Investment Property Loans: A Guide For Property Investors

Investment Property Loans complete guide by pluxa property

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Most financial advisors recommend taking loans to invest in properties even if you can pay all cash. While there are some risks involved, with a clear investment strategy, taking a property investment loan can help you diversify your overall investment portfolio without exhausting your savings. 

In this guide, we will discuss six different types of loans and mortgages that you can consider to buy investment property. 

What is an investment property loan? 

An investment property financing is a type of loan or mortgage used to purchase a property that will generate income. Unlike a traditional home loan, these loans are for properties you won’t be living in. Instead, you’ll likely rent out the property to tenants and use the rental income to help cover the mortgage payments.

For example, you might use an investment house loan to buy a single-family home to rent out or a multi-unit property like a duplex or apartment building.

Investment property loans can be a great way to build wealth through real estate. They can also provide a steady stream of income through rental payments. However, it’s important to carefully consider the potential risks and rewards before you buy an investment property.

What are the types of investment property loans?

Before you apply for a property loan, you should weigh all the options you have. These are some of the most sought-after ones for a property investment purchase. 

Buy-to-Let Mortgages

A buy-to-let mortgage is specifically designed for individuals purchasing a property with the primary intention of renting it out for profit. These mortgages often have different terms and conditions compared to residential mortgages, including higher interest rates and stricter lending criteria.

For this type of mortgage, you typically need to make a deposit of 25 to 40%. The interest rates vary depending on the lender and your tenure, but you can expect the lowest to be more than 4%. 

Suitable for: 

  • Landlords looking to expand their property portfolio
  • Individuals seeking a long-term investment with rental income
  • Investors with a consistent rental income to cover mortgage payments

Commercial Property Loans

Commercial property loans are used to finance the purchase of properties intended for commercial use, such as offices, retail spaces, or industrial units. These loans typically require a larger deposit and often involve a more complex application process than residential or buy-to-let mortgages.

Compared to BTL mortgages, commercial property loans come at an even higher rate. Currently, the minimum interest rate in the market is around 6%. 

Suitable for: 

  • Investors looking to purchase commercial properties
  • Businesses requiring premises for their operations
  • Individuals with experience in commercial property management

Bridging Loans

Bridging loans provide short-term finance, usually for a period of a few months. They are often used to bridge the gap between selling one property and buying another or to fund property development projects. These loans tend to have higher interest rates than traditional mortgages.

Since these are very short-term loans, the interest rates are often calculated monthly. The lowest bridging loan rates in the UK are around 0.39% per month, and they can go up to 2% a month. 

Factors like the loan term, property type, loan amount, LTV (loan to value), and borrower’s credit score, all influence the interest rate. 

Suitable for: 

  • Property investors looking to purchase a new property quickly
  • Individuals needing funds for property renovations or developments
  • Buyers facing a chain break in the property buying process

Portfolio Mortgages 

A portfolio mortgage is designed for individuals who own multiple (typically more than four) buy-to-let properties. It allows you to manage all your properties under one mortgage agreement, often simplifying the management process and potentially offering more competitive interest rates.

For this, you would need to make a deposit of 20-25% of the property value for each of the properties (if you are taking a mortgage for multiple properties at a time). However, the LTV percentage can vary based on the mortgage amount, especially if you are going to a private financier. 

Suitable for: 

  • Landlords with a substantial property portfolio
  • Investors seeking to streamline mortgage management
  • Individuals looking for potential cost savings

Interest-Only Mortgages

With an interest-only mortgage, you only pay the interest on the loan for a specified period. This means your monthly payments are lower compared to a repayment mortgage where you pay both interest and principal.

The capital amount remains unchanged until the end of the term. 

It’s essential to have a repayment strategy in place for the capital, as you will need to repay the entire loan amount at the end of the term. This could be through selling the property, downsizing, or saving specifically for this purpose.

While initial payments are lower, the total interest paid over the life of the loan is generally higher compared to a repayment mortgage. 

Suitable for: 

  • Investors with high rental income to cover interest payments
  • Individuals with a clear plan to repay the capital amount (e.g., through property sale or other investments)
  • Borrowers seeking lower initial monthly payments

Fixed Rate Mortgages

A fixed-rate mortgage offers a fixed interest rate for a specific term, providing certainty about your monthly repayments. This type of mortgage protects you from interest rate fluctuations during the fixed-rate period.

The interest rates are usually higher, and the downside is that you will still be paying the same interest rate even if the base rate falls. 

Plus, finance experts suggest that if you plan to sell your property within a short period, a variable-rate mortgage might be more advantageous if interest rates decrease.

Suitable for: 

  • Investors seeking stability and predictability
  • Individuals who prefer to avoid interest rate risks
  • Borrowers with a long-term investment horizon

Is it good to invest in property by taking a loan? 

Instead of investing their entire savings into buying a property, most people opt for taking a loan of a certain percentage of the price of the property. However, even that should be done carefully by weighing all the pros and cons. 

So here are the pros and cons of investing in property by taking a loan, so you can judge better. 

Pros:

  • Potential for higher returns: Property prices tend to appreciate over time, potentially outpacing the loan interest rate. Besides, historically, UK property prices have risen over time.
  • Leveraging your money: A deposit and loan can buy a more expensive property than with cash alone.
  • Tax benefits: In the UK, mortgage interest relief might be available, reducing your tax bill.

Cons:

  • Increased financial risk: If property values fall, you could owe more than the property’s worth.
  • Interest payments: These add to the overall cost of the property.
  • Illiquidity: Property can be challenging to sell quickly if you need funds.

