Since the 1990s, property investment has sky-rocketed in the UK. While this was enabled by the introduction of the buy-to-let mortgage in 1996, the uptake still comes as no surprise given that property has proven to be a sturdy, reliable asset over time.

In fact, despite several recessions and global financial crashes, the growth in property values has made it one of the best-performing asset classes for investors over the last 30 years. However, there’s a higher barrier to entry with property than other assets, like stocks: the cost.

Purchasing a property requires a significant amount of capital. Many aspiring and experienced property investors face the challenge of securing the right financing to turn their investment goals into reality, especially when paying upfront in cash isn’t an option.

As a firm with extensive experience in property transactions and working on behalf of landlords, we’ve seen firsthand how the right financing strategy can unlock the potential of a property investment.

In this article, we’ll guide you through the most common ways to fund an investment property, helping you make informed decisions that align with your financial goals.

Options for investment property financing

Mortgages

Mortgages are the “go-to” choice for financing property investments. They’re familiar, they offer great leverage, and there’s a huge range of products available – from fixed-rate to interest-only mortgages, and commercial to residential mortgages.

Plus, at their core, a mortgage is simple. You put down a deposit and the lender (typically a bank) provides the rest of the finance required to complete the purchase. Then, you pay the lender back each month with interest. But, compared to a normal home mortgage, there are a few key differences to keep in mind.

The first is that you will need a larger deposit for an investment property. A buy-to-let mortgage, for example, often requires a 25% deposit, compared to just 10% for a primary residence. Second, investment properties are seen as a riskier purchase than a home. As a result, lenders will factor the added risk into their interest rates (in short, expect higher rates than standard). The increased risk also means lenders have stricter lending criteria. They will look closely at your income, credit history, and the potential income from the property. Regardless, mortgages are a fantastic option for long-term investors.

Home equity loans and remortgaging

If you already own a property, there are a couple of options to leverage the equity you’ve built up over time.

First, you might consider a home equity loan. This allows you to borrow against the equity in your current home to finance your investment property. Home equity loans often have lower interest rates than other types of loans. This is because they’re secured against your existing property. But remember, you’re putting your home at risk if you can’t keep up with repayments. So, take the time to carefully consider whether you can afford the extra debt.

Second, there’s the option of remortgaging. Remortgaging involves switching your current mortgage to a new deal, potentially with a different lender. If your home has increased in value since you bought it, this can release equity tied up in the home. For example, let’s say you own a home in London that has significantly appreciated over the years. There is £200,000 remaining on the mortgage, but the current market value is £500,000. If you refinance the property with a new mortgage of £350,000, you’ll have access to £150,000 in cash (after deducting £200,000 to pay off the old mortgage). You could then use the £150,000 to buy a property in full, or as a deposit for another mortgage.

In summary, home equity loans and remortgaging allow you to leverage the equity in your existing home to grow your property portfolio.

Bridging loans

Bridging loans are short-term financing options that can help you ‘bridge’ the gap between buying a new property and selling an existing one. These loans are typically for 12 months or less. They can be useful if you need to act quickly, such as at a property auction. Interest rates are usually higher than traditional mortgages. You’ll need a clear exit strategy, such as selling a property or refinancing with a long-term mortgage. The short-term nature of a bridging loan makes it a useful option for a buy-to-sell investment strategy (you might know this more commonly as “flipping”).

Development finance

So far, we’ve focused on financing options for investors interested in existing properties. But what if you want to take a different route, like building something from scratch?

You’ll need a loan that can cover the cost of everything, from buying land to construction. Such projects are not cheap and they’re extremely high-risk, so you won’t get a traditional mortgage. Instead, there’s development finance. As the name suggests, this is a form of funding specifically for property development. This is a complex form of financing. Not only are interest rates higher (to compensate for the additional risk), but the finance is usually released in stages. So, as the project progresses and certain milestones are reached, the lender releases more funds. Naturally, development finance is only suited to investors with plenty of property development experience and expertise.

