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Borrowing to buy an investment property

Borrowing | Loan Helpful? 6

Asked by jjones, submitted 14 December 2009.

Open Quote I already own a house but would like to buy another investment property. Is it better to approach the bank where I have a good record or should I go elsewhere? Any advice will be greatly appreciated.End Quote

Answered by Justin on 16 December 2009

What really matters is that you’re able to borrow the money at the best possible rate, including the impact of any other charges and fees.

With a number of property developers and investors having had their fingers burned during the credit crunch, lenders are more cautious than they were a few years ago (when it seemed just about everyone assumed property prices would continue to rise indefinitely).

So expect potential lenders to be fussier and to only offer their more competitive rates on mortgages of up to 60% – 80% of the property value (known as ‘loan to value’ – LTV).

You’ll find that buy to let mortgage interest rates are currently around double those of ‘best buy’ conventional mortgages, reflecting the increased risk to the lender. Most buy to let lenders also charge hefty arrangement fees of 2% - 3% of the loan.

If you have sufficient equity in your existing house then re-mortgaging that to fund the new property purchase will likely be a cheaper option. However, it does increase the risk of losing your home if you can’t keep up mortgage repayments, so is not a decision to be taken lightly.

You should also take a view on whether a fixed or variable rate is more attractive. Variable rates, especially those with discounts, are generally lower at present. If you could afford to stomach future possible rises then this may prove the cheaper option over the next couple of years given many predict interest rates will not increase significantly over this period. However, if rising interest rates would cripple your finances then a fixed rate will give you greater peace of mind.

Beyond the next few years it’s fairly likely that interest rates will be somewhat higher than today and there’s little you can do right now to protect yourself from this. If the property is a longer term investment then bear this in mind. Perhaps consider locking into a fixed rate in future if interest rates do start showing signs of a rising trend.

By all means start by getting a mortgage quote from your existing bank as it’ll give you a good benchmark for comparison. I’d then suggest checking rates on a few price comparison websites and speaking to one or two independent mortgage brokers to get a feel for the best deals on the market. Avoid mortgage brokers who charge fees, as these will normally be on top of commission received from the lender, usually around 0.35% of the loan value (possibly more on a buy to let mortgage).

Before going ahead I’d recommend estimating all potential costs then taking a realistic view on how much rent you’d have to charge to break even, including an allowance for unoccupied periods. Then check whether that rent is realistic for the property and area concerned. In the past some property investors were happy to make a small loss on rent because soaring property prices still ensured an overall profit. In today’s subdued climate this would be a risky game to play, so make sure your projections provide you with some monthly profit.

You might find the Candid Money Property Rental Yield Calculator helpful.

You can also read more about mortgages on our mortgages page.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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