These days, with credit generally drying up around the world (and it’s going to get a lot worse before it starts to get better), we really need to be utilising every facility at our disposal, and credit cards should not be overlooked as a cheap and effective means of purchasing property through auction.
Indeed, a good number of investors nowadays buy their properties from auction using credit cards to finance the deal. I’ve done this myself and it works well. I know many others who have, too. Trying to get a mortgage for under £25,000 isn’t easy these days (not that it ever was), and many buy-to-let investment properties in the less salubrious parts of northern England sell for much less than that under the hammer. And banks are only ever going to loan you max 80% of the value/purchase price anyway, so the minimum you need to look at to mortgage through auction is £32,000-or-so. Anything less than that should really be bought with cash, even if it’s on loan. This is where credit cards come into their own. They’re quick, efficient, immediately available, there are no arrangement fees and no interviews or complicated paperwork to complete, and you shouldn’t really ever have to pay that much interest. This is how it works:
Most auctions don’t accept credit cards, but they do accept debit cards, which immediately transfers cash from your bank account. All you need do is take out a cash loan on your credit card and transfer it into your bank account in advance. You can do this in three ways: by physically entering a bank branch and requesting a cash advance on your card; by requesting the same of your issuer over the telephone, and they stuff it in your bank electronically; by using one of those credit card cheques that issuers used to send out (banned as being unsolicited from Jan 11, but still valid if you’ve got some and often available on request). It costs money, of course, to advance cash from your credit card, as the issuer will charge you for the initial advance (maybe as much as 2.5%) and you’ll start paying a fairly high rate of interest immediately (maybe as much as 2% pcm, or more).
But once these charges have been incurred, which are unavoidable, then you simply switch the balance (or balances, if you use more than one card) to another credit card offering a 0% interest period for “balance transfers”. Towards the end of the introductory period, just before the standard interest rate begins to apply, you switch the balance again to another credit card offering a similar 0% interest period. And so you go on, and can keep going on like this indefinitely.
Effectively, therefore, you’ve bought a property, that hopefully is returning a decent rental yield, and incur no on-going financing charges. My brother ’s done this on one of his rental properties and hasn’t paid a penny in interest in over 6 years. He reckons that for as long as 0% balance transfer deals exist he never need do so, and yet all the while he’ll collecting an 8% yield, most of which he lives off (doncha just love capitalism and the Western world).
If you’re astute and you don’t need to spend the rental income, what you should do is place it in a bank account. With some properties up north providing double-digit yields, theoretically you could put enough money aside to pay off the loan in a very few years’ time. (I know that there are tax and maintenance costs to be borne, but you get the idea – and remember that some properties up north offer ridiculously high yields.) Thus, after this period you will be debt-free, have a property in your possession with no finance costs and a regular steady income. A doddle. And it’s not pie-in-the-sky speculation and theorising; people do this all the time and even live off it. Indeed for some this is all they do and their secret to an easy live.
And there’s no reason why anyone shouldn’t follow in their footsteps. However, do be wary of the following: Beware Of Zero-Rate Expiry Dates – Dozens of credit card providers now offer 0% interest rate deals. These typically last for an introductory period of between 90 days and 24 months. The best bet is to use your interest-free period to apply for another card with another 0% offer, ready for the switch. But inertia generally rules the day and most cardholders maintain their balances even after the standard rate has kicked in, which is what the issuer wants to happen (in the nicest possible way, of course). Don’t get sucked into this: keep expiry dates diarised and make those transfers on time (to the day, if you’re clever). Really, really, really pay attention to the “go to” rate – the rate you’ll be charged once the introductory period is over, because that can be extortionate.
Beware Quoted ‘Representative APRs’ – Representative APRs are often highly misleading. Thanks to the growth of risk-based pricing, which takes into account a customer ’s credit history, many cardholders fail to secure even the ‘representative’ rates companies are compelled to advertise along with their lowest deals. If a company has lots of different APRs and 51% of customers pay 14.9%, it can legitimately claim that this is its ‘representative rate’ – even though 20% of its customer base pay 20.9%, a further 20% are on 25.9%, and the remaining 14% are on 29.9%. You can find out which provider offers the best deal by reviewing using one or more of those online comparison sites, such as comparethemarket.com, moneysupermarket.com, gocompare.com and/or uswitch.com.
Also be aware that you should apply for credit cards carefully and slowly over a period of time, and certainly do not adopt some sort of scattergun approach, as this burst of activity will be recorded on your credit file and could affect your rating. Do it patiently.
But, overall, if you’re savvy, credit card financing could be useful to you, especially if you’re just beginning in the property world and don’t have a great deal of funds to play with. But don’t over-stretch yourself and do keep a close eye on those 0% financing end dates. There are bankers in grand offices whose bonuses rely on you not doing so (bless).