Mezzanine finance

Mezzanine finance is a hybrid of debt and equity financing. It’s typically used in high-value property development projects, rather than for everyday investors.

Essentially, mezzanine finance “tops up” a main loan with additional finance. A bank, for example, may offer a loan worth 80% of the finance required. Mezzanine finance can then provide a further 10%, meaning the developer only needs to fund the remaining 10%. In complex, large-scale property development projects, this can be a huge boost for a developer’s cash flow.

Mezzanine finance can help you increase your returns by allowing you to take on larger projects. But it’s complex and typically only suitable for experienced investors.

Joint ventures and partnerships

Joint ventures involve teaming up with other investors or developers to finance a property project. This can help spread the risk and pool resources. You might bring different skills or assets to the partnership. For example, one partner might provide the funding while another manages the project. Clear agreements are crucial in joint ventures, so make sure you have a written contract outlining each party’s responsibilities and how profits will be shared.

Crowdfunding and peer-to-peer lending

As the modern world develops, so does financing. For example, in recent years, we’ve seen the rise of crowdfunding platforms to fund the development of everything from new video games to blockchain projects. Crowdfunding allows multiple investors to pool their money and invest in projects they’re passionate about, often in return for equity or other rewards.

Peer-to-peer lending, meanwhile, offers an alternative to traditional bank loans. P2P lending involves borrowing money directly from individual investors through an online platform, bypassing traditional financial institutions.

For property investment, this means you can obtain a loan for purchasing or developing property from multiple small investors who each contribute a portion of the total loan amount. The interest rates and terms are typically set by the platform based on your credit profile and the investment’s risk level.

Choosing the right financing option

With so many options, it can be confusing for property investors to decide on a financing option. To help, try to answer the following questions before you start comparing options:

• What are your investment goals?
  • Are you looking for long-term capital appreciation or short-term income?
  • Is your priority to build a rental portfolio, flip properties, or develop commercial projects?
• What is your current financial situation?
  • How much equity do you have in existing properties?
  • What is your credit score, and how will it affect your ability to secure financing?
  • Do you have sufficient cash reserves for a down payment, or will you need to release equity?
• What is your risk tolerance?
  • How comfortable are you with taking on debt?
  • Can you manage the financial risk if property values decline or rental income fluctuates?
  • Are you prepared for the possibility of higher interest rates or shorter loan terms?
• What is the timeline for your investment?
  • Are you looking for short-term financing (e.g., bridging loans) to quickly secure a property, or are you planning a long-term investment?
  • How soon do you need access to funds, and how quickly do you expect a return on your investment?
• How important is flexibility in your financing?
  • Do you need flexible repayment terms or the ability to refinance easily?
  • Would you benefit from the ability to make overpayments or repay the loan early without penalties?
• Do you have an exit strategy?
  • How do you plan to repay the loan or exit the investment?
  • Is your strategy viable within the terms of the financing option you’re considering?
• Have you sought professional advice?
  • Have you consulted with a financial adviser, mortgage broker, or accountant to help you navigate the options?

Once you’ve answered all of these questions, you’ll be in a much stronger position to start evaluating the best property investment finance option for you. To summarise all of the options, and give some insight into who they’re most applicable to, we’ve created this table:

Conclusion

Hopefully, you’ve found this article useful and now have a stronger idea of the different financing options available to you. But before you make any decisions, we highly recommend speaking to an expert as the best option for you will depend on your individual circumstances. 

It’s essential to carefully assess your situation in full. Consulting with an adviser can provide valuable insights tailored to your specific needs. They can ensure you get the right financing in place, allowing you to move forward confidently and make the most of your property investment opportunities.

That’s where our team can help. We work with property investors and landlords of all types, from developers of commercial properties to those just starting their property investment journey.

We support you through the entire process, from performing due diligence to securing finance. You can book a free consultation with one of the team by filling in the contact form below or calling us on 020 7299 1400.