Should real estate investors seek retail or private lenders?
Private lenders or conventional banking: who’s best for buy-to-let borrowers?
The recent budget update and changes to the regulatory framework that controls the buy-to-let market is making property investment more complex and harder to gain a foothold on. As a result, many investors are seeking alternative finance options.
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We all know that buying property as an investment is a sound idea. The benefits of doing so are numerous, not least of which is the fact that you will be able to earn a monthly income while also getting the benefit of market appreciation over the longer term. However, one question that more and more existing and prospective landlords are asking is, “Should I be borrowing from a conventional high street bank or building society, or am I better off looking into the offers available from private lenders?”.
This is a great question, and it’s not one that is easily answered as there are so many pros and cons involved with both types, and it’s all about making an informed decision based upon your own individual circumstances. However, there are some clear benefits to making use of private lenders rather than opting for traditional high street banks and building societies that are often bound by their banking procedures.
Advantages of private lender mortgages
One of the key benefits from opting for a buy-to-let mortgage from a private lender is their availability. Private banks, unlike conventional banks, have more flexibility in the breadth of products that they can offer. This means that if you are struggling to qualify for a mortgage from a high street bank or building society because you have a complex income or do not meet the affordability criteria, you may still be able to find a private lender willing to accommodate you.
This is largely because a private bank will generally take a much more pragmatic approach to lending. They may have more scope to explore the details of your circumstances, including your income and assets and liabilities, to find a solution tailored to you. Private Banks may take a view on a single incident of bad credit or default, if you can explain the circumstances. Retail lenders have less discretion and are governed more by credit scores.
What are private banks good for?
Private banks can be attractive to those borrowing against high value buy-to-let properties. The mortgage options available on the high street for loans of over £1million against a single buy-to-let property are very limited. For private banks the sky being the limit when it comes to loan sizes. If you have a high earned income, a private bank may be able to take into account your surplus earned income to cover any rental income shortfall. You might also be able to place some interest cover on the deposit to mitigate against rental shortfalls. Retail lenders are not able to be as flexible.
Private bank mortgages over £1million will usually be available at a cheaper lending margin than those offered by retail lenders. They can be more flexible with their underwriting if you are open to a wider banking relationship, and if you have some liquid assets that you could place with the bank, for them to manage.
As we mentioned at the top of the article, the decision really is a personal one. However, the advantages to opting for a private lender are clear, especially if you are looking to build your property portfolio’s value fast.