With homebuyers and investors rushing to beat the stamp duty holiday deadline, the mortgage market sees approvals reach the highest level since 2007. Recently released figures from the Bank of England shows the number of mortgages approved by building societies and banks for property purchases reached 105,000 in November, the highest level since August 2007 and up from 97,532 in October. Mortgage approvals have also increased tenfold since May when numbers hit a low of 9,400. However, investment mortgage rates are different from those for a primary property.
In November, households borrowed a whopping £5.7bn to secure their properties, this is the highest since March 2016 and up from £4.5bn in October. Additionally, net borrowing in November was substantially higher than the average from the six months to February 2020 at £3.9m.
House purchase approvals continue at pace
During recent months, the continued strength in mortgage borrowing follows a large number of approvals for property purchases. This shows people’s strong desire to take advantage of the stamp duty holiday.
Lenders have been under pressure as the number of property sales has continued to rise in recent months. And these numbers illustrate that the sector has been working to keep up with this strong level of demand.
The rise in mortgage approvals to these record levels almost offsets the weakness seen earlier in the year at the start of the COVID-19 pandemic. Up to November 2020, there were 715,300 house purchase approvals, close to the number for the same period in 2019 with 722,000.
Getting an investment property mortgage
There are differences between obtaining a mortgage for an investment property and for a primary residence.
While some loans allow down payments as low as 3% for a single-family primary home, if you purchase a single-family investment property, the down payment requirement could be around 15%, and minimum down payments for multifamily unit investment properties can be as high as 25%.
A lender may require a credit score of 620 or above to qualify for an investment property mortgage, and interest rates are generally higher for these loans. The loans are riskier for lenders because borrowers are considered more likely to default on an investment property if they run into financial trouble than on their primary home.
While it depends on the lender, you may also be required to have extensive cash reserves when buying an investment property. In most cases, government-backed loan programs offered by the Federal Housing Administration or the Department of Veterans Affairs aren’t an option because those loans can be used for a primary residence only.
Wherever you decide to source your investment property mortgage from, you should first shop around at multiple lenders to find the best investment mortgage rates and fees, just as you would when obtaining a mortgage for a home.
Pros and cons of buying an investment property
Maintenance is a significant cost to consider when buying an investment property. You can either hire someone to take care of the property, or you can handle things like rent collection, repairs, and snow removal yourself.
In general, you should expect to spend 1% of the property’s value each year on maintenance, but that will vary depending on factors like how many units it has, when it was built, and the condition of major systems like plumbing and electrical.
As with any property, you have to pay taxes and homeowners insurance. With utilities, you can either include them as part of the rent, charge them to the tenant each month, or ask the tenant to sign up in their name and pay the utility companies themselves.
Selma Hepp, deputy chief economist at CoreLogic, says choosing an area with a steady stream of renters is critical when buying an investment property. She says owners also need to be aware of rental laws that vary by state, as well as the potential for having to deal with delinquent tenants.
Here are some more pros and cons of buying an investment property:
- The value of your property may rise enough for you to sell and make a profit.
- You can benefit from tax deductions on your rental property, such as mortgage interest, property taxes, and expenses like advertising, repairs, and insurance.
- You can gain consistent income from long-term rentals.
- You can pay down your mortgage with rental income and build equity in the property.
- You could lose money trying to flip or rent the property.
- Mortgage requirements may include higher down payments and interest rates than you would see for a primary residence.
- Real estate isn’t a liquid asset, so if you need cash, selling the property could be time-consuming and complicated.
- You have to hire a property manager or manage the property yourself.
What makes a good investment property?
When evaluating the profit potential of an investment property, you should consider a number of factors, starting with how much the property could reasonably be put up for rent for. One formula, called the 2% rule, indicates that the total monthly rent should equal at least 2% of the total purchase price plus needed repairs.
Kathy Fettke, co-founder and co-CEO of RealWealth Network, says before buying an investment property, investors should look for a combination of four things: affordability, appreciation and a location with both job growth and population growth.
I like to see that the value of the property increases over time, and that generally happens in areas where there is infrastructure growth, she says.
If you have healthy cash flow from a number of rental properties, Fettke says, it can help fund your retirement. But, she stresses, not all investment properties are the same.
I can buy the house next door to the house you buy and it could have a completely different everything — a different foundation, it could have problems, it could not have a view, Fettke says. Every single property has to be analysed from head to toe or you can end up with massive expenses you didn’t know you might have.
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