR loan.
2. Limited ability to change loan features
While some lenders may allow you to tweak certain loan details on renewal, your ability to make major changes is limited compared to taking out a brand new mortgage.
3. Properties may have increased in value
If your property has appreciated significantly since you first took out the loan, renewing limits your ability to access that added equity compared to remortgaging.
4. Loan may not be “portable” to a new property
Some DSCR loans can’t be transferred to a new investment property if you want to sell the original one. Renewing locks you into the same property.
5. Missed opportunity to shop around
Sticking with your current lender means you miss out on the potential benefits of shopping around for the best offers in the market.
Should I Remortgage My UK DSCR Investment Loan to a New Lender?
Remortgaging to a brand new lender can also be a good option in many cases. Some of the key upsides of getting a new loan include:
1. Access better interest rates
2. Access more equity
3. Change the loan term
Don’t want another short 3-5 year loan? Remortgaging gives you the flexibility to extend your mortgage term out to 25+ years potentially.
4. Improve loan conditions
You can shop around to find a lender who will offer you better overall loan conditions like a higher LTV ratio, lower DSCR requirements or more flexible repayment options.
5. Consolidate multiple properties into one loan
Some lenders will allow you to combine multiple investment properties into a single “portfolio” loan when you remortgage. This can simplify payments and cash flow.
What are the Potential Drawbacks of Remortgaging My Investment Loan?
While remortgaging opens up some new opportunities, it also comes with some downsides:
1. Pay fees for a new mortgage
You’ll incure the usual fees – like valuation and legal costs – associated with taking out a brand new mortgage. These can eat into your potential savings.
2. Deal with lengthy application and approval process
It takes time and paperwork to apply and get approved for a new loan. Renewing is often faster.
3. Get stuck with a worse lender or loan
Not all lenders are created equal. You may end up with poorer service or less ideal loan characteristics by switching to an unknown lender.
4. Have to re-prove income and assets
To qualify for a new loan, most lenders will require you to resubmit pay statements, bank statements, tax returns and other documentation.
5. Lose existing lender relationship
Remortgaging means starting fresh with a new lender. Your history and standing with your current provider gets reset.
Tips for Finding the Best UK DSCR Remortgage Deal
If you decide remortgaging to a new lender makes sense, here are some tips for finding and securing the best DSCR investment loan:
– Shop multiple lenders and brokers
Cast a wide net and get loan quotes from several providers. Mix direct lenders and brokers. Comparing multiple options improves your chances of finding the lowest rate and best terms.
– Look for lenders specialising in DSCR loans
Certain lenders actively target real estate investors with products tailored specifically to DSCR financing. Their expertise can equate to better service and loan options.
– Scrutinize the fine print
The devil is in the details with mortgage loans. Comb through the terms and conditions to spot any unfavorable clauses or restrictions a lender may be trying to slip in.
– Negotiate the fees
– Get recommendations within investor networks
Speaking with fellow real estate investors who have remortgaged DSCR loans can provide insider recommendations on lenders and brokers they’ve worked with successfully.
– Have all your financial documents ready
Pull together your proof of income, bank account info, property appraisal and other paperwork early. This makes for a smoother application process.
Questions to Ask When Comparing UK DSCR Remortgage Offers
When deciding between different remortgage offers, here are some key questions to ask:
- What is the interest rate and is it fixed or adjustable?
- What is the loan term being offered (e.g 15 years, 25 years)?
- What fees will I have to pay upfront to take out the loan?
- What is the required DSCR ratio?
- What % LTV ratio will they lend based on current valuation?
- Are there limits on the number of investment properties they will finance?
- Can the loan be structured as an interest-only mortgage?
- Does the lender let you port the loan to a new investment property?
- How long does the lender estimate the remortgage process will take?
- Will I have to pay any penalties or fees if I switch lenders down the road?
Should I Use a Mortgage Broker for My UK DSCR Remortgage?
Mortgage brokers can be extremely helpful for finding and securing the optimal loan when remortgaging a DSCR investment property. Here are some of the key benefits brokers can provide:
- Access to wider range of loan products – Brokers have relationships with multiple lenders and can find you niche loan products hard to discover on your own.
- Assistance structuring the ideal loan – Their expertise can help you decide on optimal loan features like term length, interest structure, fees and early repayment options.
- Faster approval process – A qualified broker knows what each lender looks for in order to get quick approval for your situation.
- Negotiation power on your behalf – Brokers regularly negotiate with lenders to get clients better rates, lower fees and improved terms.
- Handle paperwork and liaison – The broker will manage and submit all your forms and documentation across various institutions.
The one downside of using a broker is that they will charge their own fee. However, this is often offset by the savings and better loan terms they can achieve on your behalf.
Follow These Steps When Your UK DSCR Loan Matures
If your UK DSCR investment loan is set to mature soon, follow these key steps:
- Review loan documents – Check your original paperwork to find the exact maturity date and current loan details. Make sure you have all the correct information.
- Start the renewal process early – Contact your existing lender 6-12 months before maturity to begin the renewal application if going that route.
- Shop lenders and brokers – If remortgaging, start contacting other providers 4-8 months beforehand and collecting remortgage offers for comparison.
- Gather paperwork – Have your financial statements, tax returns, property valuations and other documents ready for loan applications.
- Compare options objectively – Make a list of pros and cons for renewing vs. remortgaging based on your situation and goals.
- Leave time for approval – Build in at least 2 months between selecting a new lender and your existing maturity date for underwriting.
- Sign final docs – Return your final loan commitment paperwork to lock in your chosen renewal or remortgage option.
Moving forward at the right time is crucial when your UK DSCR investment loan nears maturity. Weigh your options carefully and take all necessary steps to ensure the transition goes smoothly.
The choice between renewing or remortgaging your UK DSCR investment property loan is an important one. Consider your own financial situation, goals, and the evolving market conditions when deciding which path to take.
Renewing with your existing lender is often faster, simpler and avoids new fees. But remortgaging can allow you to access better rates, more equity and improved loan features. Seek professional advice if needed to determine the best strategy for your investment portfolio.
With some planning and diligent shopping around, you can find the ideal loan solution whether you opt to renew or remortgage. This will provide you with competitive financing to maximize returns on your UK investment properties for years to come.