Property investment finance, explained

The short answer

A lender counts the rent the property is expected to produce, discounts it, adds it to your other income and assesses the whole position against every debt you hold. The deposit can come from cash, from equity, or from both.

The structure is where investors gain or lose the most, and most of that is a tax question rather than a lending one. Get your accountant involved before the loans are set up, not afterwards.

How lenders treat rental income

Rent is real income and lenders count it. They do not count all of it, because a property has vacancies, management fees, rates, insurance and maintenance to pay for.

The proportion counted varies by lender, and so does the evidence required. An existing tenancy agreement is straightforward; a rental appraisal on a property you have not bought yet is treated more cautiously by some lenders than others.

• The discount applied to gross rent, which differs from one credit policy to the next
• Whether a rental appraisal is accepted, or a signed lease is required
• How short-term and holiday letting income is treated, which is often much harder
• Whether existing investment loans are assessed at their actual rate or a higher notional one
• How negative gearing is handled in the servicing calculation, which varies

This is where lender choice earns its keep on an investment file. The same rent and the same salary can produce very different borrowing figures depending on which policy reads them.

Funding the deposit from equity

Most investors after the first purchase use equity rather than savings. Equity is the difference between what a property is worth and what you still owe on it, and lenders will let you borrow against a portion of it.

In practice that means a separate loan or split secured against the property you already own, used as the deposit and costs on the new one. The new property is then financed with its own loan.

How much equity is usable depends on the valuation and on the lender's threshold. A valuation is the lender's own, and it will not always agree with what you think the property is worth.

What changes when you own more than one

Each additional purchase is assessed against every loan you already hold, so the portfolio gets harder to grow rather than easier. That surprises people who expect the rent to carry it.

• Every existing loan is counted as a commitment, often at a rate above the one you pay
• The rent from every property is discounted, so total income grows more slowly than the debt does
• Lenders have their own limits on total exposure to one borrower
• Land tax and holding costs sit outside the loan and still have to be funded
• Which lender holds which property starts to matter, because concentration limits apply

The order in which you approach lenders becomes a real decision at this point. Using the most flexible policy on the easiest purchase leaves you with nowhere to go on the next one.

Interest only, and why investors use it

Interest only lowers the repayment during an agreed period by paying none of the balance. Investors use it for cash flow, and because interest on an investment loan is treated differently from principal.

The repayment rises when the period ends, and it rises more sharply than people expect because the same balance now has fewer years to run. Whether that is manageable is a question worth answering at the start.

Lenders apply tighter policy and generally different pricing to interest only lending. It is not automatically available, and it is assessed on the repayment after the period ends rather than during it.

Where to go next on this site

Investment lending spreads across three of our services, depending on what you are buying and how you are funding it.

The calculators below are the fastest way to test a deal before you take it further.