Find out how to get the best rate on an Investment Mortgage.
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Author: Pete Mugleston - Mortgage Expert, MD
Updated: January 18, 2022
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…
The following topics are covered 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
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Maximise your chance of approval with specialist advice from an expert in Buy to Let Mortgages.
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:
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.
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.
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;
- The most affordable option for you based on your circumstances
- 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
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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:
Rental Yield Calculator
This calculator will show you the rental yield on your investment property using either the original purchase price - plus associated costs - or the current value. All you need to do is choose which option you want to base your calculation on and your monthly rental premiums.
Gross Rental Yield:
Net Rental Yield:
Now you've worked out what your current rental yield is, why not speak to a broker to see what investment mortgage/remortgage opportunities are available? With their expertise in this market they'll be able to identify a range of new deals which could reduce your mortgage payments and, as a result, improve your overall rental yield.
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.
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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.
Get matched with an investment mortgage broker
There’s so much to compare when you’re trying to find a good investment mortgage rate and that’s why it can be really difficult to navigate your way through the process on your own.
We can match you with an experienced investment mortgage broker who has access to exclusive deals that aren’t visible on comparison sites and they can check your eligibility for a mortgage without affecting your credit score.
Give us a call on 0808 189 0463 or get in touch straight away to get started.
Get Started with a Broker
Maximise your chance of approval with specialist advice from an expert in Buy to Let Mortgages.
Yes, and many investors and landlords do though you’ll need to look out for clauses in your agreement that do cap the number of properties or mortgages that a borrower can have, either with the same lender or several lenders.
BTL mortgages, for example, can sometimes have a limit of 10 properties per borrower. If you need an investment mortgage without a limit on how many properties can be mortgages, contact a specialist BTL broker.
Bridging loans are processed much faster than traditional mortgages so if you need to buy a property at auction or snap up a good investment on the open market, this type of finance could prove to be easier to obtain.
Many bridging loan lenders aren’t regulated by the FCA and the repayment terms are also a lot shorter, usually ranging between 1 to 5 years.
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Mortgage Expert, MD
About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!