Saving and raising a deposit to buy an investment property can be hard work and time consuming. It is also the first obstacle we can encounter when we decide that we want to proactively invest in a buy-to-let property. That’s why I wanted to take the time to list the options that maybe available to you.
7 Ideas To Raise A Deposit To Invest In Property:
- Personal Savings and Investments
- Pension Plan
- Unsecured Borrowing
- Bridging Finance
I would like to point out that I am not providing financial advice here, I am simply highlighting ideas that people consider to help speed up the process of getting started.
Personal Savings and Investments
If you have savings or matured investments, the chances are you can increase your return on investment (ROI) by transferring those funds into bricks and mortar.
Having a sizeable amount of cash within a banks savings account isn’t going to produce much interest for you. Your cash will effectively be sleeping, so it could be time to make that cash work hard for you!
Individual Savings Accounts (ISAs) are a way of building tax-free savings and have become quite popular over the years. But there are limitations to the amount that can be saved tax-free, and you don’t receive every penny your cash earns as the banks take their cut for providing the service to you.
There are many types of ISAs available including cash, stocks and shares, trusts, bonds, and you guest it … property. The type of ISA someone picks will depend on the amount of cash they have, their goals and attitude to risk.
Take full control of your ROI by investing your cash yourself. One of the key benefits of investing in property is leverage. Not only can you get a good return on your own cash, but you will also receive a return on the cash you borrow from the bank.
Withdrawing a lump sum from your pension may give you enough to get started. I did this with my Armed Forces Pension to help me expand my business.
The introduction of new legislation which started in April 2015, allows people from the age of 55 to access cash from of their defined contributions pension without needing to buy an annuity. Essentially, people have more flexibility when it comes to turning their pension fund into retirement income.
The first 25% of the pension can be taken tax free, which maybe enough to use as a deposit to buy an investment property.
If you already own your own home you may have equity which you can extract to get started. This is actually how I got started.
I made one mistake though, which I could have avoided, had I known better.
Basically, I sold my home which I had lived in for a little over 5 years. During that time I had a new central heating system installed, new kitchen, new bathroom and I had a new driveway laid. I also decorated throughout.
Due to my work, it was beneficial for me to move into military accommodation so I decided to sell. I sold for £120k more than I had paid for it.
I then used the £120k to look for a property to let, as I wanted to stay on the property market before I spent all my cash on a shiny new car and some luxury holidays.
It wasn’t until I sat down with a mortgage broker that he explained to me that I could have kept my home to let and refinanced to release some of the equity, to then buy a second property.
The main advantage to this, is that I would have saved thousands of pounds that I spent on selling fees to the estate agents and solicitors combined.
The mortgage broker taught me one more thing though, which I was very grateful for. He explained that I wasn’t restricted to buying just one property. He advised looking for two and using around 50% of my cash on each as a deposit. I vaguely remember him talking about the benefits of capital growth on two houses instead of one, and that I should take advice from the estate agents as to where there is a demand for rentals.
So that’s exactly what I did and within 6 months I was a landlord with two properties.
If you have your own home, depending on how long you have owned it and the market conditions in your area, you maybe able to extract equity without selling too. I explain a little more in this short video here:
Methods often referred to as using Other Peoples Money (OPM):
Although it’s possible to use loans as a deposit for a mortgage application, it’s not easy and you will be classed as a higher risk to lenders.
Lenders will look at your debt-to-income ratio and will be mindful that you will need to repay both the mortgage and the loan.
If lenders are satisfied that you can comfortably afford to pay both, then they may consider your mortgage application, but you can expect to receive mortgage offers with higher interest rates simply because you are considered a higher risk.
To help improve your chances it would be better to save a 5% deposit and only borrow the remainder required for the mortgage deposit.
People have also used credit cards and bank overdraft facilities for a mortgage deposit too. I spoke with a landlord who has around 1,000 tenants, and he started his property business whilst working full time and used credit cards for his mortgage deposits.
