Mortgage brokers and investment property loans
When you invest in a buy-to-let property, the chances are that you’ll need to raise finance to do so. Beginner investors make one of two common mistakes. The first is thinking that investment can be made using a standard mortgage. The second is to approach their current mortgage provider or bank for an investment property loan.
In this article, you’ll learn the financing needs of investing in a new build property (and I’m going to look specifically at off-plan), as well as learning how buy-to-let mortgages work, and the benefits of using a mortgage broker with specific buy-to-let experience.
The timetable of financing off-plan buy-to-let property
Whether you’re buying an off-plan property or from new build stock, the process of financing your property is very similar. The main difference is that the timetable of financing is concentrated into a far shorter time period when you buy from existing new build stock; off-plan property investment could take up to three years until completion.
When you invest in an off-plan property, the following is a guideline of financial events that need to happen:
Week 1: Pay the reservation fee and finder’s fee.
Week 2: Pay a search fee to your solicitor, if a search is required at this stage.
Week 3: Pay the deposit to your solicitor before the exchange deadline. You’ll also need to sign contracts.
When you invest in off-plan property, there’s now a lull in your financial obligations while the developer is building the property. However, as the completion date draws closer, the financial timetable swings back into action…
3 to 4 months before completion: Around this time you should be speaking to a mortgage broker. You’ll complete a fact find (which could be done over the phone) and select an appropriate buy-to-let mortgage. To secure this investment property loan, you’ll need to provide some documentation (such as your P60, bank statements, and payslips).
There will be searches that need to be done by your solicitor, and these will have to be paid for.
Your selected lender will also need a valuation to support their decision to lend you the money on a buy-to-let mortgage, and this will have to be paid for.
1 month before completion: With just a few weeks to go before you complete on your investment property, you’ll need to make sure that the mortgage amount and details of your buy-to-let mortgage offer are correct.
You’ll have to finalise all the fixtures and fittings (blinds, flooring, etc.) and pay for these.
Your mortgage broker will ensure that the lender has everything it needs to proceed, so that the funds can be forwarded in time for completion.
2 weeks before completion: This is when all funds need to be transferred to your solicitor, who will then administer the financial payments in order to complete on the pre-arranged date.
How do investment property loans work?
There are plenty of similarities between a standard home loan and a buy-to-let mortgage. You’ll have to make mortgage payments on a monthly basis, and you’ll be charged interest on the loan. That interest could be charged at a fixed or variable rate.
However, there are a number of differences. The lender takes a bigger risk when extending a loan for investing in property, because you don’t live in the property. That means the criteria for lending is far stricter.
Buy-to-let mortgage criteria explained
The amount that a finance company or bank will lend you depends on a number of criteria. These include:
- Linking the loan amount to expected rental income
- The amount of deposit you can put down
- The lender’s own rules
You should be prepared to put down a deposit of at least 20% towards the purchase price. In fact, most lenders will only lend on a buy-to-let property if you can put down at least 30% as a deposit, while some won’t lend more than 60% of value.
How do fees and mortgage payments stack up?
Because of the greater risk the lender is taking (for example, what if you’re property has an extended void period – will you be able to keep up the mortgage payments?), the interest rate you’ll be charged is probably going to be higher than on a standard home mortgage.
With the majority of buy-to-let lenders, the higher the deposit you pay, the lower the interest rate you’ll be charged. What you actually pay will depend upon the terms of your investment property loan, and whether you have an interest only or repayment mortgage.
You’ll probably have higher charges and arrangement fees to pay, too, although these can be used to reduce your tax liability on rental income.
Buy-to-let mortgage regulation
The world of buy-to-let mortgages is not regulated like ordinary mortgages. However, if you do get your investment mortgage from a lender that is regulated by the Financial Conduct Authority, you are guaranteed to be treated fairly. This is one of the benefits of sourcing your financing through a mortgage broker with buy-to-let experience – they will know who the FCA regulated lenders are.
How a mortgage broker works for you
When you use a mortgage broker who is experienced in the buy-to-let market, the first thing that will happen is a meeting to discuss your objectives and financial situation. This meeting could be face-to-face or over the phone.
The broker will bring you up to date with current rules, policies and procedures, and the requirements of different lenders.
With a completed fact find, an independent mortgage broker will be able to search the market and find the most appropriate and cost-effective loan to finance your investment.
The benefits of using an independent mortgage broker
An independent broker is one who isn’t affiliated to any bank or limited group of lenders. They’ll have intimate knowledge of the buy-to-let mortgage market, the lenders who are most competitive, and those that have the most relaxed lending criteria.
A mortgage broker may make their money by charging you a fee, although most are paid by commission on the mortgage. This gives them an incentive to work hard on your behalf and find the best mortgage deal for you.
For example, you may want certain options included, such as the option to make extra payments and reduce the capital owing, or, perhaps, to pay a lower deposit. The mortgage broker will try to match your requirements with a current buy-to-let mortgage product.
And while the broker is working for you, using their experience and expertise in the market, you’ll save a heap of time that you can use much more profitably.
What could go wrong if you don’t use a broker?
Without a mortgage broker, you could secure a buy-to-let mortgage that costs more in interest and reduces your financial plan to rubble. Just 1% higher interest rate will cost you more than £37,000 over 25 years on a £150,000 mortgage. That’s a huge chunk out of your profits.
Just as bad, going it alone could end up with you being turned down by a lender because you didn’t fully understand its terms and conditions. That could ruin your credit rating, which could then have you declined when applying for a mortgage from a different lender, resulting in you losing your deposit.
If you have question or want to learn more about this why not chat with the team 01522503717 or email me.
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