Photo by ELM Property

This month, we’re talking deposits! I want to run through the options you have from a lender’s perspective but firstly, I need to update you on what lenders are asking for on deposits.

The money laundering regulations are tightening, and we are seeing lenders and solicitors asking for more information on deposit funds. So my top tips would be:

• Keep your banking simple. Don’t move money around for the sake of it and try and make as small a number of transfers between accounts as you can so we have a clear trail of funds.
• Label transfers where you can and there are many moving around.
• Keep documents like completion statements from lenders as it’s likely you’ll need to provide them.
• If you’re using a private investor then explain that we will probably need their bank statement and explanation of their source of their wealth. You need to set the expectations early so there’s no issues later on.
• Make sure you have enough funds to cover the deposit, refurbishment and all associated costs (stamp duty, legals etc) as the lender will want it all. 

In this current market, we really have a big split in the situation of our clients. On one hand, we seem to have plenty with cash available to purchase property and then refinance once works are completed. On the other, however, we have so many people trying to get into the property market but struggling to find the deposit funds.

Before I get to the options, one thing that comes up often is how much money you need to prove and whether credit cards can be used.

You need to be able to show the lender where the deposit is coming from (and it needs to be in your bank account!), as well as any refurbishment costs. This will need to match your schedule of works, and a valuer needs to agree that they schedule and cost match the works needed in the property. For example, if there’s clear evidence of damp then the solution needs to be covered off in your schedule.

 

How can you use credit cards within this? 

I hear property mentors often speak about using credit cards to pay for refurbishments so that you can refinance and pay it back without putting your own money in but to be honest it doesn’t always work that way! Lenders will want to know that you have the funds to carry out the refurbishment – if you’re not able to finish it then they will be the ones left with it and that’s not what they want! 

As with lots of things though, it does come down to your whole situation. If you’ve done it a few times before and got off your bridge successfully then they are more likely to be more flexible with where your money is coming from and we may be able to agree it. Also, if you have a large outside income (either from your property portfolio or other job) then the lender may be more flexible.

Here’s some ideas for where your funds can come from 

Savings 

This is the easiest one, but often the one that gets used up first! If you’re serious about getting into property then you really do need to think about how you can save money from your day to day expenses to creat funds for it. Especially for your first project when the lender wants to see you’re using your own funds. Look at a budget planner, find a savings account that encourages monthly savings and go from there. There may be some sacrifices that need to be made!! 

Refinance of your residential or other property.

Refinancing your residential property can be seen as risky by some, but you are moving the equity from one property to another. The advantage of refinancing rather than using your property as a second charge is that the affordability is kept separable, and there isn’t the pressure to pay off the loan as part of the refinance.  Interest rates are generally lower on your residential home too.

Remember that your home may be at risk if you do not keep up repayments on it, so consider the additional risks.  Look at the overall picture. It’s an idea to explore though.

Gifts

Often when investors are looking for investor funds, family and friends are first on the list. It’s an easier sell, but comes with more pressure! Gifts from family are easier to use for your first few projects (before you build up some experience) and it counts as your own money.

Joint venture 

This is an alternative where you are relying on the experience of someone else. It means your JV partner has more security over their funds and equally you have more support on the project. You are able to split the shareholding to reflect the funds and experience of all applicants too, so it’s flexible. 

One thing to remember is that generally all applicants to the mortgage will need to sign a personal guarantee to be jointly and severally responsible for the loan, so ensure that your JV partner is happy with that set up.

Company loans 

Something we are seeing more of, is where clients have a (non-property) company which is profitable and they want to use these funds to put into property. It is a tax efficient way of doing things, but ensure to check with your accountant. Most lenders will allow you to use company loans as long as they are interest bearing. 

Private investment 

Once you’ve built up a track record of projects – usually one or two similar sized projects – you can move on to using other people’s funds!  

Loans are an option where you run out of your own money, when you factor in the overall costs. Most lenders will now be able to use investor loans where there is a loan agreement in place and no charge on the security property. There needs to be a clear repayment method and any interest payments need to be taken into account so bear that in mind.

We are seeing that lenders need more due diligence for the investor funds, so bear that in mind when you speak to potential investors. Ensure they are happy providing bank statements or proof of where the funds have come before you enter into an agreement. And be upfront with your broker about where money is coming from so they can check before you start that it’s acceptable – some lenders aren’t happy with any funds coming from certain countries for example. 

With the right strategy you will be able to recycle some of your funds, so you’re not starting from scratch with each project – although ‘no money left’ deals are hard to come across at the moment! 

As always, let us know if you want to run anything past us! 

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.