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Eleanor Broadhurst | Baya financial

Eleanor Broadhurst

How can you maximize your borrowing with Bridging Finance?

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It feels like forever since I’ve posted but here we are! With property prices starting to become more realistic, and interest rates on term mortgages falling, we are seeing plenty of purchases using bridging. So what are your options?

BORROWING FOR REFURB COSTS

This seems the obvious answer, why wouldn’t it be if the lender can fund the purchase and refurb? Well, it may not be for a couple of reasons…

The lender will always work back from your GDV and will lend 65-70% of this figure in total. So you need a profitable deal in its own right to achieve 70% on day one as well as funding all the refurb. This means that if planning is required (which you don’t yet have), or it’s an HMO conversion you could struggle.

Also, the costs are funded in arrears, so you need a working capital of around £25k (minimum) to start the works.

With valuers being cautious over a potential downturn in the market, the GDV you may achieve now before work has started may not reflect the value you would get at the end either. So bear that in mind when looking at your figures.

SO THE ALTERNATIVE – A HIGHER DAY-ONE LOAN

We’ve now got a number of options to maximize your day-one loan, rather than rely on funding for the works. The advantage of this type of loan is that you are less concerned with the GDV (although lenders do look at it), so you are more likely to achieve what you set out to.

We can lend up to 85% net day one for light refurbishments, and 80% for heavy refurbishments.

You would then need to fund the works, but with an additional 10-20% more than you would expect for a refurb loan (and bearing in mind the initial outlay to start the works), this may not be that much less in total.

The options available and most relevant will depend on your total costs, profit, and split between purchase and refurb costs so I’m happy to have a chat about how it would work for your deal!

Affordability issues as rates change – how to stay ahead of the game!

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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!

Outside Portfolio Stress Tests

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Not a glamorous topic this week, but one that’s so important!

As rates start to creep up, and property prices are stabilizing/reducing this is something that will become more of an issue. So it’s important that you understand it.

You become a portfolio landlord on your fourth property purchase. And at that point lenders have to check your outside portfolio with some additional checks – it needs to be under 75% LTV, and the rent needs to cover your mortgage payment by 125% (assuming your mortgage interest rate is at 5.5%).

Different lenders do have slightly different rules, and one has just increased it to needing to cover the rent at a rate of 8.5%! (Not 125% though, just 100%).

Simply put, if your portfolio doesn’t work then you won’t be able to borrow any more money.

So what can you do?

1. Keep track of your portfolio as you grow.

2. Think carefully if you’re borrowing more than 75% (I know the 80% products are so tempting but this is why we need to be careful of them!)

3. Diversify your property portfolio if your rental is short – holiday lets, HMOs, and blocks of flats are all ways to increase your income so think about your next steps. A different location may be needed too.

3. Speak to your broker early if you are concerned, there are some lenders who don’t use this, although they are reducing. Be upfront as always!

Should you still be buying property?

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What should property investors do now?

This week is a tricky one for the mortgage world, but it’s really important to remember that these things are all temporary. There have been plenty of similar situations over the years and we have forgotten about many of them!

What do you need to remember as an investor?

* You’re in this for the long term, so a small price correction (which is likely) shouldn’t affect your long-term goals. Plan when you’ll need to refinance around this though, short fixed rates may not be the preferred option.

* Cash flow is the most important factor! Price all your deals with a high-stress rate (I would use at least 8% at the moment) and make sure it works at that price. Be careful with single-let properties; blocks of flats, mixed-use, HMOs, and holiday lets will increase your cash flow.

* Bridging hasn’t changed (for now!) so there are plenty of opportunities to pick up properties within broken chains or situations where people need to sell. Where there is uncertainty there is opportunity. Just watch out for your exit (and remember a good broker will be all over this, question them if they aren’t!)

* Don’t panic! This is one week, as long as your ROI is good then you’ll be fine!

Should I take out a variable rate mortgage?

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I feel like we need a daily update at the moment!

The latest from late yesterday was that swap rates are settling, and we can see this morning that more fixed rates are creeping back in today.

But… there is still talk of further base rate changes, and two specialist lenders have already stopped lending on existing cases that aren’t already offered. So there is still much uncertainty.

There are some variable rates around though, and they are much less likely to be pulled, so you have more certainty over completion – although not on the rate you will be completing on!!

Is it a good idea??

  • You’ve got to take a calculated risk. What could the rate go up to and does it still work on that basis?
  • Are you getting the property at a good price so the risk is worth taking?
  • What are the alternatives? If you need to redeem a bridge or complete something you’ve committed to then this may be the best of not very many options!

As always, give me a call if you want to chat anything through…

CASE STUDY: A Broker Who Puts Everything Into Your First Project

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When you put everything into your first project and need a broker who does the same!

The client came to us having exhausted other brokers who were unable to help with what they needed in the timescales required.

They had refurbishment experience, but not conversions. And owned no property currently, having never been a landlord.

The property was in an Article 4 area, with no planning approved.

The clients want to convert it into a 7-bedroom (or 6 as a backup) HMO

Money is tight and this is their life savings. With only one income and a young family to look after – it doesn’t get more stressful!!

So what did we do?

