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Benefits of Bridging to Purchase Your Next Deal

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What are the benefits of using bridging over cash to purchase your next deal?

The Valuation

Your bridging lender will instruct a valuation and the surveyor will have your schedule of work, so you have a professional opinion on your now and after-works figures.

The surveyor will also pick up if there’s anything that the lender doesn’t like – for example its location, neighbors, or nearby commercial units.

 

The Legal Process

Although you will need your own solicitor to purchase property cash, they are not the lender’s solicitor and therefore won’t be able to get their take on any unusual legal issues. It is much more tricky to resolve lease issues for example after you have purchased a property. Using a bridge means we have access to a lender’s solicitor and know that the property is mortgageable.

 

It Frees Up Your Money

You can look to take on multiple projects if all your money isn’t tied up on one, which it may be if you are funding the deposit and refurbishment yourself.

You also have the option of borrowing your refurbishment costs, which on bigger projects can mean you are putting in as little as 30% of the purchase price and the purchase costs.

 

It Doesn’t Cost Twice As Much

The preconception is that bridging is expensive, but there are lots of ways we can reduce the overall cost if you need a bridge and an exit with the same lender.

Lenders can reduce arrangement fees, valuation costs, and legal fees if you use them for both, and Baya will only charge an admin fee for the refinance if we have arranged the bridge.

What do you need to know about care provider leases for HMOs?

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They used to be an issue with lenders but we now have many options!

So what do you need to watch out for?

Experience

The preconception is often that you need plenty of experience in this sector but that is not the case!

You only need to have had one BTL for one year to be eligible for an HMO with a care provider lease in place.

Type of property

Each care provider needs a specific type of property, whether it is the number of bedrooms, amount of communal space, etc. It’s a balance between making sure that it is not so bespoke you can’t do anything with it if this doesn’t work out without spending further money if for any reason it doesn’t go through.

Area

Again, this will be dictated by the type of tenants. Location is so important to your care provider, so make sure you find this out before you start sourcing your property. Distance to local amenities, transport links, and particular things that need to be close (or not!) are vital to your provider.

The Lease

Ask for a copy of one of the care providers’ draft leases in advance. Lenders will need to approve them, so it is important that you give us a copy of this to get it approved, in principle, before the transaction starts. A recent case needed some amendments which the care provider agreed to, but this may not always be the case. This is really important as the fund is dependent on it.

What are the benefits?

  • Less uncertainty of tenant turnover.
  • No void periods or non-payment.
  • The contract usually includes all bills.
  • No referencing or upfront costs.
  • Property is handed back as you left it.

 

What options do you have for your next deposit?

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Here are some ideas for where your funds can come from…

Savings

This is the easiest one, but often the one that gets used up first! If you’re serious about getting into property then you really do need to think about how you can save money from your day-to-day expenses to create funds for it.

Especially for your first project when the lender wants to see you’re using your own funds. Look at a budget planner, find a savings account that encourages monthly savings, and go from there. There may be some sacrifices that need to be made!!

Refinance of your Residential or Other Property

Refinancing your residential property can be seen as risky by some, but you are moving the equity from one property to another.

Remember that your home may be at risk if you do not keep up repayments on it, so look at the overall picture. It’s an idea to explore though.

Gifts

Often when investors are looking for investor funds, family and friends are first on the list. It’s an easier sell, but comes with more pressure! Gifts from family are easier to use for your first few projects (before you build up some experience) and it counts as your own money!

Joint Ventures

This is an alternative where you are relying on the experience of someone else. It means your JV partner has more security over their funds and equally, you have more support for the project. You are able to split the shareholding to reflect the funds and experience of all applicants too, so it’s flexible.

One thing to remember is that generally, all applicants to the mortgage will need to sign a personal guarantee to be jointly and severally responsible for the loan, so ensure that your JV partner is happy with that setup.

Company Loans

Something we are seeing more of is where clients have a (non-property) company that is profitable and they want to use these funds to put into the property.

It is a tax-efficient way of doing things, but ensure to check with your accountant.

Investor Funds

Once you’ve built up a track record of projects – usually one or two similar-sized projects – you can move on to using other people’s funds!

Loans are an option where you run out of your own money, but ensure you factor in the overall costs.

