28 Jul Raising Deposit Money for Buy to Let (BTL) Mortgages
Raising Deposit Money for Buy to Let (BTL) Mortgages
A loan from a family member is a common thing in property investment, where there is support for this from other members of the family. Although this is not something that is allowed for raising money for a deposit payment for a mortgage, it is fine to do it for a cash purchase. You can, of course, formalise the loan agreement from the family member by using a solicitor or however you like depending on your relationship with them.
You can also agree whatever you want regarding the rewards to them as long as you both agree; this might include a payment at the end when you return the money to them after selling or remortgaging the property, or by monthly interest payments.
If you want to use a family member loan for the deposit for a mortgage, then to do it properly that member of the family should also be on the mortgage. You can then refinance later to pay them off (together with any additional payment agreed) and then put the mortgage in your sole name.
One of the more common things to use to raise money short term is by using a credit card that has a money transfer capability. This is where the money can be transferred direct into your bank account. This will be paid direct into the same account that you would make the credit card payments from. Not all cards have this ability, although you only need one such card to be able to transfer all your credit card balances into your bank account.
If you have credit cards that do not have this money transfer capability, then you make a balance transfer from the card that doesn’t to one that does, then transfer the balance from there into your bank account. You can also do this by using up the credit on the money transfer card and then paying it off with a balance transfer from the other card. However, you don’t want to use up all lines of credit in case you need to use some more later. In any case, using up all your lines of credit is unwise unless you have absolutely no alternative. If this is the situation, then make this for as short a time as possible as you don’t want to operate in property being in this financial position.
Clearly, if you are to show the lender the proof of savings and it is obvious that this money has come from a credit card transfer, then that will cause problems. They don’t want to see you are funding the deposit from any form of loan. In the past, I have had credit card lending that has got mixed up with my savings, let’s say, and due to a reasonable amount of time having past, there were no questions asked. Simply showing them the bank account with the ‘savings’ in it was sufficient.
You could use credit cards to finance such things as the materials for the refurbishment work as well and this would not even require a balance transfer. However, make sure any credit card purchasing is not on a high rate. Money transfers and balance transfers are generally much cheaper than paying the interest rate on card purchase, or pay the balance off in full when payment is due.
However, some credit cards offer zero percent even on purchases for a while after first acquiring the card. In this case, it is sensible to keep the balance while it is zero percent and pay off just before it goes to the higher rate. You do this by just paying the minimum monthly amount and can set up automatic payment for this with the credit card company, this will avoid any missed payments and consequences that could have on your credit rating.
Credit card money does have to be managed carefully and you should take some advice on this. In general though, the things to watch out for is ensuring that you only use this as short term finance and that you don’t find yourself being forced on to a high rate of interest (anything above what you would normally pay for a mortgage is high as far as I am concerned). The transfers you are taking out should also ideally be zero percent transfer deals for a nearly a year or more and with a low transfer fee such as no higher than 3%.
You should be looking at having it for at least nine months before it reverts to the high rate of interest, although a much longer time would be better. You have to be comfortable that you can handle credit well for this, don’t move into this area of lending lightly. I have personally had over £60,000 on credit, this was taken as cash to use out of a total line of credit (all my card lending limits added up) of £80,000. These days my balance is much lower, although for a short period I was managing things this way to help finance property refurbishment and purchases.
However, things have changed recently that impact on being able to take this approach to the extreme, like I did. This is due to the fact that on remortgaging there is now more of a focus on your other lending liabilities. Credit card lending balances is a particular focus and mortgage lenders don’t like to see that you are using up most of your credit line.
If you did take up a significant proportion of your aggregated credit limits, this could seriously limit the range of lenders that would be willing to accept your remortgage application. Therefore, before you go down this avenue, it is worth speaking to your mortgage advisor about what you are proposing to do. You want to know from them whether your credit card lending plans would likely affect remortgaging afterwards. Let them know what what the final balances are likely to be just before the proposed remortgage, as well as your line of credit available on credit cards.
The above is, of course, assuming that you are looking to remortgage and keep the property. You might instead intend to simply sell at a profit, for which then credit card balances would not be an issue for this approach. In turn, you could then use such profits to fund further purchases. However, be mindful of tax implications in this approach and make sure you take professional tax advice as there will be a tax bill to pay for trading activity and this will likely be based on your income tax rate.
Personal loans are another thing you can use to raise a cash balance. Although sometimes you will be asked what the reason for the loan is, then it is up to the lender whether they make you the loan or not. However, property upgrade work is often seen as a safe thing to do with the money, often termed home improvements. Therefore, you could always let them know that you are to use it for a property refurbishment project!
There are other ways that money can be raised of course, but these are three methods that don’t require any input outside of yourself or your family. I think that is a good way to start until you become more accomplished, and in that case, you will get more ready access to funding from others, should you need it. The main thing is to get started, and unless you have cash waiting in the bank, you have to get a little creative, like I had to do!
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