Investment mortgage is the generic term used for any mortgage that is obtained for the purpose of buying an investment property.

This could be anything from a buy to let flat to a portfolio of ten or more commercial units. Investment mortgages are treated very differently from standard residential mortgages and understanding the key features and implications is one of the first things that any potential property investor should do.

What do Investment Mortgages Cover

An investment mortgage can cover all types of potential property investment. This type of mortgage offers a range of services that would not be needed for a traditional residential property. In particular, investment mortgages are useful for commercial properties or a large portfolio that would simply not be covered by a standard mortgage.

How are Investment Mortgages Repaid

Unlike a traditional residential mortgage, the lender is interested in the income that the property will generate in order to repay the loan. With a traditional residential mortgage, the lender is interested in the employment income of the borrower and not the income or the portfolio of the property.

Anyone looking to obtain an investment mortgage will have to convince the lender that their investment is going to produce a suitable income, in order to repay the mortgage. Consequently, the lender will pay much more attention to the market potential of the property than they would with a standard residential property.

Because of this different way of financing, there is technically no limit to the number of investment mortgages that one individual can hold. Provided the next investment property is viable and offers a suitable return, the lender is likely to put up the necessary cash without due concern to the amount of other mortgages that the investor may also have.

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Investment Mortgages for Commercial Property

Investors are beginning to realise that in order to minimise their exposure to risk through the property market, it is necessary to hold a varied and mixed portfolio. As part of this hedging behaviour, commercial property is being added to existing portfolios as a way of cashing in on the currently very high rental yields of around 15 percent a year.

Financing a commercial deal requires a slightly different approach to financing a standard buy to let and additional research is required in order to add this type of property to your portfolio.

Commercial Property Idiosyncrasies

Commercial property, by its very nature, is highly dependent on the economy and the commercial factors that drive the market that the commercial property in question services. This means that when the economy in that particular market sector is booming, returns for landlords will be significantly higher than in most residential buy to let investments. On the other hand, if the economy goes into decline, the returns will be much poorer than with a residential let.

Commercial leases also extend for longer periods than traditional residential leases which are typically for 6 to 12 months. Although the days of the 125 lease have all but disappeared, it is still common place to find commercial leases running for 25 years, which understandably requires an entirely different style of management. With a long lease (or at least a lease of more than 7 years) on a commercial property, the tenant will be responsible for a large amount of the repairs and maintenance of the structure and external features of the property, which can have a significant impact on the bottom line of the project.

Commercial Investment Mortgages

In terms of actual process, there is very little difference between a standard residential investment mortgage and a commercial mortgage, the application will take the same format and broadly the same criteria will be applied in order for the lender to decide whether your investment fits in with their criteria.

Bear in mind that you are entering a commercial market and, in effect, speculating on the likelihood of success of that particular market. For example, if you are purchasing hotel premises, you are stating that you believe the hospitality industry is likely to continue booming and you will, therefore, be able to achieve a substantial rent. In order to convince your lender, it is likely that you will have to produce a detailed business plan showing the projected future of your chosen project. For this reason, it pays to select a market of which you have at least some knowledge.

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Investment Mortgages for Overseas Property

For many investors, the returns are perceived to be much greater by investing in up and coming countries abroad than they are by investing in the UK. House prices in the UK are arguably at an all time high, which for some investors is off-putting as they feel that a crash or at least a slight decline in prices is likely, in the near future.

Even those without fears for the stability of the UK housing market are often tempted to look at investing in overseas countries that offer a different set of parameters from UK investments. For example, Eastern Europe is currently seen as an area that is full of opportunity for investors, with low priced property offering good rental returns and excellent potential for future capital growth.

Bearing this in mind, obtaining investment mortgages specifically to invest abroad is no longer a new concept and is becoming an increasingly popular option for investors both new and old.

Investment Mortgage Options for Overseas Property

Broadly speaking, there are three options available for an investor looking to secure finance for an overseas property:

Option one is simply an equity release scheme, whereby any equity that has built up in a UK property is released to allow the overseas property to be purchased for cash.

The second option is becoming increasingly available and is often seen as the preferred option by investors. Obtaining the required mortgage, in the UK, is a lot easier for many investors as they are resident in the UK and can, therefore, better manage the process. There is also an added sense of security as investors understand both the language and the formalities involved. However, there are limits to the countries that are covered by these types of mortgages. For a mortgage lender, it is important that they can take possession of the property if the borrower were to default on their payments. For this reason, many lenders will not forward financing for properties outside the EU and are very restricted even within the EU.

Obtaining a foreign investment mortgage is an alternative option for overseas investors, but caution is required. Remember, every country has its own rules when it comes to mortgages. Therefore, local independent advice and accurate translations of documents are essential extra costs that must be included in budget calculations.

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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

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.

Other Features

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.

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