How to Finance Your First Property Investment

November 8, 2021
How to Finance First Property Investment


How to Finance Your First Property Investment

Property investment is still one of the safest investments in the United Kingdom. The number of U.K buy-to-let investors grew to 2.7 million in 2020, and British house prices have increased by 175% in the last 20 years.

However, property investment can present many pitfalls — even for the most experienced investors — and there are various ways to secure finance for your first buy to let property. As a result, your first investment property can be daunting.

In this article, we will make obtaining your first investment property straightforward!

1. Choose Your Location

Researching the area you are thinking of buying your first investment property is a must-do activity. You must consider the rental yields on offer, the strength of the location in terms of supply and demand whilst also assessing the potential for capital growth. 

You will also need to decide who your ideal tenant is. For example, are you renting to social housing tenants, young professionals, families, students etc. By understanding this, you will better determine various factors such as whether to invest in a house or flat and whether you invest in an urban or rural area. 

2. The Type Of Property

Once you have decided the location of your property, you will need to consider the type of property you are going to invest in. Below is a quick summary: 

  • Refurbished property - Refurbished properties are renovated properties that are ideal for investors looking for character and charm.
  • Off-plan property - An off-plan property is still in the development stage when you purchase. Sellers often market these properties at a lower price to make them more attractive to buyers and investors. 
  • Residential property - Residential properties are popular because of the rising house prices in recent years and the generally consistent high demand both in the sales and lettings market. University students, young professionals and families struggling to get on the housing ladder are typically the most sought after tenant type.
  • Student or HMO property - Student or HMO properties are a popular choice for investors because of the increasing demand and high rental yields. The high yields make it a reliable investment for first-time investors.

Once you’ve decided on the type of property, you’ll need to consider the costs and finance.

3. Consider The Various Taxes

There will be various taxes when you invest in your first buy to let property, and you need to consider them before investing. Basic taxpayers will pay an 18% capital gains tax on buy-to-let properties. If you are an additional rate taxpayer, you will pay 28% capital gains tax.

In addition, you must declare any gains on your self-assessment forms. As well as the various taxes you will pay as a property investor — you should consider landlord insurance, property maintenance, and letting agents fees. Always seek advice from a qualified tax advisor. 

4. Choose Your Finance Options

Once you have decided upon the location of your investment and the type of property you want to invest in, you will need to consider the finance options available to you.

Here are some of the best options for your first buy to let property.

Buy-To-Let Mortgage

Buy-to-let mortgages are a popular option for investors looking to purchase their first investment property. Lenders only provide buy-to-let mortgages to people buying a property as an investment. If you are looking to use the property solely for investment purposes, lenders will insist you use a buy-to-let mortgage product instead of a standard residential mortgage.

Buy-to-let mortgages are powerful investment tools, but they are more expensive than a ‘homeowner residential’ mortgage. These mortgages also require a deposit between 25% to 40% of their property’s value. Most investors choose an interest-only mortgage because it helps them maintain cash in hand from a positive cash flow position and the surplus cash available is saved up until they have enough for a deposit to put towards their next investment. 

Historically, buy-to-let mortgages had highly generous tax allowances. Some investors that are looking to have a number of investments and build a portfolio buy their first buy to let property within a limited company. It is wise to get specialist advice on the best way to structure your investment property purchase and potentially future portfolio. 

As with a mortgage for buying your own home, there are various options:

  • Interest-Only Mortgage - For most buy to let mortgages, the fixed mortgage rate is only 2-5 years in length. The lender will fix the mortgage rate for a set amount of time, regardless of whether the standard variable rate of the lender changes. Once the fixed-rate term is over, the lender will transfer to a standard variable rate.
  • Interest-Only Mortgage - The buyer pays off the interest and not the capital on an interest-only mortgage until the end of the mortgage term. Typically, the mortgage term lasts between 10-30 years. Once the mortgage term is over, the buyer needs to pay off the loan in its entirety.
  • Tracker-Rate Mortgage - The interest rate stays the same as the bank rate on a tracker-rate mortgage. The Bank of England sets the bank rate, and once the agreed time frame ends, the bank often transfers lenders to a standard variable rate mortgage.
  • Standard Variable Rate Mortgage - A standard variable rate mortgage is often a more expensive way of clearing your mortgage. That’s because the mortgage does not tend to have discounts or deals. Working with a good broker, you can usually avoid the SVR rates. 

Commercial Finance

Commercial investment mortgages are an excellent way for companies and individuals to purchase or refinance a commercial property which is rented out. Investors can also use commercial finance on a semi-commercial property or a mixed-use commercial property.

Commercial property investment projects may include:

  • Retail - Shops, single retail units, shopping parades, retail parks, and malls
  • Leisure - Hotels, cafes, restaurants, and pubs
  • Health - Nursing homes, care homes, doctors surgeries, dental practices, opticians, and vets
  • Education - Schools, colleges, and nurseries
  • Industry - Warehouses, parks, industrial units, and cafes

Key features of commercial finance include:

  • Rates from 4%
  • No minimum income (excellent for first-time investors)
  • Up to 75% LTV lending
  • Loan terms from 2 to 25 years
  • Available on new build flats, purpose-built student accommodation, and serviced accommodation

The most significant benefit of commercial finance is the variety of investment opportunities available. In contrast, you’re limited to only residential property on a buy-to-let mortgage. Commercial finance loans span from £50k to £25m+, and investors can use commercial loans on large or small portfolios.

Lenders prefer you to have some letting experience before giving you a commercial loan. That’s due to commercial investment properties having more complexities than residential properties. It is, however, possible to use a commercial loan for your first investment property. Furthermore, lenders prefer a high personal income so that you do not have to rely on the investment to support your lifestyle choices.

The deposit for a commercial mortgage varies, but it tends to be around 25% to 30% of the property value. However, some lenders might consider a particular asset/property more high risk and require a larger deposit.

A Bridging Loan

A bridging loan is a short-term loan that offers an excellent way to purchase your first buy-to-let property. These loans can offer the potential to add value and generate a higher rental income stream for your first investment property. 

Many first time investors realise that seizing the best opportunities often requires fast action. Sometimes you need to act faster than the time it takes to put a regular (cheaper) mortgage product in place.

The following situations are when you may need a bridging loan: 

  • Auctions and distressed sales - Auctions and distressed sales often mean the seller wants to offload the property as fast as possible. A bridging loan can help you if the time frame is too tight for finalising mortgage arrangements.
  • Lease extension - If you spot a flat with excellent rentable potential, you might also find a price discount because the leasehold expiry date is fast approaching. In these situations, you could use a bridging loan to cover the cost of the lease extension and the purchase price.
  • Important property improvements - Some of the best property investments require some extra work. A bridging loan could be a superb option if you need capital to fund the work.

Every lender has different lending criteria regarding bridging loans. One thing all bridge lenders require is a strong and clearly defined exit strategy and a form of an asset as collateral (which is usually the subject property). A property is often enough for collateral, meaning if you already have a property and this is your first buy to let property — you can use your current property as collateral.

Final Thoughts

Purchasing your first investment property does not need to be complicated. There are various ways you can obtain finance, and we can guide you along the way. The Merryoaks team has over forty years of property experience and our aim is to help you fund your next investment or development project and be part of your on-going growth to bigger, better and more aspirational deals.

Schedule a strategy call below to speak to one of our Property Funding Specialists.

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