An article written by Karl Griggs, Director at CPC Finance, giving an overview of different types of property finance. First published by Portico. You can see the original article here.
Most landlords will know about standard buy-to-let mortgages, but you might not be aware of the other types of finance that can help grow or enhance a portfolio.
Buy-to-let (BTL) mortgages are used by investors looking to buy and hold a residential property, which is let to tenants on an assured shorthold tenancy agreement. The rent from BTL properties is used to cover the loan repayments, and to generate additional income. BTL mortgages can be taken out by both individuals and limited companies.
Loans for Houses of Multiple Occupancy
The definition of a House of Multiple Occupancy (HMO) is a specialist asset class where a single property is subdivided, with shared kitchen facilities, and rented out on an individual basis to different people. Lenders provide specialist buy-to-let finance for HMOs as they are more complex to manage than a residential property for a single family. Generally, lenders prefer borrowers to have experience managing HMOs, but they may also consider landlords who manage multiple single properties.
Property portfolio finance
For a landlord with multiple properties, consolidating loans into one finance package can enable them to manage investments more effectively. Having one finance package can make it easier to secure finance based on your portfolio as a whole, as well as improving cash flow management. Consolidating loans can also be used by investors looking to refinance multiple properties at once.
Short term loans
Also known as bridging loans, short term loans can be secured on a residential or commercial property and can be used for a variety of purposes. They can be arranged for a period of one month to two years, either as a first charge loan on a property or second charge, sitting behind the existing mortgage. They are ideal for raising capital for refurbishment works, or covering a gap in a broken property purchase chain.
Finance for refurbishment projects
There are short term loans available specifically intended to enable landlords to carry out refurbishment works on a property. Depending on the amount of work, investors can either go for a light refurbishment loan (where works cost less than 15% of the property’s value), or heavy refurbishment, where the works cost more.
Examples of light refurbishment include cosmetic improvements such as rewiring, fitting a new kitchen or repainting. Heavy refurbishment work can need planning permission or involve building regulations. Once the work has been finished, landlords are free to sell on or change to a BTL mortgage, some of which have no early redemption charges
Secured loans and second charge mortgages
A second charge mortgage can be useful for those investors who have equity within a portfolio they would like to use, but who are unable or unwilling to remortgage. Such a mortgage sits behind the first mortgage meaning that a favourable fixed, tracker or interest-only mortgage can be retained.
In general, landlords are advised to consult professionals regarding their finance and tax affairs. Working with a FCA-regulated broker will give you an independent overview of the finance options available. A broker will help both find the most suitable loan and help package the application to give it the best chance for approval.