With all the changes that have happened in an incredibility short period of time (Jackie calls it the Truss spin dryer effect), now is really a good time to reflect on your plans and next few deals.  Rates have gone up quicker than we have ever seen, and so it’s really important to spend some time looking at how you can make things work, as we adjust to what will probably be the new normal.  As much as things have started to settle, they are still so far away from where we were.

Affordability has become an issue in places where we just didn’t see it previously, and we are seeing investors change their plans because of it.  I thought that a few examples of this would be useful to put it in context

Example one – buy, refurbish, refinance in southeast London:

Our client has a long track record of buying property in southeast London to refurbish and refinance.  He is an estate agent in the area, so has a good understanding of the market which has helped make some good buys and recycle his cash.  A typical example of what he did last year is:

He bought a 3 bedroom, mid terrace house for £340,000 and spent £25,000 on a full internal refurbishment in September 2021.  We then refinanced as soon as the works were completed (about 4 months later) at value of £525,000.  With a rental of £1,700 pm the client was able to refinance at 75% (so he was able to pull all his funds back out) to move on to the next deal.

Fast forward to a year later…

He found a property to buy for £375,000 and again with a small internal refurbishment was confident it would value at £475,000.  The rental would be £1,800 pm, but assuming a rate of 6% pa on a 5 year fixed product owned in a limited company, the maximum gross loan would be £288,000.  This means he would only just be able to pay his bridge funding off, with no additional funds – missing out on about £65,000 due to a higher rate!

Example 2 – what can you do differently?

Another good example would be a purchase Jackie made with her business partner just before the interest rates rose.  This wasn’t an affordability issue, but with the increase in mortgage payments it didn’t make the project as profitable with the original plan.  The property is currently two flats, which had not been converted very well! They agreed a purchase price of £195,000 with the original plan to renovate them both at a cost of £5,000 and then let out for £1,900 per month for both.  The GDV, as per the valuation, would be £220,000.  With the new rates (and the property is at the end of a row of shops, so needing to go to a more commercial lender) the net profit would have been around £11,550 pa.

The new plan is to convert it to a 6 bedroom HMO at a cost of £50,000; but a GDV of £300,000 so some funds will be able to be pulled out.  The net profit will be around £18,000 pa, so even with the uncertainty of energy prices, it is a much more profitable proposition.

It is worth thinking outside the box in terms of what type of property you look at and how you structure it.  Be conservative with your figures and really think about timescales.  We are finding that with the delays with solicitors, Land Registry and building works, that the cost of the overall finance is increasing which will have an impact on your return on investment too.

Also, consider how you are buying property as part of this.  Limited company owned property is usually stressed at 125% of the interest rate, whereby personally owned property is usually stressed much higher (145% or more), so this will have an increased impact on the ceiling of what you can borrow now that rates are higher.

What about your outside portfolio?

As you may know, once you are purchasing your fourth property you become a portfolio landlord.  This means that most lenders will check your outside portfolio to ensure that it fits within their parameters.  Most lenders ensure the overall portfolio is under 75% LTV, and that the rental coverage is more than 125% of the mortgage payments, assuming an overall interest rate of 5.5% pa.  One lender has increased their stressed rate and we may see others follow.  This is something else to consider when you are planning your next deal – do you need to balance things out with a lower LTV or higher rental yield?

NB: If your outside portfolio does not meet the relevant lender’s stress testing criteria – this will stop the case proceeding – it’s that important!

What are the key take-aways? 

The end of the year is always a fitting time to reflect on what you have achieved this year, and also looking forward to the next one. Looking at what you have achieved and seeing if it would still work is a great place to start.

Thinking outside of that is also so important. What’s your next step, how can you improve on what you have achieved?

Next year will be a year full of opportunities, but not necessarily from the places you will have seen previously. So spending some time understanding new markets and how you can maximise borrowing and ROI is important – and if you need help with that then give us a call!