Your 5-minute guide to investment property loans

Thinking about a business loan to invest in a property? There are plenty of options to choose from, and the right one depends on how you plan to generate income from the property. Here’s everything you need to know.

What are investment property loans?

Investment property loans are business loans designed to help you purchase properties that will generate enough income or capital appreciation to enable you to pay them back according to the terms of the loan agreement – hopefully with some profit on top.

These loans take several forms, including commercial mortgages and short-term bridging loans, and can be used by everyone from buy-to-let landlords to experienced developers with multi-property portfolios. 

What types of business loans can I use to buy property?

There are several types of business loans that you can use to buy investment property. 

The main ones to be aware of are:

• Buy-to-let mortgages – Designed specifically for landlords who plan to rent a property out to tenants, business buy-to-let loans work like residential mortgages in that they can come with either a fixed or a variable interest rate. They typically last for five to 25 years, with most lenders asking for at least a 25% deposit and evidence that the rental income will more than cover the mortgage repayments

• Commercial mortgages – Aimed at those investing in non-residential properties, such as office buildings, retail spaces or warehouses, these loans are for businesses rather than individuals. They tend to have higher interest rates than buy-to-let mortgages and can last for up to around 30 years. To qualify for a commercial mortgage, your business needs to be in good financial health and in a position to provide a deposit of between 30% and 40% of the purchase price

• Bridging loans – These short-term — usually up to 12-month — loans are designed to bridge the gap between buying a new property and selling or refinancing one you already own. They are quick to arrange and can be used for both purchase and refurbishment costs. However, this flexibility comes at a cost – the fees are significant, and bridging loan interest rates can be up to 1.5% a month

• Home equity loans – Aimed at homeowners willing to use the value of their residential property to invest in further properties, these loans can offer a way to borrow between 80% and 90% of the equity in your home. They can come with fixed or variable interest rates, which are often lower than those charged on other forms of investment property finance, and generally last between five and 30 years. However, you could lose your home if you can’t meet the repayment terms

• Portfolio mortgages – Aimed at property investors with a portfolio of properties (say four or more), these loans enable you to consolidate your borrowing for all your investment properties in a single loan agreement. This makes it easier to manage and can help investors grow their portfolio as the value of the properties in it grows

Investment property loans at a glance

Business buy-to-let mortgages

• The good: Some lenders offer interest-only repayments 

• The bad: Interest rates tend to be higher than on residential mortgages

Commercial mortgages

• The good: Can be used to finance a range of commercial property investments

• The bad: Often have more stringent lending requirements than buy-to-let deals

Bridging loans

• The good: Quick to set up and flexible in how they are used

• The bad: An expensive way to borrow – particularly in the longer term

Home equity loans

• The good: Can offer a cheap way to access property investment funds

• The bad: Are only available to homeowners with significant equity built up

Portfolio mortgages

• The good: Easier to manage than a raft of different property loans

• The bad: Often come with higher interest rates due to the increased level of risk involved

How can I get a business loan to buy property?

The information you need to provide to get a business loan to buy property depends on the type of financing you want to secure.

While some loan providers look at your personal finances during the application process, others focus on business strength and the viability of the property as an income-generating or appreciating asset.

Either way, you need to prove you can provide the funds required to cover the deposit, be that 25% or 40%.

To be eligible for a business loan to invest in property, you also need:

• A robust business plan detailing your investment strategy, experience, financial projections and, in some cases, a clear exit policy

• A good credit score – be that business, personal or both

• Documentation showing the property you intend to buy is worth the amount you plan to pay – this generally includes an independent valuation and a condition report

Is an investment property loan right for me?

Taking out an investment property loan is the only way many businesses can start to purchase properties. But the way business loans work means that investing in property this way has both pros and cons. These include:

Pros

• Leverage – By leveraging borrowed money, you can buy more properties — or more expensive properties — when the market is in your favour and earn more money as a result

• Cash flow management – You can use loans to fund renovations and improvements, enabling you to increase value and/or rental income without emptying your savings accounts

Cons

• Market fluctuations – A downturn in the property market could force down the value of your property or lead to difficulty renting it out. That may leave you unable to meet your loan repayment terms

• Borrowing costs – Investment loans often have relatively high interest rates and fees that eat into your investment returns, especially if you face late payment penalties

Read more…

• Business loans explained

• Am I eligible for a business loan?

• How to get a business loan?