Whether you’re a first-time property investor or an experienced developer, securing funding for your latest project is likely to be the most challenging part of the endeavour. Our guide to the most popular financial options for funding different property investments should help you identify the types of funding that might work best for you.
As with applying for any financial product, you should read the terms and conditions carefully, as this will vary from lender to lender. An experienced, professional financial adviser can help you decide how to progress, should you need further assistance.
Buy-to-let mortgages make it possible for a property investor to purchase a property with the intention of tenanting the property, in order to receive a regular rental income.
Buy-to-let mortgages usually require a larger deposit than standard residential mortgages (usually around 25 per cent of the property purchase price), as the risk to the lender is greater. This is because your property could end up standing empty for periods of time, and tenants could default on their rent, leaving you liable for the shortfall.
Buy-to-let mortgages are also usually only available on an interest only basis, meaning that the capital will not be repaid until the end of the term. This means that the investor will need to provide information about how he or she intends to cover this sum. Unfortunately, equity built up in the property can’t be cited as an option, as this is speculative rather than concrete.
Accepted ways of clearing the capital debt on an interest-only mortgage include cash in a savings account, stocks and shares ISAs, pensions, investment bonds, endowments or other regular savings plans, shares, and unit trusts. Your lender might also consider capital held in other properties or other existing assets.
Commercial mortgages can be used to buy commercial property like shops, offices and warehouses. A commercial mortgage works in a very similar way to a private or residential mortgage, with a lump sum deposit paid initially, followed by a series of monthly payments, spread over an agreed period of time (usually twenty-five years or more, sometimes less.)
Commercial properties can be rented to tenants in the same way as residential properties, with buy-to-let mortgage restrictions applying to commercial mortgages, if this is the reason for the application.
Auction finance is a great way for property investors to purchase a property at below its market value, something that can make a huge amount of difference in the competitive world of property development.
Should you win a property at auction, you will be asked to put down a non-refundable cash deposit on the day, with the balance due on the property within only 28 days. Auction finance is a type of lending that allows property investors to have funding agreed in principle before they even walk into an auction house.
Lenders who provide auction finance will take investors through their application process in advance of bidding for a property, which might involve credit checks, property valuations and establishing proof of income. An agreement in principle will then be set up, which covers the buyer up to a certain amount, so that they know how much to bid on the day.
Auction finance allows investors to bid either on one pre-identified property, or on any property within a certain price bracket and type. The agreement covers them up to a certain amount and for a certain sort of purchase (e.g. terraced, semi-detached).
With auction finance, the buyer is expected to fund the deposit on the property themselves. The more experienced a property investor you are, the more likely you are to have auction finance agreed, and to be able to borrow larger amounts at more favourable interest rates
A bridging loan is a short-term loan taken out to cover the interval between two transactions, typically the purchase of one property and the sale of another, or the purchase, renovation and resale of a property, for a higher amount.
Bridging loans have some similarities to mortgages. Like mortgages, the amount you’re allowed to borrow is usually dependent on the value of the property you’re borrowing against. The property is also used as security for the loan, so if you fail to meet repayments, the lender may repossess and sell it to cover the debt.
Bridging loans are also like buy-to-let mortgages in that interest is paid over the loan term, with the capital payable in a lump sum as the term comes to an end.
There are also some fundamental differences. The most obvious of these is the term – a mortgage usually spans 25 years, or longer, while the average bridging loan duration is 12 months.
Another major difference is the cost of borrowing. Currently, most mortgage rates come in under 5 per cent of the total amount borrowed. Bridging loan interest rates start at around 8 per cent and can be as high as 15 per cent or even more.
Finally, bridging loans are usually quick and simple to arrange in comparison to mortgages – often being put together weeks, or even days.
For large projects that require extensive refurbishment of a property or group of properties, and might include land purchase, property purchase and building costs, some property investors choose to apply for development finance.
With this type of borrowing, the lender agrees to fund part of the costs for each element of the project
For instance, if a developer wants to buy a plot of land for £100,000 and spend another £500,000 building properties on it, a lender might agree to finance 50 per cent of the purchase of the land and 70 per cent of the building costs.
This would leave the developer to fund the remainder of the project with their own money, rather than taking on the whole cost themselves. Operating on this basis makes capital available for unexpected costs along the way, or to invest in other projects.
Choosing the right kind of finance
Securing finance for property investment is a complex area, with many and varied options available that go beyond the broad categories outlined in this article. As with any major financial decision, it might be wise to visit an experienced financial adviser who can help with decisions on what’s best for you.
You may also wish to ask yourself the following questions about any property investment, in order to make the next steps when financing your property investment strategies.
- How much finance do you need?
- Do you have multiple properties that need financing at the same time?
- How quickly do you need it?
- What property types do you want to invest in?
- How long do you need the finance for?
- How experienced are you in property investment?
- Do you plan to renovate or restore the property over a long period of time?
- How much debt are you comfortable taking on?