Check your mort­gage rate be­fore you buy to let

Weekend Argus (Saturday Edition) - - PROPERTY -

WHEN you buy a prop­erty with the in­ten­tion of let­ting it and even­tu­ally earn­ing an in­come from it, the banks will most likely only ap­prove the home loan you need at a higher rate of in­ter­est than you qual­i­fied for on your pri­mary res­i­dence.

In ad­di­tion, they may re­quire you to put down 20 or 25 per­cent of the pur­chase prices as a de­posit be­fore they will con­sider fi­nanc­ing the deal at all, says Shaun Rade­meyer, chief ex­ec­u­tive of mort­gage orig­i­na­tor Bet­terLife Home Loans.

“Many home­own­ers who are plan­ning to buy a sec­ond prop­erty as an in­vest­ment – or even just to rent out un­til they re­tire – make the as­sump­tion that be­cause they are al­ready a ‘known quan­tity’ with a good track record of home loan re­pay­ment, they will be able to se­cure a home loan for this pur­chase on the same terms as the loan granted to buy their cur­rent res­i­dence.

“How­ever, even if the sec­ond prop­erty is in an area that the lender also con­sid­ers a good risk, they will usu­ally be of­fered a higher in­ter­est rate, and very of­ten asked for a sub­stan­tial de­posit.”

And they should not be of­fended, he says, be­cause this ac­tu­ally has noth­ing to do with their credit record or pre­vi­ous be­hav­iour as a bor­rower.

“The banks are well aware af­ter years of ex­pe­ri­ence that if borrowers ever run into fi­nan­cial dif­fi­cul­ties they are much more likely to de­fault on the loan used to buy an in­vest­ment prop­erty or a hol­i­day home than on the loan used to fund the roof over their heads.

“In fact, this hap­pened en masse dur­ing the 2008/09 re­ces­sion, and the prop­erty mar­kets in many coastal towns are still re­cov­er­ing from the glut of re­pos­sessed hol­i­day homes and flats.”

In short, says Rade­meyer, in­vest­ment prop­erty or sec­ond home pur­chases rep­re­sent more risk for the lender – and more risk will al­ways be off­set with higher rates, or more col­lat­eral, or both.

“What is more, if the bank thinks the re­pay­ments on the home loan used to fi­nance the in­vest­ment prop­erty will be heav­ily de­pen­dent on rental in­come from that prop­erty, the in­ter­est rate quoted might be even higher.

“Con­se­quently, if you want to ne­go­ti­ate a lower rate on a buy-to­let pur­chase or your re­tire­ment home, your best bet is to be able to show that you can com­fort­ably af­ford the re­pay­ments on the new prop­erty in ad­di­tion to your cur­rent com­mit­ments – and ir­re­spec­tive of whether you re­ceive rental in­come or not.”

And that is prob­a­bly a pru­dent pro­vi­sion to make any­way, as is the pay­ment of the big­gest de­posit you can af­ford, be­cause it means that you will be less at risk if a ten­ant de­faults or if in­ter­est rates rise as they are do­ing at present.

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