Financing an investment property – tips

Posted: 5th Jan 2015

According to a story in the Telegraph newspaper, there are some 1.4 million landlords in Britain’s private rental sector. A large number of these are likely to have financed their purchase of the let property with the help of a mortgage.

If you are considering investing in property in this way, you may want to take into account the following tips:

Buy to let mortgages

  • a buy to let mortgage is a quite different type of long-term loan to a mortgage advanced on a residential property;
  • a buy to let mortgage, for example, typically looks first and foremost at the business potential of the investment;
  • in other words, the lender is likely to take into account the value of the property – because that is the principal security for the loan – but given equal priority is the potential rental income from the premises, since this is likely to be the source of income from which to pay the monthly mortgages instalments;
  • in order to finance your investment in the property, of course, you are likely to be looking for rental income that is in excess of the mortgage repayments and other operating expenses you need to make;

 Insurance

  • bear in mind that your mortgage lender may also require that you have mortgage indemnity insurance;
  • this is the lender’s protection against your defaulting on repayments – typically in the event of your death – and is therefore an insurance entirely for the benefit of the mortgages company, even though you are responsible for paying the premiums;
  • it is entirely different, therefore, to the landlord insurance you are likely to arrange in order to protect your investment against loss or damage, provide you indemnity against potential claims of public liability, and offer you compensation in the event of an insured incident leaving the property uninhabitable and thus leading to loss of rental income;
  • it is just such landlord insurance cover in which we specialise here at Cover4LetProperty;

Risks of investing in property

  • in an article dated November 2014, the Mortgage Advice Bureau described how recent changes to pensions legislation is likely to increase the ease with which individuals may use their pensions to finance the purchase of buy to let property;
  • indeed, the article suggested that some 78% of the country’s landlords currently view investment in a buy to let property as their most secure future pension;
  • in a story published also in November 2014, the same source also revealed that remortgage applications had also grown by 17% in the past few months – and remortgaging, by using the proceeds of the sale of one property in order to purchase another, is an additional way of raising finance for the purchase of buy to let property;
  • although many individual case histories in recent years may have shown how financially successful may be the business of buying to let, there is also the potential for failure;
  • as already mentioned, the financial success of buying to let relies upon rental income exceeding outgoings, including any mortgage or remortgage repayments;
  • if interest rates rise and the cost of borrowing increases, this may inevitably lead to the cost of monthly mortgage repayments and, so, reverse the possibility of rental income exceeding expenses.

If you are interested in joining the growing ranks of private sector landlords, buy to let mortgages may offer one of the most immediately available sources of finance. It may be as well to remember, however, that the potential for making this a viable form of business may rely on rents continuing to match any increase in the cost of borrowing if interest rates rise.