In order to finance a property investment, the investor must determine how much their personal contribution will be, and choose between a mortgage (using the property as collateral) and a secured loan (using a securities portfolio as collateral). Etienne Planchard, Member of the Management Committee and Head of Loans and Credit, gives his perspective.
How much should the personal contribution be?
As a general rule for buy-to-let investments, 70% is considered the maximum for financing, so the personal contribution should be around 30%. This minimum contribution is particularly important since the expected rent usually cannot cover more than 60% of the investment. This recommendation is also being applied more and more strictly by the regulatory authorities in order to protect the borrower.
Collateral: mortgage or secured loan?
A property investment is usually financed by a mortgage, using the object of the investment as security. The term of the mortgage is generally 20 years for a rental property.
For investors who have a securities portfolio and want to ensure continuing returns while diversifying their investments, using the portfolio as collateral (i.e. a secured loan) offers an interesting alternative in many respects.
What are the advantages of a secured loan?
If the credit value of the porfolio is high enough, a secured loan offers:
- The possibility of 100% financing
- Exemption from mortgage registration fees (0.29%)
- Access to better interest rates, as the Bank has a more solid guarantee with the portfolio as collateral
- The opportunity to free up collateral as the loan is paid back and the debit balance decreases. A mortgage, on the other hand, cannot be adjusted until it is renewed after 10 years. This also must also be done by a notary, incurring extra costs.
With the difference in rates between a secured loan and a traditional mortgage, amounting to around 0.25%, the investor will make a considerable saving over the investment term (20 years).
Our credit specialists analyse all the relevant tax, wealth, financial and personal aspects to provide you with the best solution for your situation.
To find out more:
- You want to invest in a property: what questions should you consider?
- What is the best solution for your individual project?
Read previous articles about buy-to-let investment in Luxembourg:
More blog articles on the theme of property investment will be published soon.