How to Finance Your First Buy-to-Let Property
This article was provided by mortgage brokers, Visionary Finance.
Despite all the headwind against Buy-to-Let investors it can still be an attractive investment proposition for first time investors.
While SevenCapital recently touched upon financing your first Buy-to-Let property in their article 5 Steps to Your First Buy-to-Let Property, this is a more in depth look at the ways in which you could finance your first Buy-to-Let property.
From the obvious to the more ‘out there’ options, how can you start your property empire in 2021?
In most cases a mortgage would be your first port of call when buying a Buy-to-Let property. Typically you would have to put down at least 25% deposit and the mortgage provider will lend you the rest.
There are 2 main types of mortgage for Buy-to-Let properties: Interest Only mortgages and Capital Repayment mortgages. There are of course pros and cons for each of them.
Interest only mortgage
As it sounds, this is a mortgage whereby each month you only have to pay the interest amount on the mortgage.
In most cases the rental income will be enough to cover the interest payment and the property may indeed start making you money from month one.
However, if this sounds too good to be true, remember that once the interest-only mortgage term ends, you are left with a lump sum to pay back – the initial loan.
If you have been lucky enough to retain tenants that pay enough to cover the mortgage interest payments and leave a little over to save / invest, then it could be that you will easily be in a position to pay back the loan.
Alternatively you may decide to sell your Buy-to-Let property after several years of owning it and use the capital growth to pay the loan back.
Capital Repayment Mortgage
Choosing a capital repayment mortgage means that, although you have to pay back the initial loan plus the interest each month, there is no nasty shock in the form of a lump sum at the end of the mortgage term, and the property is yours as soon as the final payment is made.
This route may mean that there is little profit from rental income while the mortgage loan is being paid off, but once the mortgage term is completed, all rental income is profit.
There are a number of Buy-to-Let mortgage brokers in the marketplace, ranging from well-known high street names to specialist bespoke lenders. A number of these specialist lenders do not deal directly with the public and are only available to access if you go through an intermediary. It is probably fair to say that the world of Buy-to-Let mortgages is a little more complicated than it is for ordinary residential lending, so speaking to a qualified Buy-to-Let mortgage adviser is always a sensible choice.
Purchase for Cash
Another, less common, way to finance your Buy-to-Let property is cash. There are several ways to raise the cash, but remember that to satisfy the Money Laundering Regulations, you will need to prove where the money has come from.
Cash could be raised by:
- Accumulated savings
- An inheritance (or a windfall)
- Capital raising from your own home
- Family and friends
- Pension pot
The upside of paying cash for your Buy-to-Let property investment is that there is no waiting around to get a mortgage approved, you will own the property so no monthly mortgage payments, you’re not reliant on interest rate fluctuations and it should ideally make everything quicker as there should be fewer people involved in the transaction.
However, be aware that if you use friends and family to fund your purchase, we would strongly advise that a contract is put in place to ensure that everyone is protected.
Although these are the two main ways to raise money to purchase a Buy-to-Let property, there are other ways that are worth thinking about:
Co-Own with a Friend or Relative
Going into Buy-to-Let property investment with a friend or partner is becoming more and more popular and can help to spread the load.
A mortgage would be based upon two or more incomes, resources could be pooled to raise a deposit, and the management of the deal and property / tenants becomes a team effort.
As always, it is important that contracts and agreements are drawn up to define the terms of the arrangement and to ensure that everything is above board and watertight.
Limited Company Buy-to-Let Mortgage
While limited companies have their own pros, cons and costs to weigh up, many individuals working with property are now choosing to change their approach and register in this way.
Many high street mortgage brokers are less willing to lend to limited companies, as they don’t meet with their risk appetite. As many ‘limited companies’ seeking a Buy-to-Let mortgage are in fact self-employed landlords, the chances of business failure are viewed as more significant. This can make sourcing a limited company Buy-to-Let mortgage a potentially trickier process.
Fortunately, as the numbers of landlords choosing to register as limited companies rise, so too do the number of mortgage options and providers available to them.
Rather than going to your bank, who can only offer you a couple of options, it is better to find a mortgage broker who can search many companies to find the best Limited Company Buy-to-Let option for you.
So if Buy-to-Let property is your dream and you’re looking for a way to finance your property portfolio, one of these five options should be right for you.
If you would like more advice on Buy-to-Let mortgages, Visionary Finance can be contacted on 01908 465100 or www.visionaryfinance.co.uk.
This guest post was provided by Visionary Finance. The opinions expressed by the guest writer above and those providing comments are theirs alone, and do not necessarily reflect the opinions of SevenCapital or any employee thereof. SevenCapital is not responsible for the accuracy of any of the information supplied by the guest writer.