Investment Property Financing

Investment property financing is the core of this site's information and knowledge. Purchasing property without having a clear strategy in terms of how much you will actually pay is a little dim. Most people don't know what the options always are and assume that how they have bought their own home is the same way in which they'd buy an investment property.

Factually possible but not that smart. There are a number of factors for property financing that need to be taken into account when financing a buy to let property and having reviewed the UK Mortgages section, you'll appreciate what these are.

Taking mortgages and investment property financing a stage further, you'll appreciate that the 15% developers discount which is passed onto the buy to let investor is significant as this is the deposit figure that is generally needed to fund the purchase of the unit.

There are a couple of ways that this can be used, either by BRIDGING or by using an GIFTED DEPOSIT OR EXCHANGE BOND but before we go into that, here's why you can't usually use this in the straightforward sense; assuming a 85% LTV mortgage and excluding other deductions:

Purchase price of property £200,000

To Exchange:

10% deposit on Exchange = £20,000

On Completion:

Balance of deposit £30,000

Mortgage £150,000

TOTAL PURCHASE £200,000

CASH investment required £30,000

Here the valuation of the property has been taken to be £200,000 Now in the case of investment property financing, where you introduce the 15% developers discount, simple maths tells you that you get 15% off the £200k ie the property is costing you £170,000. Simple. So the sums look like:

Purchase price £200,000

less discount (15%) £30,000

Selling Price £170,000

To Exchange:

10% deposit of selling price: £17,000

On completion:

Balance before mortgage £8500

Mortgage £144,500

TOTAL PURCHASE £170,000

CASH Investment required £25,500

In both these scenarios the purchasers cash is required upfront to fund the purchases. However, these days, people with not that much money could buy perhaps three flats for the same amount of money. How?

By using a bridging loan to fund the developers discount and using the mortgage valuation figure rather than the purchase price figure to be the 'headline' figure, so:

Purchase price £200,000

less discount (15%) £30,000

Selling Price £170,000

Mortgage valuation figure £200,000

To Exchange:

10% deposit of selling price: £17,000

On completion:

Balance required before mortgage -£47,000

Mortgage £200,000

TOTAL PURCHASE £170,000

CASH Needed on completion £0

Wonderful! All your money back and a 100% mortgage! However, do you still have to have that £17,000 in the first place BUT it comes back to you on completion.

When it comes to investment property financing using the exchange bond, this is essentially an insurance policy, whereby you pay a premium for the bond - £1500 ish for a £200k property for a one year period and £2500ish for two years, where the bond guarantees to the developer that if you don't complete, then, the insurance company pays out and pays the developer. The Exchange Bond company then still looks to the purchaser for the money. The issue here is that you will be credit scored for each property and if you have a number of exchange bonds out, then these would become expensive. Using the Exchange Bond looks like this:

Purchase price £200,000

less discount (15%) £30,000

Selling Price £170,000

To Exchange:

10% deposit of selling price: £0

Exchange Bond £2,500

On completion:

Balance before mortgage £25,500

Mortgage £144,500

TOTAL PURCHASE £170,000

CASH Needed £25,500

So you still need to actually have the £25,500 for here as well

BUT note that this does NOT come back to you on completion. A combination of both the Exchange Bond and bridging would be a creative option for investment property financing. Currently Baron Properties are the only company that have a successful and dedicated bridging option for their investment property financing of investor's properties that are known to IPF. The Exchange Bond is becoming increasingly well known in the industry with Developers as these are the beneficiaries in any bond.

A Word of Warning:

There are plenty of ads offering investment property financing of 100% mortgages and no money down deals which on the face of it seems great. However there are some companies that don't quite know what they are doing and what has happened is that these people get themselves into a mess by having two mortgages on the same property at the same time - which is illegal! The bridging operation is the only legal way of completing on investment property financing if you're trying to use the developer's deposit. There is a Gifted Deposit which also comes through from the developer but it depends when and how this is introduced at the completion stage - the only logical way is to have these funds on hand made available by the developer's solicitor at the appropriate time of completion.

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