Borrowing for buy to let

Borrowing for buy to let

explained

Borrowing for buy to let is the most important decision any prospective landlord will face when entering the buy to let market. Naturally each case is unique and there is no correct answer to each case.

Many of the buy to let industries have been concerned over recent months that as more and more people scramble to get on to the buy to let ladder, methods used for borrowing for buy to let have become riskier. Prior to the credit crunch of late 2007 many lenders loosened their traditional buy to let lending requirements that typically demanded 75% loan to values. This saw an increase in riskier loans with even a few lenders offering 100% buy to let mortgages.

Worse still it has been reported that some individuals have become so keen to tap into the popular buy to let market that having been turned away from buy to let mortgage companies, they are borrowing from additional sources such as credit cards and personal loans in order to come up with the deposits required by buy to let companies. If true this kind of behavior poses a big risk to the buy to let industry and landlord alike. IN the current climate of slowing or negative house price inflation, buy to let landlords can expect much less in the way of capital gains in their properties over the short to medium term. Instead prospective landlords should treat their investments as long term and ensure the fundamentals add up. In other words does the monthly income exceed the monthly mortgage costs? What is the buy to let yield?

Borrowing for buy to let using unconventional kinds of finance can put you buy to let business at risk. If borrowing using personal loans or credit cards, any short term rise in interest rates could quickly erode any profit and put you from profit to loss in a very short period of time. The worst case scenario from here is that you suddenly are unable to meet your finance payments and face having the property repossessed or even going bankrupt. In much the same way that corporations do, you should ensure that the term of you assets matches your liabilities. In other words when making a long term investment such as a buy to let property, finance the purchase using a long term source of finance such as a buy to let mortgage.