Financial markets change all the time, so something that may have been possible last year may not be possible this year. But I also believe they can be cyclical too.
For further advice on using a loan or other forms of unsecured borrowing for a mortgage deposit, you should contact a mortgage advisor. I have used www.landc.co.uk as a broker and I am happy to recommend them. They won’t charge you a fee and there’s no obligation to use any of their services.
This is a short term loan usually up to 12 months but can be more, and some lenders will provide a 100% financing for the purchase and refurbishment works of a property.
The loan is secured as a second charge to an existing asset, i.e. your home or other investment property which you control.
Bridging finance is generally more expensive than a mortgage but they are far quicker to arrange. They are often used for purchasing property at auctions, but they can also be used to fund a deposit for a mortgage too.
As bridging finance is a short term loan, you will need to plan and work towards replacing the loan with a mortgage. This can be done by adding value to the property.
If you are able to add an additional 25% to the value of the property when using bridging finance, it would mean that you could use the equity as the deposit when applying for a mortgage. Once your mortgage is approved and in place, you simply pay back the bridging finance.
Often the result of a very sad situation, but investing your inheritance will add to your legacy.
Lenders may ask for a copy of the will along with a bank statement showing when the funds were deposited into your bank. Some lenders will require you to hold the funds in your bank account for 3 months before you can apply for a mortgage.
A gifted deposit from family or friends must be exactly that – a gift. This could also be an ‘early’ inheritance.
This means that there must be no requirement for you to pay them back. Lenders will require documentation signed by both parties detailing the donors name, the relationship to the recipient and the value of the gift. They will also be required to provide a statement to confirm that there is no expectation for the recipient to make any repayments.
This practice is common for first time buyers when receiving a mortgage deposit from the bank of mum and dad.
Due to money laundering regulations and guidelines, you will need to declare where your deposit has come from. Some lenders accept sources which others decline, so it is important to declare your source of deposit from the start when approaching any lenders or mortgage brokers.
How Can I Invest In A Property Without A Deposit?
The most common way is through owner finance. This means that the property you are wanting to purchase is owned by the vendor and they do not have a mortgage or loan tied to the property.
You can make an offer on the purchase price with terms that allow you to make payments monthly (just like a mortgage payment) with the option to pay the total price at a predetermined amount in the future. This will give you time to arrange a mortgage and pay the full amount you owe to the vendor.
To learn more on this topic, I highly recommend reading Wake Up And Smell The Real Estate by Tom McKay.
He is a multi-millionaire with more than 35 years of experience with investing in real estate, and he started at the age of 19 – with no money.
How Do I Start Investing In Property?
Below is an overview of my 7 Steps To Purchasing A Buy To Let Investment Property. You can click on each link below to go directly to the specific step, or you can download my free ebook so that you have my guide with you at all times:
1. Funding – Ideas to help you get over the first stumbling block (This article)
2. Mortgage – Be well prepared by making yourself a credible buyer
3. Research – Much more exciting that the traditional type of homework
4. Viewings – Grab you FREE checklist and get focused
5. Calculations – The numbers MUST work!
6. Making Offers – Negotiation is an art
7. Letting Agents – Great for first time and armchair investors
Is Buy To Let Worth It?
Providing you carry out your due diligence when purchasing a property, and you invest for the long term and treat your investment as a business, then YES, Buy-To-Let is worth it.
Buy-To-Let is NOT a get rich quick scheme and there are a number of regulations you must adhere to. But don’t let that put you off as investing can be very rewarding, both financially and professionally.
If you feel there are things you don’t know, don’t worry! There is plenty of free education online. You will also require the assistance of several professions along the way who will also be able to answer any questions you may have.
Like all markets, the housing market will have its ups and downs. But by taking a long term approach and educating yourself with a small amount of the right knowledge, you will be able to succeed as a property investor and landlord.