Will a poor credit rating limit your investment potential?

THE QUESTION

I'm currently looking at purchasing a house for £70k and I have funds to purchase outright with no mortgage. I have a potential tenant ready to rent at £550 pcm returning approximately 9%

My credit rating means I can't place a deposit and get a buy-to-let mortgage, hence buying outright. I’d like to take £60k out of the £70k paid back out for future investments.

Would the banks look at me completely different having a £70k asset or will they still view me as a poor risk and refuse to lend?

THE ANSWER

If I understand you correctly, you have previously been declined for a BTL mortgage because of your poor credit history. If that is correct, owing an unencumbered property will make absolutely no difference to that. Your credit history doesn’t change because you buy a property for cash.

Mortgage lenders turn down people with poor credit histories because that history identifies them as someone who has proved less able to maintain the credit commitments they have made in the past. The lender’s logic is that such people are statistically more likely to be a problem payer in the future. Simply put, lenders don’t need the hassle of more bad payers, so they choose not to lend.

Even if you had good credit, getting £60k out of a £70k property = 85% and 85% BTL mortgages are almost non-existent. There is a point here and that is – focus on what you can do, not what you want to do, but cant.

You might want to build a portfolio of properties that you rent out, but if you cannot get mortgages, it is not a feasible strategy to follow; at least not with your name going on the mortgages.

However, you can flip or buy-to-sell.

If you buy and sell at a profit, your cash pot will build until you are able to buy a second property for cash; and then a third and so on.

There is another solution

For the property you plan to invest your £70k on, there is one type of lender that will lend to you; bridgers.

They will lend against the property you bought for cash to enable you to buy your second property; lending against that also so you don’t need any hard cash to buy your second similarly valued property. Sell that second one for a profit, increase your cash then repeat as many times as you like.

At some point, whatever is sitting on your credit file will drop off and then you will be able to get mortgages on how many properties you have accumulated at that point.

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