Investing in properties has not been easy in the last few years; especially for those who are just entering this competitive market; it is now extremely difficult to find a mortgage with less than 40% of the value of the property, the next challenge is to be able ato achieve a 125% rent-to-mortgage-payment, otherwise lenders providers will not finance your investment; however, there is an increasing number of mortgage brokers and consultancies firm to help you through this difficult process – finding the right one is another challenge; however, things are slowly improving.
Financing your buy-to-let property
1. Loan over 60% loan to value is the norm: it is difficult nowadays to find a mortgage for a property if you have less than 40% deposit; even if you have been a loyal customer with your mortgage provider of if you have a large portfolio you must understand that lenders providers do not reward loyalty - a large deposit is needed so you might start looking for smaller properties or those that are not in hot spots areas; or simple buying smaller properties in key areas; buying a run-down property might be another solution if you can afford the renovation costs.
2. Re-mortgage to raise finance: this is a tax efficient way to raise finance for a buy-to-let property – provided that you already have other investments properties. Tax is only paid on the interest paid, not the capital repayments; therefore if you have already paid a significant proportion of the mortgage in other properties; you can utilise the money in order to finance new purchases; this is how many property investors normally conduct their business and indeed one that will save you money.
3. Co-mortgage: this is an innovative way to get into the property investment sector without breaking the bank – or at least it will allow you to share your worries with others – this is where up to four people which could be your family or friends can raise one mortgage; the only problem is you that will be jointly liable for the whole mortgage; therefore, before taking the decision, make sure you trust them. The co-mortgage becomes legal by completing the “deed of trust”.
4. Rent to interest payments: any lender provider will normally expect that the rent is at least 125% the interest payments; this only refers to the interest; not the capital repayments; therefore if the interest payments are £500 a month then the rent should be at least £625 per month.
5. Variable or Fixed Mortgage: it is always difficult to advise on this subject and many mortgage brokers normally differ in their opinions; but at the end of the day, it will always depend on the investors and their preference; many of us want the security of a fixed payment – however, this comes with a price (a higher interest rate); the best way is to review the offers for fixed and variable mortgages and decide which ones suits your needs.
5. Identify Opportunity Areas: Off-plan properties in opportunity areas or those that are likely to increase in value in the new future are potential investment opportunities; the attraction of many investors is the chance to buy during the first release as developers normally set up a lower price to test the market and demand for these properties - generally the second phase is more expensive if sales targets are achieved; buying off plan also gives you the opportunity exchange contracts with 10% deposit and sell the apartment or house before completing contracts; in that case you make the profit without having to pay for stamp duty. The perfect case scenario is Nine Elms on the South Bank; during the first release apartments were sold at 20% lower than during the second phase; many investors are now re-selling the plots -even before they are completed- for a substantial profit and moving to their next buy to let opportunity.
Financing your investment property in the competitive buy to let market is a venture than normally rewards you if the homework and research is done in anticipation.