Most lenders will now be able to use investor loans where there is a loan agreement in place and no charge on the security property. There needs to be a clear replacement method and any interest payments need to be taken into account so bear that in mind.

With the right strategy, you will be able to recycle some of your funds, so you’re not starting from scratch with each project – although “no money left” deals are hard to come across at the moment!

Speed-up Your Mortgage Application

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What can you do to speed up your mortgage application?

With everyone so busy, and delays from all angles it seems, it’s more important than ever to ensure that we are as proactive as we can be to keep it running smoothly…

First up… EPCs!

You now need a valid EPC for all term mortgages, residential and commercial.

Some lenders will now give you a discount on rate and/or arrangement fee so it is in your interest to have a new one carried out if you have recently carried out a refurbishment.

So please ensure you have a valid EPC (A-E) to ensure completion is not held up.

Planning and building regulations

The lender’s solicitor will want your solicitor to confirm that all planning and building regulations have been signed off before the completion of term mortgages.

Please ensure that this is the case, and if there are any areas that could present an issue then tell us immediately so we can help resolve them or use a lender who would be happy to use title insurance and avoid the issue!

Engage with your broker early!

It can take a week or so for an AIP, and then another 3 weeks to book a valuation so you need to give yourself enough time.

Rates are also changing so much at the moment, and they are only going one way! So get your application in early to secure your rate.

Don’t instruct your solicitor until you have an AIP from a lender

Most lenders have a small panel of solicitors they will use, and most offer a ‘dual representation’ service where they can use one company to act for you and the lender.

So speak to your broker as they may have a preferred company to use out of the panel.

This will avoid unnecessary costs of searches with the wrong company – and many lenders don’t need searches anyway.

Be prepared for it to take longer than you expect!

We used to comfortably be able to complete it in 8 weeks but it taking at least 12 weeks at the moment.

we can mitigate some of this by starting early, but legal is taking a long time!

Make sure you are factoring in this time with bridging/investor finance, as well as the plans you have for these funds.

 

How Can I maximise my HMO valuation?

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As an investor, you are generally trying to pull as much out of each deal to allow you to move on to the next one. Getting the right valuation for your HMO is key to this!

There are a few ways lenders value HMO’s, so here is a simple explanation for them all:

Bricks and Mortar Valuation

Most lenders will value an HMO up to 6 bedrooms as an empty house regardless of how much you have changed the layout. The comparables they will use are for similar-sized properties in the local area.

In order to achieve more than this, you need to work with a couple of specific lenders who have other options but all lenders will value on a bricks and mortar basis where the existing layout has been kept; for example where the only change has been converting a lounge into a bedroom and perhaps adding an en-suite.

Commercial or Investment Valuation

This is valuing based on yield. The lender will use a net market (not actual) rent, using local comparables.

Most specialist lenders will use this method where the property has Sui Genaris planning, and some will also use it where Article 4 applies.

There are a couple of lenders in the market that will also consider this where you have a larger HMO and C4 planning where the internal layout has been significantly changed so that it would be more likely to be resold as an HMO rather than a house. There would also need to be a good demand for both room rentals and the resale of an HMO.

What’s the commercial valuation calcuation?

Annual market rent – 20%

Average yield

This is an approximate calculation and figures can vary but it’s a good guide.

HMO Hybrid Valuation

Where your property does not fit into the previous definitions, there are a few lenders that have an alternative. There are other lenders who say they do and don’t so you do need to be careful!

It is up to the surveyor to decide if the internal layout is significantly different from a house and whether it would be more likely to sell as an HMO. This would typically be where the property has all double bedrooms with en-suite, the kitchen has multiple cookers, sinks, etc. and the living space is comparatively small. There needs to be a demand for resale as an HMO too.

How do surveyors come up with a hybrid figure?

They take the purchase price of the property (or market value where it was purchased under value) and add the cost of the conversion. This is based on an average cost so may not be exactly what you have spent.

Having a good valuer pack and a clear schedule of work is so important.

This is a guide and doesn’t always work perfectly, so if you would like to talk through your case and whether it’s worth trying to get that hybrid or commercial valuation then please give us a call!

Autumn mortgage update – what’s new?

