Ultimate Guide to Financing Rental Property

11 Mar 2019 - Peter

If you want to become a property investor or landlord, one of your first steps is to finance your rental property. Even experienced landlords can find the alternative financing options complicated, so we’ve written this essential guide to help you get started.

Option 1: Traditional Buy-to-Let Mortgages

If you have a deposit available, the traditional buy-to-let mortgage is a simple way to finance new rental properties. Traditional buy-to-let mortgages are much like a standard occupier mortgage, with three main differences.

Firstly, your mortgage provider will take forecasted rental income into account. Since 2017, legalization has been passed which requires that the rental income will cover the interest on the mortgage by a margin of typically 145%, at a stress-test interest rate of 5.5%.

Put simply, you’ll need £100 of rental income for each £15,000 you intend to borrow.

For example:

However, there are 3 exceptions:

Secondly, the mortgage will typically be more expensive than an occupier mortgage, with a higher interest rate and greater fees required.

Finally, you’ll require a 25% deposit as a minimum. This can come from a variety of sources:

Option 2: Bridging Finance

Bridging finance is a lot like a mortgage, but with some key disadvantages:

Yet, bridging finance can be a powerful tool:

Considering these factors, bridging finance only makes sense in a few circumstances:

See our interview with Simon Murphy below for more details on bridging finance. Always speak to a financial advisor (we like Simon at Fenton Simpson) before making decisions like this!

Option 3: Get Creative

There are several more ‘creative’ ways to fund a property purchase. For all of these, do speak to a financial advisor before proceeding:

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