What type of loan is best for an investment property?

Your choice of loan is critical when it comes to professional property investing, which is why we’re going to head this blog with a disclaimer:

Disclaimer: The information to follow should not be regarded as advice. The best way for you to fund your investments will be unique to your situation. You may want to discuss your options with a professional financial advisor.

The types of loans available to property investors can be broadly divided into five, as follows:

Investment mortgages
Personal loans
Private loans
Remortgages/Equity release products
Short-term loans

Investment mortgages

Investment mortgages are the most popular way for investors to fund their portfolios. The buy-to-let (BTL) mortgage is designed for investors following a rental income strategy. These loans usually require a larger deposit than a residential mortgage, so investors may need further loans to cover this.

Sub-divisions of BTL mortgage loans include HMO (House in Multiple Occupation) mortgages and commercial BTL mortgages.

Like their residential equivalent, BTL mortgages can be arranged on a capital repayment or interest only basis.

Buy-to-sell mortgages are also available to investors who are following a capital growth strategy.

Personal loans

While personal loans are a less common way to obtain funds for a property purchase, they can offer some advantages. For example, a mortgage can take a long time to arrange and offers can be withdrawn if issues are uncovered which affect the property’s value or suitability as an asset.

In contrast, a personal loan can usually be agreed quickly on a secured or unsecured basis.

Private loans

Borrowing money from friends and family can be a wise move, but it also comes with unique risks. The main advantage is that interest rates can be set very low or the loan provided interest-free. The lender will often be rewarded with a share of any profits from the property. but that would be agreed in writing between the parties. It is important to understand that private loans are subject to regulation.

Remortgages and other equity release products

If you already own a property, whether it is on a mortgage or not, you may be able to access cash through a remortgage or an equity release deal. The amount of money you can get your hands on will be related to the property’s value, but professional investors often remortgage existing properties to fund new investments.

Short-term loans

Short-term loans are less popular than mortgages and personal loans because of their high arrangement fees, and interest rates, and stiff penalties for late payment or early withdrawal.

A well-known example of a short-term loan is a bridging loan, which is normally used to bridge the gap between buying a new property and waiting for an existing property to be sold. Another example is auction finance which can enable buyers to meet strict completion deadlines when buying at auction.

All of the above types of loans can be part of a successful investment strategy, but it is vital that all risks are weighed up and costs are carefully calculated. We highly recommend you speak to a qualified financial advisor before deciding what type of loan is best for an investment property you are interested in.

More options for funding property investment

Rather than focusing solely on what type of loan is best for an investment property, consider other ways of raising finance that do not involve loans at all.

These include:

Joint ventures (JVs). If you are cash poor, you could team up with a cash rich partner and contribute your skills instead of money (sweat equity). JVs often work well when one partner is in the construction industry and can pay their share in terms of practical skills and industry contacts. Both parties must complete and sign a Dedication of Trust.
Sourcing services. Cash-backed investors are often willing to pay another party to find lucrative property deals for them. Following completion, the sourcing agent will receive either a flat fee or a percentage of the property’s value. They can then use this to fund a deposit on their own investment.
Seller finance. In rare circumstances, a property owner will agree to finance your purchase of their property.

Find out more at a FREE Fielding Financial seminar

For more advice on what type of loan is best for an investment property, we recommend you speak to an experienced investor at a Fielding Financial property seminar near you. Take a look at our dedicated Free Seminar page for the most convenient time and place for you to attend.