Call our friendly team

01702 606 301

Financing an investment property – tips

According to a report to Parliament in June 2021, there are 4.4 million households in the private rented sector, accounting for some 19% of all households in England.

If you are the landlord of one of these homes, there is a high chance that you financed your purchase of the property with the help of a mortgage.

If you are thinking about a new or further investment in property in this way, you might want to consider the following tips and suggestions:

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 story in the London Evening Standard on the 9th of July 2021 discussed in some detail how buy to let mortgages work;
  • a buy to let mortgage, for example, typically looks first and foremost at the business potential of the investment;
  • in other words, the lender of course considers 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 the landlord will pay the monthly mortgages instalments;
  • in order to finance your investment in the property, you will need to look for rental income that is in excess of the mortgage repayments and other operating expenses you need to make – currently, 25% to 30% more, suggests the government-sponsored Money Helper;

Insurance

  • as with any mortgage, your lender is almost certain to insist that you arrange sufficient property insurance to cover the value of the property and its need for reconstruction following a total loss – that insurance cover naturally safeguards both your own and the lender’s financial interest in the property;
  • but 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 and is, therefore, an insurance entirely for the benefit of the mortgage lender, even though in mnay cases 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

  • an article in The Times newspaper on the 15th of September 2021 made the seemingly obvious point that a successful property investment depends on making more money from buying to let than you spend – something that might prove more difficult in practice than it sounds in theory;
  • the article also suggests that it has become more difficult to make that profit these days than it probably was in the past – principally because of changes in the tax regime related to buy to let income and other legislative changes that demand greater expenditure on the part of landlords;
  • a posting by the online listings website Zoopla on the 15th of September 2021, for instance, explained that when you invest in a buy to let property you not only pay Stamp Duty at the standard rate but also a further 3% “surcharge”;
  • other changes to the tax regime mean that landlords can no longer claim so many allowances against their buy to let rental incomes;
  • in addition to the initial cost of purchasing your buy to let property, you will also face regular expenditure on repairs and maintenance (some £5,750 a year, suggests The Times), council tax, landlord’s insurance, and your mortgage interest repayments;
  • to reiterate, therefore, 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.

This entry was posted in Property. Bookmark the permalink.