We went through the lending options available and needed a refurbishment bridge as they could not complete it without these funds. We found a lender who was happy with their limited experience.

As always, we ensured there were options for the exit once the works are completed. They need to keep the property for income.

The next hurdle?

The next challenge was PLANNING. We needed the lender to be comfortable with the lack of planning.

However, the GDV as a refurbished house was not profitable and therefore not really viable!

After working closely with the lender, and reviewing and amending the schedule of works, we were finally able to achieve a day one drawdown sufficient to complete the purchase.

How do you value mixed use properties?

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Commercial Element is nearly always a vacant value. Unless you have a blue chip company on a long lease when we can sometimes achieve a market value.

Residential Element will be valued using similar comparable properties in the area. Remember properties above commercial are usually less desirable.

If you have an HMO as part of the residential part, you may be able to achieve an uplift on the bricks and mortar with a yield-based or hybrid valuation. This is where you can benefit!

You will either end up with an aggregate value (the sum of the individual parts) or a block value for the building, where around 10% is deducted from the aggregate value.

Which figure the lender uses will be up to the valuer and their comments. Can the property be broken up and sold individually? And would there be sufficient demand to do this in 12 months?

 

Is there an alternative to bridging finance?

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If you have a property that is mortgageable, but you need to do some work in order to let it out, do you need to use bridging?

We have another option!

It works well if you are looking at a smaller refurbishment where you don’t think you’ll get enough uplift to warrant paying for a bridge.

It is also an option if you are looking for a long-term project requiring planning for example if you are can wait to start bigger works.

It allows you to buy a property where you need to carry out a light refurbishment in order to let it out.

The valuer will see the schedule of works and can take this into account when looking at the value as well as the market rent figures. This is especially important when you need a higher rental figure to make the deal work.

This can work for residential as well as semi-commercial properties where they are tired and in need of a refurbishment before you can let them out.

You can use it for existing HMOs where there is a license in place but it needs some refurbishment to attract more rent or different tenants.

We can use a desktop valuation in the majority of cases, enabling a quick completion where required.

There is a 2-year fixed with a 2-year tie-in, allowing an opportunity to reassess what you are looking to do at that point. They also have a 5-year fixed with a 2-year tie-in, offering you some more flexibility.

There are some things to be aware of, as always:

  • The property does need to be habitable in its current condition.
  • No heavy refurbishment or planning.
  • You will need to show you’ve got 3 months’ mortgage payments in the bank to cover the refurbishment period.
  • They are lending based on their current condition and value, so there’s no room for uplift at this point.

Have I got enough experience?

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Simple Buy to Lets

You don’t need any experience for this! If you own your residential property then this opens up your options, but there are still lenders for first-time buyers.

Be aware there may be a minimum income requirement, so make sure to be really upfront with your broker.

HMOs

For small HMOs (up to 6 bedrooms) we have a number of options for first-time investors.

What has changed is that we now have options not only for first-time buyers but also large HMOs for first-time investors or buyers.

These are medium-term products to allow you to gain experience in this area.

Mixed-use Properties

We now have a lender for first-time investors for simply mixed-use properties!

This is a great opportunity for investors to move into a different area, look at longer-term lets and be able to look at more properties.

The commercial element needs to be let, although we can use a bridge if we need to first.

How can leases add value to your property?

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Splitting Leases

This is one of the most common ‘tips’ you get from property mentors and courses – buy freehold flats and create leases to add value! It doesn’t always work like that, as the way lenders value property is based on how it is likely to be sold, and if that is as a block then you won’t get the uplift on a revaluation. There are, however, ways you can do this. You could look at smaller blocks, where they could be split off and sold easily.

Generally, you need to consider the size of them, demand, split utilities, and access. The ideal would also be to carry out a refurbishment or wait a period of time before refinancing them as you need the valuer to disregard the purchase price as a comparable. You can also look at splitting houses into flats; additional flats into blocks and rearranging space to create more units. These can all create value through the sale or refinance of the properties.

Extending Leases

There is a large quantity of flats around the country with short leases which struggle to sell. This is due to most people (buying property to live in) not understanding the lease extension process, as well as a need for a longer capital repayment mortgage. When you are basing your maximum mortgage on your income, and the mortgage is capital repayment, you usually need this over a long period of time (age depending!) to make it affordable. Generally, you need 55 years left on the lease at the end of the mortgage so if you have, for example, 68 years currently you could only look at a 13-year term.

The difference with an investment mortgage is that you are able to look at it on an interest-only basis. This means that the monthly payment is the same if it’s one or 25 years. You do need to find an alternative way to repay the mortgage and be aware that the full balance will remain at the end of the term, but this does give you options. You could, with the example above, take the mortgage over 13 years and in that time increase the lease length and then refinance. This could increase the value and allow you to take some money out of the property. This is a great opportunity as an investor that homeowners just don’t have.

Share of Freehold

This is another misconception among many potential homeowners. Again, they see a short lease and assume it is expensive to extend it, or they won’t get a mortgage on it. The same principle applies as above with your mortgage term, but it can be much easier to extend your lease. All leaseholders have to agree and all leases need to be extended simultaneously, but it is much cheaper than extending a standard lease.