Property economist

question

Posted by: Yuveer | 2014/10/08 16:19

How does one go about getting funding for buy-to-let investments?

Hi, I bought my first property last year - a one bedroom loft apartment in a prime location. I would like to purchase a second property as an investment, however I know that within the next five years I plan to buy a free-standing home for the long term, and rent out my current flat. At this point in time I hope to have 3 properties in my portfolio - one which I would live in, and two on rent. I am afraid that when I apply for a third loan - for my long term home - I will be told that my income is tied up in two existing bonds, and might only get a fraction of the loan amount required. Will this be the case?

expert answer

Posted by: John Loos | 2014/10/15 14:11

Hi Yuveer

 

This is a really good question... Banks will typically not take your full rental income into account to allow for times that your property might be vacant or where a tenant might not pay you. This is obviously done to protect both parties as it is in neither the banks' or your own best interest that you default on your loan commitments. Typically when clients default on a property and the bank is left with no other recourse than to sell the property on Sale in Execution we only realise about 60-70% of the value of the property. As you can see this leaves the client with a shortfall that they will still be responsible to service despite not owning the property anymore. So our interests are actually quite aligned in terms of this and we try to do what is best for both parties to the transaction. As a further protective measure we also typically allow for the prospect of interest rate increases when we do your affordability assessment, also just to protect you that should rates go up, you will still be able to make good on all your financial commitments.

 

So in conclusion, the risk you point out is a valid one. To mitigate this risk you have to do your own affordability calculations in such a way that you have more than enough room to maneuver should some of these risks play out. Although, not knowing your full financial circumstances I cannot guarantee that you will be approved, you at least are in a better position to understand how we look at these aspects from a banks' perspective.

 

thanks and regards,

John

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