Key Features of an Investment Mortgage
Essentially, an investment mortgage is no different from any other mortgage; it is a loan taken out in order to finance a property purchase. The property itself is taken as security against the loan, so if the mortgage holder defaults, the lender can take control of the property and sell it in order to recover their loan.
Investment mortgages, do, however, work in a slightly different way compared with traditional residential mortgages. These key factors should be taken into account when comparing the features offered by different providers.
Amount of Borrowing
With a traditional residential mortgage, the amount of borrowing permitted is determined based on the income of the mortgage holder or holders. This is normally anything between 3 to 5 times the annual salary of the holders and it is expected that employment income will be used in order to repay the mortgage. Although the lender will take pay slight attention to the property, the attention will only extend to the point of ensuring that the value of the loan could be recovered if the property had to be repossessed.
With an investment mortgage, the calculations are totally different. The bottom line is that the lender does not care about the employment income of the holder and is only interested in the income that can be derived from the property itself. As a general rule, lenders will expect the property to be able to generate a monthly income that is 130 percent of the monthly mortgage payments, although some lenders may offer less stringent requirements. As the lending is dependent on the income that can be derived from the property, expect the lender to take a much greater interest in the rental and housing market in the locality. It may even be necessary to produce your own business plan showing that you have considered all of the additional costs and potential market fluctuations.
Deposits with investment mortgages are also normally much higher than the deposits required for traditional residential property. As a rough guideline, an investor will be expected to produce a deposit of around 20 percent of the asking price, although this may vary with different lenders.
An investment mortgage will often allow an investor to expand their portfolio within the same terms of the mortgage by offering a flexible loan that can be extended to multiple properties. This is hugely advantageous for investors who want to be able to predict the costs of expanding their portfolios, accurately, or who want to have the facility to expand quickly if the need arises.
In essence, investment mortgages are similar to traditional residential mortgages;
the amount of borrowing is calculated based on the income from the property and not on the income from the employment of the mortgage holder; and
other differences include the need for a larger deposit and the flexibility to add more properties to the portfolio.