Avoid mortgage disappointment to benefit from leverage
Property investment could be the key to realising your financial objectives. There is no reason why we shouldn’t expect UK property investment to perform similarly to how it has performed over the last two decades. If you’d bought residential investment property in 1986, it would have increased in value by an average of 7% per year – that’s more than double the rate at which the same investment into FTSE 100 shares would have grown.
To access the best property investment opportunities and realise their extraordinary profit potential, you’ll need to be financially prepared first. The majority of property investors take advantage of leveraging (borrowing to invest), but a recent research report by Nottingham Building Society (NBS) shows that a third of mortgage applicants fail to get their mortgage approved. Imagine finding the perfect property in one of the best places to invest in property UK, and then being turned down for the buy-to-let mortgage you need to secure the deal.
In this property investment blog, I’ll outline the findings of the NBS research, and you’ll learn six things you can do to make sure you aren’t the one in every three mortgage applicants that have their dreams shattered.
Mortgage problems are the main reason for property investment to fall through
The NBS research draws on data from polls conducted by PollRight between 14th and 26th January and by Consumer Intelligence between 14th and 18th January this year. This study found that:
- 37% of mortgage applicants struggle to secure a mortgage because of their age
- 38% have problems because of their credit history
- 19% have problems because of affordability issues
With the Bank of England and Prudential Regulation Authority’sdirectly leading to:
- many lenders increasing the requirement for rent to mortgage cover from 12.5% to as high as 15%; and
- stress testing of buy-to-let mortgages at 5.5% interest rates,
the number of failed mortgage applications could rise further.
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To avoid this fate, you’ll need to make sure your finances are in order before applying for a buy-to-let mortgage to fund the purchase of an investment property.
Six things to do to strengthen your financial position ahead of property investment
Successful property investors have some things in common:
- They’ve spent time on investment education.
- They’ve discussed their plans with their partner, and have that support and encouragement.
- They’ve formed an alliance with experienced mentors and guides.
- They’ve done high-level property investment research, finding the best places to invest in property in the UK.
- After they’ve invested, they’ve benefited from professional property management, allowing them to use a Set and Forget buy-to-let investment strategy.
In preparation to buy each investment property, successful property investors also make sure their finances are prepared for the investment. It not only reduces the possibility of being refused the mortgage needed but also helps to make sure that the investment will perform as expected. Here are six things you should do to strengthen your financial position ahead of buying an investment property:
1. Know your objectives
Meet with an advisor and discuss your financial goals. Questions that you should consider include:
- Do you want to make a capital gain, or benefit from long-term income?
- What is the timescale of your investment?
- Do you plan to be involved in the day-to-day running of investments made, or do you want to take a ‘hands-off’ approach?
- What is your tax position, and how will it be affected by investment?
- When would you like to retire?
- What are your current and upcoming financial commitments?
Once you are confident that property investment can help you to achieve your goals, you’ll be in a better position to prepare your finances for investment.
2. Take charge of your credit check
We all have a credit history, and mortgage lenders always check this before they agree on a buy-to-let mortgage. They want to make sure that you are credit-worthy, and will be a responsible borrower. Here are things you can do to increase your credit score:
- Make sure you’re up to date with all loan and credit card payments
- Pay down credit card debt
- Pay loans and credit cards on time, every month
- Don’t make multiple applications for credit
- Check your credit report regularly, and dispute any items that are incorrect
- Keep old credit cards and loan facilities open (even if you don’t use them)
3. Build a large deposit
The larger your deposit, the more likely it will be that you’ll be offered the mortgage you need. A lower level of loan-to-value could also bring down the interest rate charged on the buy-to-let mortgage, as well as improve your cash flow.
You might decide to tap the Bank of Mum and Dad for the deposit needed. A lot of property investors release equity from their home. If neither of these options is available to you, don’t despair. Read our property investment guide about how to save an investment property deposit quickly – £25,000 in a year is achievable.
4. Plan a contingency fund
Don’t enter into a property investment without an emergency fund. It should be enough to see you through void periods when your property is between tenants, and should also include cash that is available for emergency maintenance and repairs (a much lower amount is needed for new build properties).
Once invested, a good strategy is to make sure you save some of your positive cash flow into a contingency account.
5. Accurately assess the expenses associated with your investment property
When preparing your cash flow projections, you’ll have to be accurate with your estimates of costs. Remember to include items such as landlord insurance, service fees, property management fees and mortgage costs. Make an estimate of maintenance and repair bills, and allow for void periods. Watch Brett’s video about two-year cash flow to see how expenses and cash flow projections should be done.
6. Speak to a mortgage broker
The final step to preparing your finances for property investment is to talk to a mortgage broker. They’ll be able to assess your situation and advise which buy-to-let mortgage product and provider is most suitable and most likely to accept your application. The benefits of using a buy-to-let mortgage broker could save you thousands of pounds through the life of your property investment.
If you’d like to be put into contact with a mortgage broker who knows the buy-to-let market, contact us today. We recommend from a panel of brokers that we regularly assess on behalf of our clients.
The edict that ‘money goes to money’ is not true
There’s a saying that states that money goes to money. In the world of property investment, this isn’t true. You actually can profit on other people’s money – every penny on a mortgage has the potential to make a profit from an investment property purchase.
Making sure your finances are in order and that you are financially prepared for property investment will ensure that you are seen as a good buy-to-let mortgage applicant. With the mortgage offer in place, you’ll be in the position to make money on other people’s money.
For more information about the mortgage brokers on our recommended list, and to explore how property investment might help you achieve your financial goals, contact us today on +44 (0)207 923 6100.