If you want to get into property you’ll find that to get started you either need a hefty nest egg to invest or you need to tick the mortgage lenders boxes. Usually, they want you to:
If you can’t tick all these boxes, you’ll reduce the lenders who will be willing to provide a mortgage. Typically lenders first priority is to protect their money - so anything outside what they consider to be ‘normal’, makes them nervous.
A lender’s normal is that people borrow money to buy a house to live in. If you don’t already have a home you own, they become suspicious and suspect you don’t plan to rent it out, but to live in it yourself. This breaks all the Buy-to-Let (BTL) mortgage rules. To a lender it doesn’t make sense to buy a property as a first time buyer, and then let it to someone else.
If you don’t earn more than £25K a year, Most BTL lenders have no confidence in your ability to maintain your mortgage payments. It doesn’t matter that you plan to use rental to cover them with rent, they are purely focused on the simple scenario that you haven’t proved you can do this. The reality is also that, over the term of a mortgage, once at the very least you will have a tenant leave and have to find a new one, that may not happen straightway so lenders need to be confident that you can keep up the mortgage payments from your own income – hence why they see £25K a threshold to meet that requirement. Their thinking is that, if you can afford to pay a mortgage, you would already be living in a mortgaged property - anything else is abnormal.
Add to this any minor blots on your credit record - even relatively small ones - and they’re all backing away shaking their heads.
Does that mean you can’t get into property investment?
No, there are other ways to achieve your goals.
Bridging finance can provide a workaround to this problem. This is because a bridging lender is looking at their loan from a completely different perspective. They look at the value of the property and lend against that - with the view that, if you don’t pay back the loan they can always repossess the property. Unlike mortgage lenders who aren’t interested in repossessions as they see them as more trouble than they’re worth.
If you use bridging finance to purchase your first property and hold on to it for 6 months, you can apply for a mortgage to refinance it. At this point most BTL mortgage lenders will no longer consider you to be a first time buyer. This gives you many more choices of mortgage lenders.
You still need to resolve the low income issue, but now there are BTL mortgage lenders that will consider lending to property owners on lower incomes. A good broker will identify your ability to get mortgages in this situation before you took the bridging loan out. This ensures you are protected and have a sound plan to repay the bridging loan.
It’s all about knowing the ropes - and nobody expects a first time buyer to be familiar with their lending options.
Once again bridging finance lenders are less concerned with your credit record, as long as you don’t currently have arrears. They know their money is covered by the property’s value and will overlook the odd smudge on your credit record due to late payments or even a CCJ.
With the ability to purchase a property your next step is to decide what kind of property to buy.
If you buy a ready-to-rent property, your capital (the deposit) will be trapped in the property until you sell it. That means you will have to save up another deposit for your next property. If you don’t have a massive cash pot to begin with, you are going to run out of cash way before you build the size of portfolio you desire.
This is why buy, refurb, refinance - or recycle your cash - is absolutely essential to master. If you know how to manage this process you can pull most/all your cash out of each property you buy by increasing the property value before you apply for a mortgage. This enables you to build a far bigger portfolio with your pot of cash.
So here’s your checklist:
And you’re up and running as a smart property investor!
NOTE: If you’re looking for an experience bridging broker to help, drop me a note.
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