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This week I want to cover a few things as we head into autumn to highlight some great opportunities that we have in the mortgage market. There have been so many changes over the summer as lenders push to write more business in a increasingly competitive market.

Last night at Watford PIN we were talking about what opportunities are around at the moment and changing strategies to adapt to the current market. The key part to that is knowing what finance is available as this is key to pricing . I’m always happy to chat through any ideas you have and how to structure your deals.

First time landlords for HMOs

There has been a few new options for this recently. I’m forever having conversions about whether it’s worth starting with single let’s or to go straight in to HMOs. There’s usually a compromise somewhere and starting with HMOs has meant a slightly higher interest rate. However, we have a new product to the market that allows first time investors to obtain a competitive HMO rate at 70% loan to value. This is fantastic for cash flow, allowing you to maximise your monthly income from your first property.

85% LTV for bridging

I’ve mentioned before that we can can arrange 85% bridging loans for purchases needing a light refurbishment. What has now changed is that you no longer need any experience to do this! This is fantastic for first time investors (who own their residential property) to allow them to put less into a deal and open up new opportunities. There are some caveats as usual, so always best to check with us and we can run through the details.

80% LTV buy to let and HMO products

It’s important to look at the pros and cons of 80% mortgages for investment property. As you start to buy more properties and become a portfolio landlord, lenders will carry out a check on your outside portfolio and it needs to be below 75% loan to value so you need to be aware of this.  Having said that, they do have their place. Where you have a property that you feel has been under valued, an HMO being valued on a bricks and mortar basis, or where you have other properties that you aren’t able to get a high LTV with to balance out your portfolio. Having more 80% options is definitely a good move forward, and as always it drives down the costs when there is more completion.

Semi-Commercial Mortgages and Valuations

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What you need to know about semi-commercial mortgages and valuations!

We’re back! After a few weeks of dealing with the crazy amount of completions we seem to have had, and a week of an un summer holiday in Devon it’s back to blogging!

This week we are talking about semi-commercial mortgages. Specifically the valuations for these mortgages as they are so important.

When someone calls me up to ask about semi-commercial mortgage quotes and costs, the assumption from them would be that we are looking for the ‘lowest cost’ option and that’s not what I am thinking! There are a number of semi commercial lenders back in the market now, most at 75% LTV and some at 70% and their rates are similar. There are pros and cons of them all and we will discuss that. The most important part of that comparison is not necessarily rate though, the valuation methodology is often overlooked and that’s something I will always want to cover at the beginning.

How do you value a semi – commercial building? 

The commercial element can be valued as a vacant building, or with the benefit of a tenant in the property. The difference is usually about 10-15-% depending on the location, tenant and lease length. Some lenders will use the vacant value and some use the market value and that can make a big difference to the amount you are able to pull out of the property.

What about the residential element? 

It’s more common now to see HMOs above a commercial unit. It’s an easy way to up your rent, and given the location (usually above a parade of shops) there is less issue with demand when letting to students or professionals than to a family.  Again the value of an HMO can depend on if you’re using the vacant or bricks and mortar value, or the market value. There is an assumption that as you are paying for a commercial valuation that you will get a commercial figure but this isn’t necessarily the case!

Some lenders will use the market value, which is fantastic for pulling as much money out as you can, and some will (as with the commercial element) use the bricks and mortar, or vacant value. 

As an example, we have recently refinanced a semi commercial property for a client. It is a shop with a 4 bedroom HMO above. The vacant value is £285,000 and the market value is £310,000. This means that the client has been able to pull out an extra £18,750 by using the market value of the building. This can be far more important than a small difference in interest rate. This client has used those funds as a deposit for another BTL property, so the onward return is increased even further.

So how do you know what to do and who to use? 

This is where you need a good specialist broker! We have great relationships with our lenders, we only use lenders that we know and trust and this means we know their criteria and appetite inside out so we know what to expect! With rules changing so often at the moment,  it’s important that your broker specialises in these types of cases and understands valuation methodology.

As always give us a call if you have any questions.

 

Good Example of Mortgages on Block of Flats

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All you need to know about mortgages on blocks of flats – and a good example!

I’ve had quite a few enquiries about flats recently, and we’ve just had an offer for a great example of how to structure your mortgage so I thought this week I would run through all you need to know!

