The Future of No Money Down

Posted by Ishbir Rakhra on 27th August 2013

London Skyline

Many property investors believe that “no money down” (NMD) techniques are no longer valid in theUKproperty market and never will be again. However, this is not entirely true. The future of NMD lies in adjusted tactics that will still work as part of a well-considered investment strategy for the foreseeable future.

Two of the fundamental pillars of pure NMD have been effectively destroyed in theUK. It’s now almost impossible to find an instant remortgage from any major lender – in no small part thanks to the wild, unregulated lending used to fund NMD in the recent past – and most have also stopped offering 100% remortgages, capping at around 80% of the property value. 

So how can NMD survive without those pillars to support it? The future of NMD lies in what could be called “impure” NMD tactics or “low money down.” 

As the latter name suggests, the new technique is not to aim for a property investment where absolutely all the invested money is extracted as soon as possible. Instead, the target is an investment where most of the capital is recouped in a longer period of time. 

To achieve this, the property is bought in the usual NMD fashion: the initial investment and fees are covered by individual financial resources then the property is remortgaged. However, the subtle changes are significant. For starters, the remortgaged value is limited to the lender’s cap (around 80% as mentioned above), so some of the initial investment remains in the property. Secondly, the remortgage is delayed for at least six months – a period demanded by most popular lenders to ensure stability. 

While this approach limits the number of properties that can be purchased with a specific amount of investment capital, since the cost per property is higher than pure NMD, it also provides a certain amount of intrinsic stability. The capital left in the property gives a better buffer in an economic downturn, both in equity and cash flow, and the six-month delay gives the investor time to recoup some of the initial cost in rental income. 

An alternative method is to use other people’s money for the initial investment and pay back the loan with funds from monthly rental income and remortgaging after at least six months. This reduces the amount of personal investment in the purchase, although pure NMD is still not achieved. 

When it comes to reducing the risks involved in purchasing multiple properties, new “low money down” tactics are very effective. Leaving some capital in each property slows down portfolio growth and thus makes it more manageable in times of economic flux. The equity and cash flow buffers give more flexibility to an investor who needs to sell in a sudden downturn to reduce their portfolio size.

Additionally, investors can reduce their risk even further by delaying the remortgaging period. By waiting a year or even longer, they have time to generate extra capital from rental income and the property has time to rise in value, thus increasing equity.

The future of pure NMD may have been devastated by changes in lenders’ attitudes and regulations, but those same changes have made intelligent portfolio building a safer, more assured method of capital investment. The key, as always, lies in measuring the risk against the returns and working within the bounds of a well-considered strategy.