How to finance a BTL investment
When purchasing a BTL property, there are a number of choices that landlords will have to make and these can impact significantly on the success of their investment.
The first choice is whether to buy for cash or use financing.
The advantages of buying for cash are as follows:
1. You are likely to be able to buy at a discount, as you can act quickly and are not reliant on a mortgage offer.
2. Should the tenant stop paying the rent or you have a void period, you will not have a mortgage to pay.
3. You will not be impacted by Section 24.
4. 4. You will not be impacted by Bank of England base rate hikes.
The main advantage of using BTL finance is that you can grow your portfolio through leveraging.
If you use bank finance, you will be able to leverage your cash to purchase more properties.
For example, if you had £100K cash, as a rough example, you could buy a property outright for £100K or you could buy 4 x £100K properties, putting in a 25% deposit on each one, and financing the rest with a 75% loan to value Buy to Let mortgage.
This could potentially increase your monthly net income, and, over time, mean that you benefit from 4 properties increasing in value, rather than just one.
The disadvantages of using buy to lets finance are:
1. Should the tenant stop paying the rent or you have a void period, you will still have to pay the mortgage each month.
2. You could potentially be impacted by Section 24.
3. If you are on an SVR or tracker rate, your mortgage would increase if the Bank of England increased the base rate.
4. There are fees associated with raising finance, although some of these can be added to the loan.
5. You have to provide your potential lender with a lot of information and documentation.
All of the above needs to be taken into consideration before deciding what is right for you. Your decision should be based on your own personal financial circumstances, if you qualify for BTL mortgages, your attitude to risk, your tax position, and your personal goals for investing in property.
With BTL mortgage products, you have the possibility to raise finance in your own personal name or through a limited company.
At MakeURMove, we recommend that you speak to a reputable tax advisor to find out what is the best structure for your individual situation.
Buying through a limited company can reduce your exposure to Section 24, but like most things, there are swings and roundabouts, so it is important to find out what is right for you personally.
Limited company mortgage products can have higher rates than sole-trader ones, although the marketplace is becoming a lot more competitive due to the increase in landlords who are buying through a limited company structure.
According to June 2018 research conducted by Precise Mortgages, nearly two out of five landlords will use limited companies to buy properties over the next year compared to just over a quarter as individuals.
Among landlords with more than four properties, the percentage buying new property via a limited company rises to 42 per cent while among those with up to three properties it drops to 31 per cent.
Landlords operating in London are the most likely to be planning to purchase through a limited company.
If you are a small landlord with a maximum of three or four properties, and you are not too highly leveraged, then it is unlikely that buying through a limited company structure is the right choice for you.
This helpful video by Shawbrook Bank considers the distinctions between buy-to-lets for limited companies and individuals, plus the underwriting and legal processes attached to buy-to-lets for limited companies.
Many small landlords just speak to their High Street bank about BTL mortgage products, but in fact, specialist BTL lenders like TMW, Precise, Together, Shawbrook, Paragon, Fleet, and Kent Reliance have a far wider and more competitive range of products to choose from, and may offer higher loan to values than you can find on the High Street.
What is clear from the above, is that the tax and financing landscape for small landlords is changing, and at MakeUrMove, we recommended that you seek professional advice from a “whole of market” mortgage broker and also a specialist property tax advisor.
Doing so will ensure that your BTL investments remain profitable and sustainable over the long term.