Firstly, what’s a multi-unit freehold block (MUFB)

It’s a block of flats where it is all on one freehold, so it is kept all together as one with no flats on their own leasehold titles. We sometimes see blocks that have been broken up, so some flats have been sold off within the block and that can cause issues with your mortgage it’s worth checking the Office Copies at Land Registry to see what the situation is before you proceed. Some lenders do not like split freeholds – ie. where some flats are on their own leasehold – whether you own them or not.

What do you need to think about before you put an offer in? 

  • As I’ve mentioned, the Office Copies are really important so always check this before you do anything else – it’s a quick and cheap starting point!
  • What planning is in place if the property has been converted? There are so many historical conversions that don’t have the correct planning so this is something to check. You can look at the planning portal, or check with the planning department. Don’t assume that just because the council tax is separate that it’s been granted!
  • Could the properties be split off and sold separately? Utilities need to be split, check the water tank and boiler too.
  • Are each flat over 30m2 and do they have independent access?

What mortgages are available and what should you think about? 

As always, there are a couple of considerations as well as the interest rate! There are some lenders who will offer a competitive rate for blocks of up to 12 flats and for purchases this may work well. We can look at it on a 2 or a 5-year fixed, so if you are looking to refinance at some point there are shorter options.

These lower-rate lenders will value the property at what’s called a block value though, and that may or may not work for you. What this means is that the valuer will look at the individual values of the flats, and then deduct about 10-15% depending on the demand for the sale of the full block. Recently we have seen a fairly consistent 10% being deducted from the value.

If you want the opportunity for an aggregate value, then we do have other options. This could be for your own development or a refinance of a property you already own. Rates will be higher, but as always it is about the bigger picture! For blocks of up to 10 flats, where the valuer confirms that the flats can be sold within a 12-month period, then we can use the aggregate value; this means the total value of the individual units. In real terms, this usually means a minimum of 10% on top of the block value, so that’s the consideration on absorbing the rate difference.

There are other reasons that you would use a more specialist lender, so don’t get put off when things look a bit more complicated:

  • Some flats are under 30m2
  • Where some flats are on a leasehold title so it’s not a freehold block
  • Where some flats have been sold off so you don’t own the whole block
  • If it’s a block of more than 12 flats

As always, consider your yield when looking at these properties, the rate is only a deciding factor if the yield isn’t enough! 

A recent example…

A client has built a block of 6 flats and is putting them on long leasehold titles. We have had a valuation carried out and are able to use the market value as the flats could be sold within 12 months. This is giving the client an additional 10% on top of the block value – in this instance, it was increased the loan size by £123,000 so can make a big difference to the viability of the project. We were able to fund 75% LTV of the aggregate value.

Give us a call if you want to run through any examples.

Is a green mortgage really a green mortgage?

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 It’s been an interesting couple of hours researching this…. So, 3 years ago I bought and renovated my loft apartment. I wanted it future and green proof, so I had new high grade windows, electric combi green boiler etc etc.  I have just had a new EPC and the is rated as E!!! best will be a D.

 

So I called up the EPC man and questioned this.  His answer was very clear; EPC is not about green it is about low costs to run the property.

 

Good windows and sound insulation lower the rating, but so does a GAS boiler – as it is cheaper to run. Electric storage heaters are also great, as they use night time tariffs, so again, cheaper to run.  An electric green combi boiler adds, as they are more expensive to run even though they don’t need GSC checks and flues.

 

As we all know, a ‘Green’ car is more expensive than a dirty petrol or diesel – so green really isn’t necessarily the cheapest option, which can work against a lower EPC.

 

Now that is clear, what are these ‘Green’ Mortgages.

 

Well the industry is incentivising property owners to look at the ratings on their properties, which is a good thing.  It has to be A-C (or some high street lenders, just A-B) at the point of completion.  They will not lower your mortgage rate after that, even if you reduce the rating.  The reduction can be up to 0.25% pa, so a good incentive for a long term investor; it also covers BTLs, MUFBs and HMOs – some cover new builds, some don’t.

