Are you a first-time property investor? Or an experienced developer? While securing funding can be very challenging, there are a range of different options available to help you invest in property.
In this article, Nest Wise discuss three of the key financial options that can be considered.
1) Buy-to-let mortgages
If you are looking to increase your property portfolio and become a private landlord, a buy-to-let mortgage could be a great option for you.
A buy-to-let mortgage is sold to those who buy property as an investment rather than as a place to live. If your intentions are to rent out a property, many lenders will not allow you to finance your purchase with a standard residential mortgage.
It should be noted that buy-to-let mortgages usually require a larger deposit than standard residential mortgages. 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. Another issue with buy-to-let mortgages is that the repayments only usually cover the interest and not the capital, so identifying how the sum borrowed will be paid off requires further consideration and long term planning.
2) Auction finance
If you successfully bid for a property at auction, you will be required to pay a 10% non-refundable deposit, that day or within 24 hours, and the full amount within usually 28 days.
You might think you can arrange a mortgage this quickly, however in many cases the time allowed to pay the full amount is faster than a bank can move which can place your 10% deposit at great risk. You also need to ensure that the property is mortgageable (meaning it must have no title defects and a functioning kitchen and bathroom which many repossessed properties in an auction may not have). You should carefully check the auction pack to ensure this or instruct a solicitor to review the pack before the auction. If there is a delay receiving your mortgage funds and you fail to complete on time, you could be faced with interest, further costs and potentially the seller withdrawing and retaining the deposit. Therefore, a better option can be to arrange auction finance in principle prior to the auction.
Things you should know about auction finance:
- It can be a fast process. Auction finance can usually be arranged in a matter of days.
- You are likely to still need a deposit of 25-30%.
- You may be required to do credit checks, have property valuations and establish proof of income.
- You will receive an agreed mortgage in principle which will cover buying property up to a certain amount, so that you know how much you can bid on that day on one pre-identified property, or on a property within a certain price bracket and type (e.g. terraced, semi-detached).
3) Bridging loans
A bridging loan is a short-term loan that can be useful if you need to borrow money for a short period. It can help to fill the gap if you want to buy a new property before selling another one or if you need to renovate a property before gaining longer term finance or selling it. Bridging loans can also be used if you buy a property at auction.
There can be two types of bridging loans:
- Closed Bridging Loan
A closed loan has a fixed repayment date. This will normally be given if you have exchanged contracts but are waiting for your property sale to complete.
- Open bridging loans
An open loan has no fixed repayment date. However, you will normally be required to repay the loan within one year.
It should be noted that once a bridging loan is taken out, a 'charge' will be placed on the property in the same way as a mortgage is. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans. Depending on the value of the property and loans, you may be able to secure a mortgage and bridging loan against the property.
While bridging loans can be arranged quite quickly, there is still a risk that the lender might not be in a position to release funds in time if the property is purchased at auction. More importantly, it should be noted that they tend to have higher interest rates than conventional mortgages and usually attract much higher fees.
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