The ultimate decision will boil down to your financial situation and risk tolerance. 

Can I get a loan to invest in property? 

Yes, you can generally get a loan to invest in property. There are specific mortgage products designed for buy-to-let investments. However, lenders typically have stricter criteria for these loans compared to residential mortgages.

Factors like your credit score, deposit size, rental income potential, and the property itself will influence your eligibility. It’s essential to shop around and compare different lenders to find the best deal.

What credit score do you need for an investment property?

There’s no specific credit score requirement for an investment property in the UK. However, for most first-world countries it ranges between 640-750.  Lenders also prioritise your overall financial stability, rental income potential, and property value.

While a good credit score increases your chances, it’s not the sole factor. Factors like deposit size, income, and property type also matter. Some lenders might offer specialist buy-to-let mortgages with more flexible criteria.

Can you get a business loan to buy a buy-to-let property? 

Yes, you can potentially take a business loan to invest in a buy-to-let property or any other kind of property. However, you would need to have enough convincing numbers for the lenders to believe in your plan. 

In most cases, you would need to accumulate at least 20 percent of the purchase price as a downpayment to convince the lenders that you are serious about the business plan and ready to risk your own money as well. Besides that, you might also need to show them that after that downpayment, you would still have enough money to fund the operating costs.  

Your plan would also require you to convince the lenders that your income from the investment will be enough, steady, and predictable to pay off their debt. 

Investment property loan requirements

Here are the requirements one needs to match to be eligible for investment property loans from government banks, private banks or private lenders. In the case of private banks or private lenders, you might get a slack on credit score; however, their interest rates might also be higher. 

General Eligibility Criteria:

  1. UK Residency: You must be a UK resident to qualify for property investment loans.
  2. Creditworthiness: A good credit history is essential. Lenders assess your credit score to evaluate your financial reliability before giving you investment loans. Your credit score must be high; however, the exact range will vary from lender to lender. 
  3. Income: A stable income is required to demonstrate your ability to repay the property loans. This includes employment income, rental income, or other sources.
  4. Deposit: You’ll typically need a deposit, usually around 25% of the property value, although this can vary depending on the type of investment loan and lender.
  5. Investment Experience: Some investment property mortgage lenders might prefer applicants with prior experience in a property loan. 

Required Documents:

  1. Proof of Income: Payslips, tax returns, and bank statements to verify your income.
  2. Credit Report: A personal credit report to assess your creditworthiness.
  3. Bank Statements: To show your financial history and savings.
  4. Property Details: Information about the property you intend to invest in, including valuation reports and rental assessments.
  5. Business Plan (Optional): If you’re planning to let the property, a business plan outlining your rental strategy can be beneficial.
  6. Identification: A passport or driving licence to verify your identity.
  7. Proof of Deposit: Evidence of funds available for the deposit.

What type of loan is best for investment property?  

The best loan for an investment property in the UK is typically a buy-to-let mortgage. These are specifically designed for landlords and consider rental income when assessing affordability.

Other options include:

  • Portfolio landlord mortgages: For those with multiple properties (at least more than four mortgages going on).
  • Bridging loans: For short-term financing, often used for property development.

Is it profitable to invest in property? 

Historically, property investment is seen as a profitable venture in the UK. Despite the recent dip, if you consider the past 10 years, UK properties have greatly appreciated in value. 

The picture is the same even for the past five years. So, if you are ready to give it enough time, the gain on property investments is certain. 

property investment market growth chart in last five years

What makes this assumption even more believable is the rental home shortage in the UK. Many parts of the UK have been going through a demand and supply issue in terms of rental properties since 2023. As a result, UK rental homes are becoming more and more unaffordable for students or individuals who are in the early stages of their careers. 

This can be a great opportunity for property investors to build HMOs or regular BTL properties and enjoy both rental yield and property appreciation. 

How Pluxa Property helps you get maximum profit in property investment in the UK 

Pluxa Property helps you streamline your UK property investment journey in many ways. Here are some ways we can help you maximise your profits in property investment. 

  • Guaranteed Rent: Enjoy a steady income for up to five years, eliminating worries about tenant voids and rent arrears.
  • Free Refurbishment: Enhance your property’s value without upfront costs, increasing potential rental yields.
  • Exclusive Deals: Access to lucrative investment opportunities handpicked by property experts.
  • Cash Flow Booster Packages: Optimise your investment returns with tailored financial strategies.
  • Expert Guidance: Benefit from professional advice and support throughout your investment journey.

Here are the services we offer for maximizing your return on property investment:

1. Rent-to-Serviced accommodations services

As a leading property investment company in the UK, Pluxa Property offers a wide range of services to help investors like yourself achieve your goals. With over 10 years of experience in the UK property market, we are a trusted partner for your investment needs.

One of our key services is helping you convert your buy-to-let property into a high-yielding serviced accommodation investment. We handle everything from tenant management to interior design, so you can enjoy the benefits of this lucrative strategy without the hassle.

2. Buy-to-Serviced accommodations services

If you’re looking to invest in a serviced accommodation property from the ground up, our experts will help you find the right property, negotiate the best price, and manage it for maximum returns. We can help you achieve up to 15% rental yield every year.

3. Overseas Investments

For those looking to diversify their portfolio internationally, we offer an exclusive collection of carefully selected Spanish villas with high rental potential. Expand your overseas property portfolio with our expert guidance.

4. BRRR investments services

We also specialize in BRRR (Buy, Rehab, Rent, Refinance) investments. Let us help you find BRRR properties in the UK at a discounted price, so you can maximize your returns.

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