Financing your property investments
Many people naturally feel that they should keep their borrowings and debt down to a minimum. However, buying with mortgage can be less risky and has a number of significant benefits over buying with cash.
When buying with a mortgage, you will need to put a deposit down, and you will then pay interest on the amount of money your borrow from your Mortgage Lender.
This option allows you to leverage the banks to make your cash go much further (for example you might be able to by 3 properties with mortgage instead of buying 1 with cash!) This also spreads your risk, and vastly increases cashflow since there are more properties paying out rent to you every month.
The typical loan to value (LTV) for a buy-to-let is around 75% but you may be able to borrow a little more if you need to. Interest rates typically increase when the LTV increases. Some investors wish to borrow less to keep their interest payments and
debt levels down.
However your return on investment (ROI) will be significantly higher when you buy with mortgage (the higher the LTV the higher the ROI) since you are putting in far less cash to begin with! For example if you’re looking for an ROI of 6%, you can’t get anywhere near this if you are funding the full purchase yourself!
When you apply for a mortgage, the banks will now run vigorous affordability tests to make sure you can afford to make the repayments. This is based on your income as well as your expenditure. You will also need to have a good credit score in order to be approved for a mortgage. Since the financial crash of 2008, widespread measures have been put in place to prevent high risk lending again. Although borrowing is as cheap as it’s ever been for those that can get it, it’s never been more difficult to qualify for a mortgage. Responsible lending is clearly a good thing and results in a more stable economy for everyone.
When you take out a mortgage there are generally 2 options, interest only, and interest and repayment. The latter has a higher monthly repayment but includes an element of paying off the sum borrowed as well as an interest element. Many Landlords opt for interest only mortgages to keep their cost down and their ROI up. If this is your strategy, you will need a longer-term plan in place to pay off the mortgage. At the end of a 25 year interest only term, you will still owe the exact same amount you borrowed in the first place. Whereas with a 25 year repayment mortgage, the borrowed funds will be paid off at the end of the term and you would then own property outright.
Buy-to-let finance is a technical subject so if you need some independent mortgage advice from a specialist, please get in touch. Our Mortgage Broker has access to the whole of the market and the best rates and will provide a free telephone consultation in order to show you what your best options are. If you decide to go ahead with a mortgage product based on the findings of our Broker, a competitive brokerage fee will apply. A good Mortgage Broker is hugely valuable professional to have on your team! Please ask if you need an introduction.