Complete Guide to Loans for Investment Properties

If you're looking for the types of loans for investment properties, finding a mortgage with a low rate is probably going to be near the top of your agenda. However, there is so much to think about.

In this article, we’ll provide a breakdown of the types of loans available for investment properties.

• Buy-to-let mortgages 
• Buy-to-sell mortgages
• Holiday lets
• Second charge mortgages
• Commercial mortgages
  

Buy-to-let

If you’re considering a buy-to-let mortgage, be sure to make sure you qualify for one. It’s a lot easier if you’re a homeowner already, or if you currently have a buy-to-let. But if you’re starting from scratch, it can be more difficult. Unlike a mortgage for your own home, it’s not so much about you. Although your credit history and income will be reviewed, they won’t be the deciding factor. Instead, it’s based on the type of property you want to mortgage.  

How much can you borrow? 

Generally, most people get 75% loan-to-value (LTV),  meaning 75% of the value of the property in the form of a mortgage with a 25% deposit. You’ll also have to consider rent. The lenders will assess the rental levels expected on your particular property, so when you get the property valued, they will also put an expected value on the rent. Often referred to as rental stress tests, that number will determine how much you can borrow. 

The quickest way to check if the property you’re looking to get a mortgage on will meet the right rental levels is to speak to a property finance broker.

A big decision is whether you go for an interest-only mortgage or alternatively repay the capital. Most investors choose to only pay off the interest because that leaves them with more cash left over at the end of the month. This means is that when you get to the end of the mortgage term, you still owe exactly the same as you did in the first place because you haven’t been paying it off over time. So, when you get to the end of the term of the loan, you’ll either have to sell the property or sell some other assets instead.

Buy-to-sell

A buy-to-sell mortgage is a loan that you use to buy a property, then sell it on. If you are an investor looking to make a profit, this could be the option for you.

However, many high-street lenders don’t offer buy-to-sell mortgages because they concentrate on the more traditional products. If they do offer them, often the product comes with high rates and high fees.

Holiday lets

Although holiday lets have been around for a long time, we’re getting more and more enquiries about how to finance them. It’s important to know that there are a number of variations of holiday lets loans, but let’s just stick with traditional holiday lets for now. 

Holiday lets are seasonal

Generally, holiday lets are seasonal and lenders understand that, so they will average out income across the year. Lenders will consider high-season, medium-season and low-season rental rates. So most often, if you come to us with an enquiry, we’ll ask for an indication of these amounts. Different lenders have different rules on rental calculations and this is the main reason that a lender may come back with either a rejection or a request for a bigger deposit.

The reason for this is that the lenders that tend to operate in holiday let sector tend to be regional traditional building societies. These players are usually more conservative when it comes to rental calculations and tend to have tighter criteria. Generally speaking, these lenders are smaller and more risk-averse. Rates are likely to be approximately a percent higher than average BTL mortgages. All in all, finding the perfect deal is a little more challenging than a normal buy-to-let where decisions are based more on the property than the borrower.

Second charge mortgages

The loan you use to buy your home is called the first-charge mortgage. A second charge mortgage (or a second mortgage) is a secured loan against your home that you can take out if you already have a mortgage. There are a number of reasons why you might consider a secured loan.

For example, you may have a very attractive residential rate which could be historical, so you take out another loan, known as a “second charge”. It’s not right for everybody, but there is a place for it. Second-charge lenders may be more flexible and you may be able to borrow more.

Considerations for second charge loans

There are some considerations to keep in mind with second-charge loans. Not all first charge lenders will allow a second charge on the same property, so you’ll need to understand your first mortgage. Who is your provider? What are your monthly costs? 

Generally secured loans are smaller than mortgages, let’s say between £20-£60K. However, there’s a greater level of work from the compliance point of view, so brokers typically charge more for securing these deals. Whatever the broker charges, the most important thing about secured loans is that you keep up repayments on them.

Commercial mortgages

A commercial investment mortgage is used to purchase or refinance a commercial property which is let to tenants. They’re similar to residential buy-to-let mortgages and work similarly in property investment. They’re an excellent way to expand your portfolio on a larger scale and we recommend this to investors with high capital. 

A commercial mortgage has slightly higher rates than a residential property for investment purposes. The amount you can borrow typically can’t exceed 65% of the purchase price, but it can be determined by the rental income generated by the investment. Consider this investment carefully, as it can last from three to 25 years. 

Check out our complete guide, 'Commercial Mortgages: Everything you need to know', for an in-depth insight into the world of commercial mortgages.

How do you go about choosing the right mortgage for your property investment project?

There are a lot of important things to think about. The first is the type of mortgage, which is normally expressed in terms of how the interest rate is set. The terms could be fixed, tracker or variable. A fixed-rate mortgage is where the rate of interest that you pay is fixed for a period of time.

An alternative to this is a tracker mortgage or one that changes in line with the bank of England’s base rate. For example, you may have a mortgage which tracks at 1% against base rate. If the Bank of England’s base rate increases, then so does the interest rate that you pay. 

The third option is variable, which means that the lender can change the rate to whatever they want, whenever they want. 

When choosing a mortgage or loan, these are the things that most property investors focus on, but what else should you keep in mind? 

Fees and costs

Although the interest rates are very important when considering the types of loans for investment properties, you also need to know about the fees and costs that surround your mortgage or loan. Some products will have no fees whatsoever, while others will have fees that run into several thousand pounds. Often the products will look more attractive because of their headline rates, but when you break down the costs, they may work out to be more expensive.

Speed

Another factor to consider is the speed of deal completions. Not all lenders are created equal and their service levels will vary dramatically. This is particularly important if your deal needs to move quickly. If you pick the wrong product and it drags on over weeks and sometimes months the deal may fall apart.

Lending criteria

You may personally qualify for the mortgage that you’re going for, but the type of property or it’s located may impact your application. It’s therefore really important that you check the small print to ensure that you and the property meet the lenders criteria. 

Good advice

The best piece of advice we can give you is to work with a good property investment or mortgage broker. Property investment mortgages are more complex than mortgages on your own home. You need an expert as it could end up costing you time and money if you get it wrong. 

Want to learn more about mortgages? You’ve come to the right place

When deciding the type of mortgage loan for investment properties, make sure it’s the right one for your property goals. With various types of loans available, starting on the right track is essential. Would you like to learn more about mortgages for property investment? At Finance Nation, we’re here to help. 

Our guide on funding your property portfolio goes through the different strategies and property brokers that can help expand your portfolio. Download the guide to find out more.