If you want to buy property, you’ll need a mortgage; right?
Not necessarily. While traditional buy-to-let mortgages are one of the more straightforward routes to property investment financing, it’s not the only way of generating the funds to buy.
Here’s just a handful of alternatives to standard mortgage financing that you could potentially use for your next property acquisition.
We’ll start with one of the more difficult alternatives to mortgage financing; paying in cash.
It’s an option which is unfortunately too expensive for most investors. Plus, you won’t be able to use the leverage of mortgage lending to maximise your returns.
But if you can afford to purchase with your own capital, you won’t have to wait weeks or even months for mortgage application processing; which means you can snap up highly sought-after properties quicker than your opponents.
You also won’t have to deal with monthly mortgage repayments, and you won’t have the threat of repossession if you end up having cashflow issues.
Designed as a temporary loan to ‘bridge’ a gap in your finances, bridging loans are particularly useful in scenarios where mortgages aren’t compatible with your requirements.
For example, if you’re buying a property at auction, you’ll need to pay the full balance within two to six weeks. That’s too fast for the often glacial process of securing a mortgage; especially considering that you might not know which property you’ll even end up winning at the auction.
Most mortgage products are also incompatible with properties that need a bit of renovation work before you can let them out to tenants or sell them on.
Lenders prefer properties that can start generating income to cover the repayments straight away. They’ll typically refuse to lend on properties in an ‘uninhabitable’ condition.
Bridging loans are much faster and much more flexible. You can generally borrow as much as you need, with no restrictions on the type of property; and you won’t have to make monthly repayments.
The downside is, you’ll have to repay the whole loan within a much shorter time period; usually around 12 months. You’ll need to demonstrate to the bridging lender that you’ll be able to pay off the loan at the end of the term.
In practice, bridging loans are more of a stop-gap measure, and once the loan term is up, you’ll typically need to exit onto a standard mortgage or another form of finance.
You might be able to extend the loan term if necessary, or get an ‘open’ bridging loan with no fixed repayment deadline, but these can be more expensive.
Development loans (also known as construction loans) are broadly similar to bridging loans as a form of short-term financing.
However, development loans are more squarely targeted at investors who are planning new builds, conversions or heavy refurbishment projects; which means they can often provide longer loan terms and potentially more affordable interest rates.
The upshot is that development finance is usually released in installments after certain construction milestones are met and approved by a surveyor; rather than the single lump sum that a bridging loan would offer.
This sounds like a negative at first, but it can actually help your project maintain steady cashflow and prevent the scope of the building works outstretching the total budget.
Second charge mortgages
If you’re a homeowner with an existing mortgage, or you already have at least one other buy-to-let in your portfolio, a second charge could help you turn your equity into funds for a new investment purchase.
It works like this. The new loan is secured against your existing property, but if you default on repayments, the lender is essentially second in the queue to recover their debt after the original mortgage lender.
Second charge mortgages are good for getting fast access to money, but keep in mind that it essentially leaves you with two debts to manage, and you’re effectively undoing your past efforts to repay the existing mortgage.
The second charge loan may also come with a higher interest rate; and of course, you’ll need a lot of equity in your home or existing buy-to-let to cover an entire new buy-to-let purchase.
If you’ve built up a sizeable pension pot over the years, you might be able to use those savings to fund a smaller buy-to-let purchase; particularly if you’re able to combine it with your other savings.
Rules on pension tax enable you to draw out up to 25% of your pension pot tax-free. That money can then be used to invest in property, which can potentially grow your money faster than your pension scheme alone.
Of course, it depends on how much you’ve managed to save. You might find that the pension funds will only cover the deposit, and you’ll need a mortgage or some other financing solution to cover the rest.
But it’s certainly an option worth investigating; and besides the money aspect, owning an investment portfolio in your retirement years can offer a great way of keeping yourself occupied without the stress of a full-time business.
Need a little help with your property investment finances? At GNS Associates, our specialist property and construction industry accountants in Uxbridge can provide everything you need to keep your property business steaming ahead.
Call us on 0208 090 2604 or email email@example.com to arrange a consultation today.