 

So the best option to benefit is when you refurbish your property.  I would highly recommend you getting an EPC specialist round to tell you exactly what is required to get into the lower bracket, best not to assume.  At least this way you know exactly what your options are and don’t confuse new shiny upgrades as positively effecting your EPC ratings.

 

What can you do to benefit from this:

 

It all starts with the refurbishment.  Most investors wanting to add value will go the refurbishment route.  Also, with the climate issues, the green areas will increase, so you really want to future proof your property.

As a wider topic, lender follow the competition; once a lender decides on doing something, then it really isn’t long before the rest will want to be in the party. 

 

If you are buying a property that qualifies for a term mortgage, but is sitting at the E end if the rating, it is worth considering making the changes a condition of exchange, thereby getting a new EPC before completion, therefore benefiting from the lower product rates.

 

Care Provider leases on HMO properties

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Happy Friday everyone – I never thought I’d moan about the weather, but when everything is so busy and taking so long at the completions end, it is pushing a lot of us to our limits.

Today we are covering Care Provider leases on HMO properties.

Having got more investors wanting to get involved in this sector, I thought it good to cover this week.

As some of you know, I have been involved in this area for some time, starting some years ago with refinancing large HMOs for vulnerable women and their children. This was daily emergency housing, so the most difficult to place.  In recent years, lenders have shied away from the vulnerable areas, as they didn’t want the prospect of reputational risk.  Which really made me mad, as it is so important that they have options, which need funding.

Moving on, last July, I worked with one of our investors to get a supported living contract approved – which I did.  It wasn’t for the very vulnerable area, but a start.  Since then we have enabled funding for a number of HMOs on this is basis and this lender has now changed their policy regarding care providers.  This has enabled us to have much more certainty around what we can offer our clients.

So how do you get involved in this area…. 

The assumption is that you need lots of experience, but you actually only need to have had one buy to let (single let) for 12 months. You don’t need to have any previous HMO experience.  The refurbishment part is slightly different if it involves one, but if it is a light refurbishment then yo don’t need any previous refurbishment experience.

The important part is to check out is your potential care providers; a lot of them are not regulated as they cover areas that fall outside CQC etc.  Check their reviews, as the lenders will not tolerate those with poor reputations.  Doing your due diligence early on will save a lot of time and cost later on.

  •  Type of property – each care provider needs a specific type of property, whether it is the number of bedrooms, amount of communal space etc; and so on.  It’s a balance between making sure that it is not so bespoke you can’t do anything with it if this doesn’t work out without spending further money, if for any reason it doesn’t go through.
  • Area – again, this will be dictated by the type of tenants.  Location is so important to your care provider, so make sure you find this out before you start sourcing your property.  Distance to local amenities, transport links, particular things that need to be close (or not!) are vital to your provider.
  • The lease – ask for a copy of one of the care providers draft leases in advance.  Lenders will need to approve them, so it is important that you give us a copy of this to get it approved, in principal, before the transaction starts.  A recent case needed some amendments which the care provider agreed to, but this may not always be the case.  This is really important as the fund is dependent on it.

FYI – if a lease goes over 7 years, then it is registered at HM Land Registry and the care provider will pay SDLT on it.  Something to consider.

As a recent example, a client came to us who had bought a property cash to convert to an HMO.  He had bought it for £130,000 in January of this year.  As he started the refurbishment, he engaged a care provider early on to understand the requirements they had for the HMO.  They are a charity who help young adults leaving care, providing them with supported living as a stepping stone to living alone.  Their ethos is around helping their tenants not only with housing, but also with with their finances, employment and ensuring that they are supported at a time when so many are not.

The refurbishment cost £60,000 in total.

After looking carefully into comparables for the end value the clients estimated this would be around £200,000.  The surveyor inspected the property and lease and gave it a value of £210,000 – a great result, the lease created an uplift in value well as long term security.  The rental income is £2250 per month on a 3 year contract.

We were able to lend 75% of the new open market value, within 6 months of the purchase date. This is on an interest only mortgage too, which historically was an issue for this type of lease.

I genuinely believe that having commercial leases in place, with the current climate of uncertainty, can only be a good thing for both investors and lenders.  There are no void, referencing of new tenants and most of the contracts include the bills – so it is a much more profitable, both money and time for these type of contracts.

I hope that is of help, but were here for a call, as always.