8 Alternative Ways to Finance a Property Purchase

Financing a property purchase allows buyers to increase their purchasing power. A buyer who does not meet the standard profile for a traditional mortgage may have an easier time qualifying for financing through alternative means, though a buyer's eligibility for most financing methods is dependent to some extent on their income and credit history no matter the method chosen. These alternatives to a traditional mortgage may offer buyers additional flexibility.

Purchasing through HomeBuy

HomeBuy is administered through the Homes and Communities Agency, and offers multiple schemes for property financing. All of the schemes work on the basis of the buyer purchasing a percentage or "share" of the property, usually with government or developer financing, and either renting or mortgaging the remaining shares. Most of these schemes allow "staircasing", where the buyer purchases additional shares of the property through lump sums as they can afford it.

Investor Shared Equity

Investor shared equity is a form of shared ownership between the buyer, one or more investors, and a mortgage lender. To take advantage of investor shared equity, a buyer must have at least a 5% deposit (also read about the impact of pool fencing on property values here). The investor(s) funds the remainder of a traditional deposit up to 40%, and takes a corresponding share of the equity in the property. The buyer arranges financing through a mortgage for the rest.

Typically in this arrangement, the buyer will pay a set amount of rent to the investor for a period of five to ten years. After the agreed-upon period, the buyer is expected to "buy out" the investor's share of the property in a lump sum. Buyers may either do this by putting aside savings throughout the time period or by re-financing their existing mortgage. Since the buyer is paying rent as well as a mortgage, it may seem that this would be more expensive. In practice, the rent is correspondent to an interest rate on the investor's equity share, and the mortgage payments are much less than they would have been if the buyer had only put 10 or 15% down as a deposit.

Joint Mortgages / Joint Equity

Joint mortgages, also called joint equity, are a mortgage taken out between two or more people. Since lenders rarely agree to mortgage a property that has an existing primary mortgage, this relationship is usually a co-signed mortgage between two people on the property. Joint mortgages usually take place between relatives or friends who have a trusting relationship, since the responsibilities of mortgage payments, taxes, and upkeep on the property are shared jointly and equally.

If one of the joint owners fails to pay their share, it falls to the other owner(s) to pay the difference, since all owners are equally legally responsible. Joint mortgages are a benefit for individuals who either do not have enough income or a strong enough credit history to qualify for a mortgage on their own, yet have the means to pay for a mortgage and related expenses each month.

Buy-to-Let Mortgages

Buy-to-let mortgages are specifically for properties that are being purchased in order to let to the public. With a buy-to-let mortgage, would-be property owners are usually able to put down a lower than average deposit, as little as 5 to 10%, as the lending company that approves a mortgage on the property will have examined its suitability as a rental. First time landlords may be required to place their primary residence as additional collateral.

Interest Only Mortgages

Interest only mortgages are mortgages on which the buyer only pays the interest due during the mortgage term. At the end of the term, the buyer must pay off the principal of the loan in full. Interest only mortgages have been accused of being one of the reasons for the real estate market collapse, so lending standards for these products are now strict. Since there is little possibility of early repayment, buyers may not see much of a benefit from this type of financing; it is usually only best for those who anticipate staying in a property for less than five years and selling the property for at least the original purchase price.

Pension Mortgages

Pension mortgages are another type of interest-only mortgage, except that the term ends at the buyer's retirement. Pension mortgages are only available to those who will receive a lump sum payment from a personal pension plan upon retirement. In many cases the mortgage lender and the buyer work with the pension plan to assure direct payment of the lump sum from the plan to the lender upon distribution.

Endowment Mortgages

Endowment mortgages follow the same theory as a pension mortgage, except instead of the lump sum being drawn from a pension plan, it is drawn from an endowment life insurance product at the end of the life insurance term. This type of loan assumes that the individual has an endowment insurance policy, and also assumes that the investments in that endowment will perform well enough to pay out at the end of the term. It does not assume that the pay out will be due to the individual's passing. Once popular, these types of loans are no longer seen often.

Flexible Mortgage

For those who can qualify, a flexible mortgage has the benefits of a traditional mortgage while mitigating some of the drawbacks. Flexible mortgages allow the buyer to make overpayments without penalty, and overpayments made may offset future underpayments. Certain flexible mortgages also allow payment holidays. There are rarely fees assessed for early repayment with a flexible mortgage, and most have a fixed interest rate.

In order to qualify for alternative financing, it's important that any potential property buyer do their best to present themselves as an acceptable credit risk. No matter which financing options are pursued, always note any extenuating factors that might improve the chances of a loan being approved in the loan documents; circumstances such as a strong investment portfolio or considerable savings can help overcome other possible negatives such as a short credit history.