We take a look at five smart ideas for quickly coming up with the cash you need to buy a property for the first time!
1. You don't need to be earning the world
Whilst investing in property may seem like its only for the upper class, you actually do not need to be earning a large amount of money to invest. In fact, some lenders have no minimum income criteria - why is this? When it comes to funding an investment, the lenders of the money are more interested in the property itself than how much you specifically earn. They will conduct rental stress tests on the property to see if it will be a sound asset and that the rent figure will cover the mortgage adequately and leave plenty room for movement. When applying for finance, you can show earnings from employment, self-employment, pensions and many other income streams. So the take away is - finding the correct property is of higher importance than being a big earner.
2. Mortgage lenders always want to conduct their own valuation on the property
When purchasing an investment property in Scotland, without exception, the lender will conduct their own valuation of the property. Some lenders may offer these for free and some will charge. The lender will also pick who they want to conduct the valuation, so don't get too excited. Even if there is a home report they will still conduct these valuations as they use them to collect their own information on the property - one of these pieces of info being the monthly rental figure. This figure is what they believe the monthly rental value is of the property and they will use this in their all-important stress tests. These stress tests are financial indicators that make sure the property is financially viable and takes into consideration void periods, repairs, tax and other expenses. These tests are also not conducted at today's interest rates, but at higher rates of 5% - 5.5%. Lenders will restrict lending to the lower of the maximum stress test amount or maximum loan to value (LTV).
3. Additional Dwelling Supplement - Don't Forget!
If you already own a property then you may be subject to additional dwelling supplement tax. The amount of tax that you would have to pay does vary depending on which country that you are living in within the UK. This tax is often forgotten about but can add up to be quite a bit and obviously affects your return on investment. I would suggest getting advice from your solicitor on this tax and how it would affect you - it is a bit of a negative for investors but there are always positives and negatives to everything! In my opinion, if you are buying a property and holding it for a long time then that additional tax cost becomes very insignificant over 10 or 20 years.
4. You're going to need some money...
When investing in property, lenders do want to see a commitment from you and this will come in the form of a deposit. They very much prefer for you to use your own funds for the deposit but there are some that will allow gifts from close family and a few they accept gifts from non-related individuals. How much deposit do they want? Whilst there is the odd exception, the typical deposits they would want to see are 25% for a buy to let mortgage, 30% for a holiday let mortgage, 30% for bridging finance and around 40% for commercial finance. Compared to buying a residential home for yourself, the deposits are higher but this safeguards you from potential drop in equity if there was a dip in the market.
5. First-time buyers can be first time landlords, but...
The majority of lenders would like you to own your own property before they give you lending on an investment property and help you become a landlord. However, there are a few who will offer finance to those who wish to become a landlord without owning any other properties. In these cases, mortgage providers would assess you more stringently and would conduct stress tests as if it was a residential property. Their worry is that there is a higher chance that you would want to move into the property since you don't own your own home, this is why they will make sure that you can personally afford the mortgage.