Investment Mortgages

Choosing the right investment mortgage can be difficult. They can all vary in terms of flexibility and eligibility criteria. It really depends on your particular need and reasons for wanting one.

This guide includes everything you need to know if you want to finance an investment property purchase correctly, with the right type of mortgage for your circumstances, budget and plans for the future.

Read on for more information or jump to the section that’s relevant to you via the links below…

What is an investment mortgage?

An investment mortgage is specifically designed for someone who wants to borrow money to buy a property purely for investment purposes rather than as their main residence.

So, for example, you might use an investment mortgage to;

• Purchase a house or flat as a buy-to-let investment and make a return on the rental income
• Buy a plot of land or derelict property, get planning permission and sell it on for someone else to develop
• Renovate a property and then put it back on the market for a profit
• Buy a holiday home – whether in the UK or overseas – and use it as a rental business
• Buy a commercial property – retail outlet or office block – and rent it out to a business

What are the different types available?

There’s a whole range of specialised mortgages you can use, depending on the type of property and venture you’re looking to pursue.

Here’s a list of examples with a link to further details on each one:

Buy-to-Let mortgage

A buy-to-let mortgage is used by investors that seek to earn income from a properties’ rental potential over the long-term.

The main lending criteria is based on the amount of rental income you can make over and above the mortgage payments.

House of Multiple Occupancy (HMO) mortgage

A standard BTL mortgage won’t be suitable if you’re renting a property or several apartments within a building, to multiple tenants.

For that, you’ll need a HMO mortgage. Sometimes lenders require evidence of a HMO licence and/or HMO planning permission before they can make a decision.

Holiday let mortgage

These mortgages are used to purchase a property that’s to be rented out for holiday lets.

Similarly to a standard BTL, the potential rental income and your ability to generate it will play a big part in the approval decision.

Overseas Buy-to-Let mortgage

Both UK and overseas lenders have mortgage products for property purchases abroad. You might need a higher deposit for this type of loan because the level of risk is considered greater.

Commercial mortgage

A commercial mortgage is usually taken out by limited company directors or individuals that are purchasing commercial space for their premises, office space or land but they can also be used to raise capital for business purposes.

Buy-to-sell mortgages

Investors hoping to convert property and flip it for profit might take out a buy-to-sell mortgage which typically has shorter terms ranging from a few months to several years.

Finding the right mortgage for your specific investment needs can be tricky. An experienced mortgage broker would be able to add value here and identify the right lenders and mortgage to match your requirements.

How to get an investment mortgage

If you’re looking for an investment mortgage there are a few simple steps you can take, right at the outset, to make the process much more straightforward.

Step 1. Organise your documents

Find and gather;

• Your passport or driver’s licence
• Three months bank statements
• Proof of earnings – last 3 months payslips & P60 (employed) or a minimum of 1 year’s certified accounts, ideally 2-3 (self-employed)
• Mortgage statement for any existing properties you own (if applicable)
• Copies of any existing lease agreements as proof of rental income (if applicable)
• Proof of address (ideally from the last 3 months). Lenders accept utility bills, credit card statements or council tax statements.
• A business plan (if applicable)

Step 2. Check your credit reports

It’s in your interest to know what’s on your reports. Lenders will look at your credit score and your credit history in general for any red flags like severe and recent debt.

Different CRAs, i.e. Crediva or Equifax, hold different information about you because some are updated more frequently than others.

That’s why it can be a good idea to check what information they have about you on each of them before you apply for a mortgage.

Step 3. Get matched with an experienced investment mortgage broker

We only recommend mortgage brokers that have experience in the type of mortgage you need.

That way, you get matched with someone who knows where to look for the best investment mortgages.

You’ll want a broker that knows;

• The importance of finding flexible mortgage agreements
• The difference between an interest-only and repayment investment mortgage
• Who offers the lowest interest rates
• How to communicate with the other experts involved in the property purchase.

All these things affect the quality of the deal you end up with.

Some investment mortgages can span between 5-35 years, so don’t get stuck with a mortgage agreement that isn’t;

1. The most affordable option for you based on your circumstances
2. Easy to leave if you find a better deal elsewhere later down the line

What are the repayment options?

Most investment mortgages are offered on an interest-only basis. With this option, your monthly repayments only consist of interest, while the outstanding capital balance isn’t due until the end of your mortgage term.

Alternatively, you might opt for a repayment mortgage. The monthly repayments would cover the capital balance and the interest that’s charged for the loan, so they’d be higher vs an interest-only mortgage

Will you be eligible?

Eligibility criteria will vary from lender to lender.

A non-owner occupied property inherently brings more risk, so you’ll need to prove that you have a solid plan in place for how you’re going to cover the investment mortgage repayments.

Each lender uses their own set of criteria because the type of mortgages they offer vary, with some being more open to more risky lending i.e. BTL mortgages for people with CCJs and others specialising in commercial mortgages for limited company directors.

Below are some typical eligibility requirements that investment mortgage lenders set.

Minimum rental yield and ICRs

Some lenders have minimum rental yield requirements as well as minimum income coverage ratios (ICR).

For example, at the time of writing (December 2021) a landlord applying to Clydesdale Bank would need rental projections that cover 135% of the mortgage payment.

Together will ask for rental projections of 165% if the borrower is a first-time buyer, whether the mortgage is for an HMO or holiday let.

Barclays, however, do not insist that borrowers meet a minimum rental yield requirement. Instead,  they use their own internal solvency and affordability tests when assessing an application.

Rental yield is an important indicator of how profitable your investment property is. You can use our calculator below to work out the rental yield for the property you’re looking to buy:

Deposit requirements

Having a larger deposit can improve your chances of securing the best interest rate offers available. A higher loan-to-value (LTV) simply carries less risk for a lender.

Investment mortgages and remortgages don’t always require large deposits. Some lenders like Precise Mortgages may be prepared to loan up to 80% of a properties’ market value if it’s a HMO.

Kent Reliance offers remortgages with an 85% LTV if the purpose is to raise money for property improvements, meaning you could only need a 15% deposit.

How much deposit is needed for commercial investment?

If you need an investment mortgage to buy retail stores, a restaurant, office space, factories or other commercial space, some lenders might ask for a higher deposit or for you to have substantial equity in another property that can be used as security for the loan.

For example, lender InterBay Commercial provides mortgages for up to 65% of a properties’ market value, requiring a 35% deposit.

Aldermore can do slightly better with a lower deposit of 25%  for loans up to 1 million.

It’s your overall circumstances and the investment’s viability that ultimately affect how much deposit you’ll require.

How to get the best rates

Generally, interest rates for investment mortgages will tend to be higher than for standard residential mortgages.

This is due to the additional risk a lender undertakes for the various ventures involved with this type of borrowing.

Finding the right lender for a specific investment mortgage can be tricky.

Buy-to-let mortgages are quite common amongst mainstream lenders but more niche lending, for a HMO or Holiday Let, usually falls under the domain of specialist lenders.

This is where the assistance of a broker can be a huge help.

They will be able to identify the specific lenders who can provide the type of lending for whatever business or investment opportunity you’re seeking.

Going direct to a lender could also limit you to just their rate deal when there may be better offers elsewhere.

What’s the difference between an investment mortgage and a second mortgage?

A second mortgage is, as the name suggests, an additional mortgage you would have on a different property to the one on your main residence, which is your primary mortgage.

So, in effect, an investment mortgage could also be categorised as a second mortgage if you already have one.

You don’t ‘have’ to already have a primary mortgage to qualify for an investment mortgage but, it does tend to help your application if you already have one when applying.