Summary of the case
- First time landlord
- Purchase of 2 bedroom maisonette
- Student let
- Deposit raised from remortgage of residential home
What we achieved for the client
- 80% loan to value (LTV) borrowing
- Purchase with £27,000 deposit
- 3.25% per annum 5-year fixed rate
The challenges of the case
Our client approached us, looking to get into buy to let property investment for the first time. Their security property was a two bedroomed leasehold maisonette (a flat with two floors), which they intended to let out to students.
There would be one tenancy agreement for the two tenant rooms.
The property was a house that had been converted into 4 flats.
The client owned their own residential home, so had experience in owning property, but they had not invested in rental property before, so this was a brand new undertaking for them.
The client opted to generate a deposit for their buy to let investment by remortgaging their home.
The equity available in the client’s residential property only enabled them to raise 20% of the value of the maisonette property as a deposit.
So, our challenge was to find an 80% LTV buy to let mortgage, which would accept students as tenants and would accept a first time landlord as an applicant.
Raising a deposit for buy to let investment
You might think that the only way you can raise a deposit for a buy to let investment is through your own cash savings.
In actual fact, this is far from the case, and though not all of the scenarios below will be applicable to you, there may be an opportunity amongst the list that suits you:
You might be in the very lucky position that someone you know would like to give you a cash lump sum to fund your investment in rental property.
If you are not fully familiar with the mortgage industry, you might not even question whether or not this would be an acceptable source of a mortgage deposit. But, lenders must establish that your investment has come from a legitimate and legal source.
The good news is that most lenders will accept gifted deposits, where it is from an immediate family member i.e. a parent, brother or sister or grandparent.
Relationships outside these dynamics may be considered, so if you have a different scenario speak to your mortgage advisor and they can ask relevant questions to the lender they approach for you.
Stocks and shares
If you have money invested in stocks and shares, you can use the proceeds of selling them to fund a buy to let deposit.
The lender will want to see an audit trail, which demonstrates this is where the funds have come from. This comes back to their need to establish that the money is coming from a legitimate and legal source.
Further advance on a mortgage
You may own other property, whether that is residential, buy to let, or commercial, that you have a mortgage on.
A ‘further advance’ is when you ask a mortgage lender you are already borrowing from to increase the amount they are lending to you. As long as the extra borrowing is for a purpose your lender is happy with, and still fits within their loan to value and other criteria, they may well be very happy to do so.
There are pro’s and con’s in doing this.
If you are on a great rate of interest (better than you could secure elsewhere via another borrowing route), it could result in a cost effective outcome for you.
If you are still within the ‘deal period’ of your mortgage, you would have to pay early repayment charges (ERCs) if you remortgaged. However, with a further advance, the additional lending is set up separately from the first loan and ERCs are not charged.
You must bear in mind that borrowing more is likely to increase the overall amount you pay the lender, in mortgage interest or capital repayments, so it needs to be affordable for you.
Don’t assume that just because you are a client of the lender, that a further advance with them will be the most cost effective option. That’s where the value of a broker comes in. A broker can go into the market place and evaluate whether a further advance with your current lender, or a remortgage or second charge mortgage with another lender (see below) is appropriate and the most cost effective for you.
Do you have equity in a mortgaged property (your mortgage is significantly below the maximum loan to value you can achieve by remortgaging to a new product)? Or do you own an unencumbered property (residential, buy to let, or commercial)?
If yes, you could release cash from your property to raise a deposit for a buy to let mortgage.
To avoid paying early repayment charges, you would need to be out of the deal period (also called the ‘initial rate period’) of the mortgage.
Increasing your borrowing will increase how much you pay in mortgage interest, so consider whether you can afford to do so.
Remortgaging a property to raise a deposit can be a relatively cheap way to raise funds, compared to other borrowing types due to the interest rates available.
Second charge mortgage
A second charge mortgage can be helpful in raising a deposit for a buy to let property, if you are still within the deal period/initial rate period of a mortgage on your property, where remortgaging would mean you have to pay early repayment charges.
If can also be beneficial if your current mortgage interest rate is lower than remortgage deals can offer you, as your existing mortgage is not disrupted.
Second charge mortgages sit alongside an existing mortgage and allow you to raise funds from available equity in your property.
You will need to check with your lender that they are happy for you to take out second charge borrowing, that you have the equity available to extend your borrowing and that the additional borrowing will be affordable for you.
If you have more than one limited company, and there are suitable funds within them, you can use an inter-company loan to raise a deposit.
Typically, a lender will need evidence that the company lending the money will not be financially unstable as a result of making the loan, this may be in the form of a letter from the company accountant, for example.
It is worth investigating the tax implications of this type of arrangement, your mortgage advisor cannot give tax advice, so you would need to go to a qualified tax professional.
Some landlords use their tax free lump sum to cover the cost of a buy to let mortgage deposit. Investing in buy to let in retirement is common, and many lenders have flexibility on upper age limits of applicants.
There are even examples where lenders effectively set no upper age limit for applicants.
As with any mortgage deposit, the lender will want to see the paper-trail for the source of the money, for example your pension paperwork and bank statement.
Sale of property
If you are in the throes of selling a property, you can use the proceeds of the sale to raise a buy to let mortgage deposit.
Your buy to let lender will want to see proof of the offer made on the property you are selling.
Income from abroad
If you are a foreign national living in the UK or here on a visa, it may be that the money you want to use to fund your buy to let deposit has come from a country outside the UK, for example your home country.
Similarly, you may be an expat of the UK living abroad, and as such the funds for your buy to let deposit area from income from abroad.
Lenders will look for a legitimate paper trail for the deposit funds in each instance.
This is a more specialised area of the market, but we can help.
Securing a deal for our client
At 80% loan to value the choice of lenders for first time landlords is still somewhat limited, so we were really pleased to have been able to secure the client this level of borrowing.
Not only that, but we secured a long-term fixed rate of 3.25% per annum over 5 years, which will protect the client from fluctuations in mortgage interest rates through to 2027.