In the UK, property remains one of the most resilient asset classes. From first-time buyers to portfolio landlords, getting established on the property ladder remains a popular way for many to grow their wealth. Depending on an individual’s circumstances and ambitions, Arbuthnot Latham, Private and Commercial Bank, explains the various routes to securing finance for property investment in 2021 and beyond.
Property finance for individuals
Many individuals, who have enough capital, will look to supplement their income by acquiring a second or third property on top of the one they live in. This will almost always involve a personal investment of capital and additional funds secured via a loan or mortgage.
The appeal of becoming a buy-to-let landlord is not just the relatively good performance of the UK residential property market, but the fact that the value of the asset can be increased with a proactive approach to property maintenance and improvement. Until now, property has been a very stable asset class, and is one that empowers the owner to increase its value over and above standard market movements. It is important to note, with any asset class, that previous performance is not an indicator of future performance.
If an individual is looking to make this sort of investment, any finance they are able to secure will be contingent on their own circumstances. For example, will they be able to show how they would personally cover a shortfall if rental income doesn’t cover interest payments?
Other factors banks consider with individual buy-to-let mortgage applications
Whether they are entering the property investment market for the first time or expanding their portfolio, a clean credit score is an essential part of the puzzle. Small issues like missed payments might not make a huge difference, but County Court Judgements or missed mortgage repayments will be a significant barrier to securing the finance they need.
Most lenders in the UK require a minimum income to consider eligibility, but there are options for those with a lower income threshold, and there are even options available that have no income requirements.
Existing portfolio or assets
What lenders are willing to offer will change depending on if the individual is new to property finance or already own properties. Some lenders won’t consider landlords who own several properties, but this varies across the UK.
Property finance for portfolio landlords
Individuals who own four or more mortgaged properties become what’s known as a ‘portfolio landlord’. When they pass this threshold, there are certain expectations on banks regarding due diligence. From here, it’s not just about their own personal circumstances. For example, a bank is required to know the status quo of the rest of their portfolio. They need a deeper understanding of how the assets might interact and will also want to gauge their understanding of the market they’re operating in.
Factors banks consider with buy-to-let applications
- Do they keep accurate records? There are many conditions to satisfy buy-to-let properties (fire safety certificates, guarantees for electrical items, insurance, etc.) More important still for HMOs: annual gas certificates. If they’re disorganised, cannot produce documentation when asked, or their business approach obstructs a bank’s due diligence, this is a red flag when considering a finance application.
- The bank wants to know that a buy-to-let landlord is competent: aware of their obligations and best practice
- A portfolio landlord should understand the market they want to operate in. Banks look for investors who have a good handle on their local area. A speculative application – not rooted in a comprehensive business plan – means more risk for the bank and a higher rate of interest.
Portfolio landlords should make sure they chose a lender who is right for them. If the individual are vastly experienced, cheaper rates found on the high street can be the right approach. A note of caution here is that as different lenders’ appetites change, it could result in an ongoing dynamic of regular refinancing to achieve the cheapest rate.
Other investors might move away from -the potentially lighter touch relationship approach of the high street, and opt for a longer-term relationship of consistency where their banker understands their circumstances, has years of sector expertise and can tailor solutions to meet their needs.
This is particularly helpful when circumstances change. The pooled collective knowledge of a real estate finance team can be particularly valuable to help a portfolio landlord adapt when circumstances change.