Investment mortgage guide for property investments in the UK, Jersey, Guernsey and Gibraltar

by Barclays Wealth International on November 18, 2010

Investment mortgage guide | Mortgages for property investment

What this investment mortgage guide covers

This guide will introduce you to two types of investment mortgage:

  • A buy-to-let mortgage. This is necessary if you want to buy a property in the UK as an investment with the intention of renting it out to other people.
  • An international investment mortgage. This is for UK citizens looking to buy investment property or a second home in the UK, Jersey, Guernsey and Gibraltar.

We also have guides on offshore and currency mortgages.

Will you be able to get an investment mortgage?

These are some of the questions you will need to ask yourself:

Can I raise a big enough deposit?

The deposit required for an investment mortgage is generally higher than that required for a residential mortgage. Generally speaking you will need to be able to raise a deposit of at least 40%, though this may be higher depending on your circumstances.

Will the rental income of the property be sufficient?

The rental income likely to be generated by the property (verified by an independent source such as a surveyor) will need to be around 125% to 135% of the monthly interest on the mortgage. This allows for times when the property is not occupied and earning money.

The buying process

The speed at which a property sale takes place can be vastly different from country to country. Be prepared for the unexpected. Make sure that your proposed use of the property is legally and culturally acceptable. Find out from people local to the area in which you are buying, what the processes and protocols are when buying an investment property.

Important information about investment mortgages

When buying an investment property there are some important points to keep in mind:

Surveys

Find out what surveys you need to conduct in order to assess the value of the property and its structural soundness. For example, the mortgage lender will probably require a survey confirming the value of the property and the likely rental income that it will obtain.

Searches

It is essential to ensure that the seller is the legal owner of the property, and a legal search will confirm this. Local or national government registries also should be checked to make sure that there are no pending developments that would harm the value of the property e.g. a new motorway being built next to the property.

Fees

Each professional party involved in the transaction will charge a fee for their expertise and time. These include the real estate agent (in most cases their fees will be charged only to the seller of the property), the lawyer, the surveyor, and the lender. How much these fees add up to depends on the value of the property, the depth of surveying and research work, and the rules and regulations of the country in which you are buying.

Taxes

Inevitably there will be taxes to pay including:

  • Buying taxes. Such as Stamp Duty Land Tax in the UK
  • Capital Gains Tax. The taxation on any increase in value of the property when it is sold
  • Earnings taxes. As an investment, your property if chosen well, should earn you a profit. This could be subject to personal income or business earnings taxes.

The amount you pay in tax will vary considerably according to the country in which you are buying and your own personal circumstances. So it is essential that you seek independent professional guidance on this issue.

Local regulations

Building and investment regulations can present a serious hazard to the would-be international property investor.

Make sure you are fully aware of all rules and regulations that may apply to the structure and proposed use of the property in which you are planning to invest. Getting this wrong could cost a great deal of time and money.

Insurance

Two types of insurance that you will need to consider in any country are insurance for the building structure itself, and insurance of the possessions and valuables contained within it. If your investment property is intended to be rented out then you may only want to cover your own items e.g. washing machine, fridge and cooker.

You may also need to consider other forms of insurance such as landlord liability and vacant cover.

What investment mortgage options are available?

Once you’ve established that you can get an investment or buy-to-let mortgage, you need to decide what structure of mortgage you would like.

Fixed rate

A fixed rate mortgage is one in which, for the first two to ten years, the interest rate charged does not change. So even if other interest rates move up and down the interest on this mortgage stays the same during the fixed rate period.

At the end of the fixed rate period the mortgage will probably be subject to the lender’s standard variable rate (see below). This change from fixed to standard variable rate (SVR) can bring about an increase in monthly payments, so borrowers need to be prepared.

Standard variable rate

The SVR is the lender’s ordinary, no frills interest rate, charged on mortgages. It is usually a few percentage points higher than the Bank of England base rate of interest.

So if the Bank of England puts its base rate of interest up by 0.5% then most lenders’ SVRs will also increase by 0.5%. However, unlike a tracker mortgage, lenders are not obliged to change the interest rate.

It’s also worth noting that at the end of a fixed period, mortgages such as fixed-rate or discount will often become SVR mortgages.

Tracker mortgage

Like an SVR, a tracker mortgage is a variable rate mortgage that is usually based on the Bank of England base rate. Unlike an SVR, the interest rate on a tracker is obliged to follow movements on the interest rate it tracks.

A tracker may have more flexibility such as allowing the borrower to vary the amount they pay each month. This flexibility is usually brought about by the absence of early repayment charges (ERCs).

ERCs are put in place to discourage borrowers from leaving special offer mortgages before the term is complete. The reason for this is that in exchange for the preferential arrangement, the borrower must commit to a minimum period of payments.

Foreign currency mortgage

If someone is buying a property in a different currency from that in which they are being paid, then a foreign currency mortgage can be a convenient way of avoiding costs incurred by exchange rate movements.

For example, you might be paid in Japanese yen but have bought a house in the UK with a mortgage in pounds sterling. If the value of the yen subsequently declines, then your monthly mortgage payments will increase.

By taking out the mortgage in yen, the amount that you owe and pay does not change relative to what you earn, regardless of any sterling-yen exchange rate changes.

Offshore mortgage

This is designed primarily for financial efficiency making use of existing banking accounts outside the UK. Under current UK tax law, an offshore mortgage has no tax benefits from having an onshore mortgage.

Whenever tax planning and efficiency are involved, it is imperative that you seek independent professional advice on your own financial circumstances.

For more information or to apply

To apply or find out more information, speak to a Barclays Wealth International Mortgage Adviser. They specialise in providing investment and residential mortgages for property purchases in the UK, Jersey, Guernsey, Isle of Man and Gibraltar.

Call us on +44 (0)1624 684305

Visit the Barclays Wealth International website.

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If your loan is denominated in a currency other than sterling CHANGES IN THE EXCHANGE RATE MAY INCREASE THE STERLING EQUIVALENT OF YOUR DEBT.

Terms and conditions apply to all mortgage products. We strongly recommend that you obtain your own independent tax advice before proceeding with an offshore mortgage.

Barclays Wealth will require a first charge over the property.

Barclays Wealth is a responsible lender and when considering your application for borrowing, your financial circumstances will be appraised. Remember should you run into difficulties please contact us immediately.

In all forms of advertising and marketing material where repayments are quoted, we will show clearly a typical Annual Percentage Rate (APR). We will also clearly indicate in all lending-related advertising issued in Jersey that we abide by the Code of Practice for Consumer Lending.

Lines are open 7am to 8pm weekdays and 8am to 5pm weekends and UK bank holidays, local time. Call charges may vary. Please check with your local telecoms provider. Calls may be recorded for training and security purposes.

The products and services described on this page are provided by the following companies, which are part of Barclays Wealth: Barclays Bank PLC in England and Wales, Barclays Private Clients International (Gibraltar) Limited in Gibraltar and Barclays Private Clients International Limited in the Isle of Man, Jersey and Guernsey. For further information on these companies and Barclays Wealth please read the Important Information.

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