No deposit property purchase

There was a time when no deposit mortgages were available, but the credit crunch put paid to all that.  However, people still ask if they can purchase property without a deposit. In reality it is still possible to get 100% finance by using the house you’re buying and your unencumbered main residence or existing rental property as security to get the deposit money and refurb costs from the bridging?

I teach exactly how to do this under the Fast Funding Formula module in my Ninja Investor Programme workshops and, in essence, this is how it works.

If you own 100% of the equity in a property you can offer it as additional security to enable you to borrow 100% of the purchase price of the property you want to buy.  More than that, you can also borrow the refurb costs too.

Bridgers will lend you up to 75% of the value of your unencumbered property.

Not everyone owns a property with no mortgage on though, do they? The good news is that it is also possible when your current property has a lot of equity in it, typically 50% or more and this is a more common situation.  Then bridgers will lend on a second charge basis.

Because second charge lending is riskier for a lender than having a first charge on a property, the loan-to-value drops to a maximum of 65%, but 65% of what?  Of the value of your property, not 65% of the equity in the property.  Take a simple example to illustrate this:

Property value £200,000

Mortgage £100,000

65% of £200,000 = £130,000

So bridgers would lend a maximum of £130,000 in this instance, but the first charge mortgage lender already has £100,000 of that so that leaves £30,000 of usable equity for the purpose of a deposit on a property you want to buy.

Why would you not just get a mortgage on your property?  That’s an option, but you might not want to because:

•  The rental income the property generates means that mortgage lenders would lend you significantly less than 75%, more so since lending criteria in this respect tightened in January 2017.
•  Your personal income on your main residence mortgage may already be at what your lender considers to be maximum capacity i.e. they don’t feel you can afford to borrow more than you already have.
•  You might have already cleared a mortgage on this property after many years of paying it down and feel quite attached to its unencumbered status. You would be prepared to bridge against it for a few months, but don’t want to get tied down with another mortgage for years to come
•  You might not be very active, so committing to a year-round monthly payment, although cheaper, is less favourable than a short-term loan, even with higher interest, when you have an ongoing project.
•  Your credit may not be good enough to get the best mortgage rates, but bridgers aren’t fussed by that.

If you decide to take a second charge against your main residence, mortgage lenders will require a  provable income required to release further borrowing, but bridgers don’t take your income into account, it’s all based on the property values.

Obviously you’ll need to do your sums and ensure that there will be sufficient profitability to enable repayment of the loan so you can refinance or sell the new property and get your equity back in the property you’re using as security.

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