Investing in property should be seen as a long-term project although there are obviously ways and means of making a short-term profit. When looking to the longer term it is important to reduce the cost of your property investment and ensure you are on a sound financial footing. Remember, savings on the cost of your property investment equate to a greater return. So, how can you reduce the cost of your property investment in the short, medium and longer term?
Reducing the mortgage term
The term of the mortgage is simply the length of the agreement over which you will pay interest and then repay the capital at the end. In a perfect world, reducing the traditional mortgage term means that you will have less time over which you need to pay interest on the capital thereby reducing your overall cost. You will obviously need to have the capital available for repayment at the end of the term and ensure that you have sufficient cash flow to cover monthly mortgage payments.
There will be occasions where you may wish to retain a traditional mortgage term or even extend it where possible. A reduction in monthly mortgage payments, over an extended period of time, may help with cash flow and even allow you to invest elsewhere creating an enhanced accumulated return. It all comes down to maximising the return on funds available.
Increasing your deposit
It really does depend upon what type of mortgage you are looking for but a deposit in the region of 30% is commonplace nowadays. You may come across situations where you can put down a reduced deposit, maybe around 20%, although this will likely lead to an increase in headline mortgage interest rates. On the flipside of the coin, if you were able to put down a greater deposit then this will reduce the risk to the lender which should be reflected in a lower headline mortgage interest rate.
In the past we have seen UK mortgage companies offering 100% mortgages (and on some occasions 120% mortgages) although they have to a certain extent been withdrawn from the UK market. These mortgages left little leeway in the event of a significant market downturn as we saw after the 2008 US mortgage crisis.
Assets under management
The mortgage market for high net worth individuals tends to revolve around the private banking sector. These are lenders which are funded in a very different manner to traditional banks and therefore operate under different regulations. They obviously need to be careful with regards to their risk profile but they do tend to be more flexible when it comes to mortgage funding. One way in which you can encourage a very attractive headline mortgage interest rate is to undertake an AUM (assets under management) arrangement.
In these situations the borrower will transfer a predetermined level of investment funds to the private bank’s asset management division. The funds will remain under management by the private bank until the mortgage has been paid off although the borrower will still receive all income from the funds. This is not only a way of adding additional security to an overall mortgage package but it also allows private banks to expand their services to new customers.
As you will see above, there are various ways of reducing the cost of mortgage funding which are very subtle but can be extremely effective. Every pound you can save on mortgage funding costs is a pound which drops into your pocket. Many people use mortgage brokers to negotiate the best deals, especially where private banks are concerned, and it is certainly worth considering.