Finance for a Buy-to-Let deposit
THE QUESTION
Can you use a business bank loan as mortgage deposit on a BTL purchase?
THE ANSWER
It’s a simple question that invokes a less than simple answer. The key issue is transparency between borrower and lender. If you engage in any type of misrepresentation of the true source of the deposit and you will stray into the area of mortgage fraud. This can be defined as follows:
Concealment of a material fact that, if revealed, would alter the lending decision
An alternative definition of mortgage fraud is this direct quote from the Law Society’s website:
“People may commit mortgage fraud by giving false information to lenders to get a larger mortgage than they're entitled to. This can include misrepresenting […] sources of funds other than the mortgage”
Lending options reduce massively if you do use a business loan as a deposit. Why? Because mortgage lenders trust the normal and distrust the abnormal.
What is normal to them is that the borrower puts down the required deposit designated by the mortgage product from their own funds and can prove it is their own money when requested to do so.
What is abnormal is to borrow the deposit from an outside source; this creates conflict in lenders’ minds, stemming mostly from the fact that you have no 'skin in the game', no financial commitment to the property.
This creates two fears in lenders minds, based on their painful past experience.
- At the first difficulty you encounter, you may decide you can’t be bothered with the property and effectively hand it over to the lender to sort out, as in hands them the keys to the property. Lenders don’t want the hassle of having to deal with what is, effectively, a repossessed property.
- You have no incentive to maintain the property so it becomes more distressed with each passing year.
If you want to access mortgages from a wide selection of lenders, this is not something you would do.
Joint venturing i.e. using other people’s money can be another way of not putting your own money into a property. However, there is a big ‘but’ here - great care needs to be taken with the structure of this, too.
If you borrow 100% of the purchase price from a private person and no mortgage lender is involved, there is no deception there, so it is fine.
Problems begin to arise when you still intend to get a mortgage and borrow just the deposit money privately, then it is definitely not fine and here's why -
Lenders view borrowing the deposit privately in exactly the same way as the original question, you have none of your own money in the deal and you have borrowed 100% of the purchase price, which triggers all the concerns mentioned above.
You could JV and do a mortgage jointly, but that would link the credit histories of you and your JV partner, with the risk that a misdemeanour by one would ruin the credit rating of the other.
One type of JV that has worked well and keeps lenders happy is if the other JV party with the money, takes the mortgage in their name - this keeps the mortgage lender happy as the person using their own money has the mortgage. Your name would not be on the deeds nor on the mortgage, but he could create legal documents, such as a Deed of Trust, that secure your share of the monthly cash flow profit and even your share of the equity profit from an eventual sale. Not owning the property may not be your desired outcome, but it is legitimate and has been done many times.
With very few lenders, using a limited company structure and taking a loan from someone unconnected with the business is acceptable, but again massively reduces lender choice and the likelihood of market leading rates.
This is all discussed in this YouTube video.
You can learn more here:
- Contact Kevin Wright over on his Facebook page.
- Browse the Recycle Your Cash online training library by clicking here.
- Attend an upcoming 1-Day Property Finance Masterclass event - Book in here.
