Last updated 22:11, Tuesday, 26 August 2008

In a market of falling property prices landlords may be thinking this is an opportunity to bag a bargain. If you’re contemplating becoming a landlord for the first time you may also be wondering if this is the ideal moment to get on the ladder.

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So, how do you go about investing in property and what are your options?

For an experienced landlord there may well be equity available in your existing properties or personal money to fund a deposit.

Arranging a straightforward buy-to-let mortgage to be raised on the property in question should prove simple assuming the achievable rental is sufficient to cover the mortgage payments, plus a given percentage.

For any potential first time landlord the situation can be much more open in terms of raising funds for the purchase.

If there are deposit funds available then the preferred method for the investor may well be the same buy-to-let option described above.

The current lending market means the number of lenders with products for first time landlords is reducing, and you may need a sizeable deposit.

If you have a mortgage-free main residence you could consider raising your loan against your home.

The benefits of raising a residential mortgage on your own property over a buy-to-let mortgage are very clear:

Firstly, assuming the value of the main residence is sufficient, 100% of the funds needed to purchase an investment property could be raised – meaning you need not disturb other investments you may have or be forced to use all your cash assets.

Secondly, it avoids the need for any form of rental cover over and above the mortgage payments.

This can be a very big issue with a buy-to-let mortgage as it will restrict the maximum lending amount and is usually down to the opinion of the valuer of the property.

Thirdly, residential mortgage rates are usually more competitive than buy-to-let rates, meaning a lower monthly mortgage payment.

Finally, it provides total control and freedom for the property investor to use the property as they wish, without having to conform to the lender’s requirements – for example, many buy-to-let mortgage providers will not allow renting to family members, or multi-occupancy, like student lets.

One important disadvantage of raising 100% of the purchase price against your own home is the threat of negative equity.

If the value of your rental property falls, you’ll still owe the full amount of the loan and the charge is over your own home.

You can still offset mortgage interest against rental income on the buy-to-let property when using your own property to raise the finance – the funds can be allocated to the investment property via a tax return.

You’ll need proof that the funds were indeed used in this way to support the claim – the mortgage completion statement should provide this evidence.

For certain investors who are comfortable using their own residence in this way there is also the potential added benefit of using an offset mortgage to raise the funds.

An offset mortgage allows one (or sometimes more) current account or savings accounts to be opened alongside the mortgage account.

This account can then be used by the investor to collect the rental payments from tenants.

These rental payments can then be offset against the mortgage balance to reduce the amount you owe.

For example, if you raise an interest only offset mortgage of £100,000 against your own property and purchase a rental property with the funds, then collect monthly rent of £500 into an offset account, this is the situation with the mortgage at the start, and after an eight year period has elapsed:

Start £100,000 mortgage balance = £550.58 pm payment *

After 8 years £87,369 mortgage balance = £511.25 pm payment *

This is assuming an interest rate of 6.54% and an interest only mortgage over 20 years. Source: Intelligent Finance Offset Calculator.

During the life of this type of mortgage, you will always have instant access to the funds held in an offset account, especially helpful in this scenario to fund possible maintenance on the property to ensure your obligations as a landlord are met.

Compared to a regular buy-to-let mortgage where, after eight years, the outstanding balance will still be £100,000 (plus any fees which may have been added to the loan) and the interest payment will remain the same, you can begin to see how an offset mortgage can benefit the first time landlord.

If you choose to raise funds this way always remember to have a full survey carried out on the investment property and to arrange landlord property insurance. As with all aspects of finance raising using property as security for a loan, it is imperative that you seek professional, independent advice and guidance, as everyone’s circumstances and goals are unique and should be assessed on this basis.

*Your home may be repossessed if you do not keep up repayments on your mortgage payments.

n For more information on buying to let call freephone 0800 195 2161 or email moneymatters@armstrongwatson.co.uk