Buy-To-Let Funding Options

Personal Loans

Credit Cards

Bridging Finance

Conventional Mortgages

Further Advances

Re-Mortgages

In All Cases

Personal Loans

Personal loans are available to most investors, including those with impaired credit. These loans are unsecured and, dependent on the status of the borrower, attract various levels of interest rates.

The maximum amount of any personal loan is £ 25k with a maximum repayment period of 7 years.

There are seldom any administration fees and this form of loan does not attract a valuation of any property. The decision to lend is based on the borrower's credit history.

Some lenders offer an initial re-payment holiday of up to 3 months after the loan is taken up.

Some lenders charge early redemption penalties, typically 1 month's interest, but these can be reduced to a minimum where the lender allows for partial repayment followed by complete repayment of the balance.

For example, if you were to take out a loan for £ 25k and, at some time in the future pay down a high balance, say 15k in 1 month to £ 1k and then during the following month pay off the balance of £ 1k, the penalty interest charge would be based on the £ 1k.

Where the personal loan is used within the investors' rental business, the interest in allowable for tax purposes.

Credit Cards

Credit cards can be used for a number of purposes within buy-to-let.

The obvious uses include payment for building materials, furniture, carpets, domestic appliances etc.

It may be possible to settle your builder's account by credit card if the builder offers that facility even if you have to pay a surcharge.

Credit cards can sometimes be used to pay the 10% deposit on a property bought at auction.

In each case, if the credit card is dedicated to the rental business and not used for any other purpose, the credit card costs including any interest would be an allowable expense for tax purposes.

Bridging Finance

Bridging finance is available to fund the purchase of a property that cannot be conventionally mortgaged such as derelict property or where the timing of the completion date does not allow for mortgaging conventionally as is often the case with properties bought at auction.

Typically the maximum loan to value is 70% of purchase price, subject to a minimum loan of £ 25,001. The result is that Bridging Finance is only available for properties costing at least £ 35,716.

This obviously rules out a great deal of derelict or highly distressed property that can be bought at auction, which fail to make this break point, though it is possible to aggregate more than one property to arrive at the minimum loan of £ 25,001.

Under these circumstances a combination of a personal loan and credit cards may be the answer.

Monthly interest charges are around 1.5% with an admin fee of around 1.5% of the total loan.

Investors will also incur legal costs as the loan is secured on the property in question, which necessitates a legal charge being registered.

Whilst Bridging Finance & Personal Loans may appear to be relatively, or even very expensive, using this form of finance, if it is necessary, increases your buying power considerably, enabling investors to develop a portfolio much faster than would be the case, where the investor was relying solely on their own cash.

Also a combination of a Personal Loans , Credit Card & Bridging Finance could enable an investor with little or no cash to start down the buy-to-let road. It must be stressed though that this would be a high risk strategy and should not be undertaken without fully understanding the inherent risks and probably taking professional advice before starting out. See Bridging Finance Matrix

Conventional Mortgages

Buy-to-let mortgages are available to virtually all investors. The terms & conditions vary dependent on the status of the borrower, the type of property and the prospective tenant.

Most UK tax residents, provided they are employed, can borrow up to 85% of the value of the property, subject to the Loan to Rent Ratio.

The Loan to Rent Ratio (LTR) is a qualifier applied by lenders to ensure that if the borrower defaults, the rent, which will then revert to the lender, will cover the ongoing monthly payments.

The ratio is between 125% & 150%, commonly 130%. The way it works is that the lender requires the monthly rent to be x% more than the monthly loan payment.

The effect of applying this qualifier to buy-to-let loans is to reduce the effective value for loan purposes and increase the amount of the deposit that the investor must find.

Care also needs to be taken in checking that the interest rate used by the lender is that which applies to the loan and not a higher figure. Often, where the buy-to-let loan is in any way discounted for an initial period, the non-discounted rate is used for LTR purposes.

Further Advances

Where a property has increased in value the investor is generally able to release cash from the property by way of a Further Advance from the same lender subject to any LTR qualifiers.

This is the cheapest way of raising additional cash as all that is required is a valuation and small administration fee.

Further advances should not be confused with Re-Mortgages . A Re-Mortgage is where the investor either mortgages a property that they already own outright or effectively moves an existing mortgage to a new lender.

A re-mortgage involves higher costs as a Solicitor will need to be involved and there may be higher administration fees.

Re-Mortgages

A re-mortgage is taken out by an investor where he either owns the property outright or subject to Bridging Finance, or wants to move the loan from lender A to lender B.

A property bought for cash or with Bridging Finance that is subsequently mortgaged conventionally is re-mortgaged.

The case for moving from lender A to lender B only really arises where the terms of lender B are significantly better than lender A. This generally would only arise where the lender B was prepared to lend at a higher Loan to Value as there is little difference in interest rates between lenders.

In All Cases:

Provided that the borrowed monies are used within the rental business all costs and interest associated with the loan will be allowable to tax purposes.

There is generally no restriction other than the LTV or LTR on how much cash a borrower can take out of a property over the years. Some people believe that you cannot borrow more than the original purchase price. This is not correct and many portfolios are developed by drawing down on the increased equity arising out of increased property values.