Adding value to your property: How can a bridge to term product help you? 

What an amazing week we’ve had – we are still flying high from Wednesday night!! Roll on Sunday now…

This week I want to talk about bridge to term products specifically. Last week we covered bridging and why it is so important to add value to your property, but there is more to it – and there are ways to reduce your overall cost and this is a big one!

What is bridge to term? 

It is a product which allows you to use the same lender for the bridge to purchase the property and then use it as an exit onto a term mortgage as well.

How does it work? 

There are two types:

  • You can have it as ONE product, which means that you have two offers at the beginning (one for the bridge and one for the term) and the valuation with cover both products too, so you have certainly over the end value and what you can work towards.
  • You can have it as 2 products, so you apply for them separately and have two valuations and offers (the term gets started once works have been finished). This allows a valuation to take place once works are completed so you often get a more favourable figure, it can also take into consideration the finished property, which really can help. As with the same lender it has the advantage of lower arrangement and legal fees.

What are differences between this and a standard bridge?

From a cost point of view, you can save on valuation costs (in some instances), legal fees and arrangement fees. This will help to reduce your finance costs and increase your ROI. As bridging can be very expensive, this is a good way to bring it down.

It also offers you some certainty around the exit for your bridge. The lender will underwrite the case for the exit as well as your initial loan, so any issues with the property should be picked up on before you buy the property. There’s never a guarantee with these things, but it does mitigate some of the risk.

How much can I borrow and what works can be carried out? 

This depends on the type of product.

We have a lender who will look at both parts as one product, as mentioned earlier. This is ideal for light refurbishments before letting out as a single let. For example where the EPC isn’t good enough, or it needs a new kitchen or bathroom. We will know the end value from the schedule of works and the valuer will confirm this. You can borrow up to 65% for the purchase, and then 75% for the refinance. This is a low cost option and offers some security but does mean you are putting more in up front.  The 2nd valuation is only a revisit, to confirm the works have finished – it cannot change the GDV. You have to complete and refinance by 6 months maximum.

For more complex refurbishments, ie conversions from commercial to residential or to HMOs we have another product. This is set up as two products, a bridge to start and moving to a term facility when it’s finished.  The initial valuation will include GDV expectations from the valuer. For light refurbishment projects we can lend up to 85% of the purchase price (subject to some restrictions) and for heavy refurbishments we can go up to 75%. Heavy refurbishment would also include anything requiring planning or building regulations. You also have up to 18 months to do the works.

For the term exit we can generally lend up to 75% of the new value.

For both options we do not need to wait 6 months from the purchase.

As always, give me a call to discuss individual cases and how we can make it work. Have a fantastic weekend and come on England!

What can you do if you don’t have planning?

I hope you’ve all had a lovely week enjoying our new freedoms, I know I have! It is tiring though!

This week I want to talk about what to do when a property doesn’t have the right planning for your plans. This covers a number of areas, and some are easier to overcome than others. There are a few solutions though.

Create a back up option 

This is probably the easiest solution to the issue. It works particularly well with conversions to large HMOs (when you’re not in an Article 4 area).  Large is classed as everything 7 bedrooms or more and requires a separate planning class.  Also semi commercial property that you want to convert to residential and can’t under permitted development. What it means is that you have an ideal scenario (if planning is approved), but also an alternative that could work without any change of planning class.

With the example of an HMO it could work as either a large HMO but also as a 6 bedroom. You will need to asses the refurbishment costs and the rental for both options and ensure that it works either way.  Some clients will do the works assuming they will get planning, and then use the extra space for a study or additional communal space if they don’t. Others convert it to a 6 bedroom and then wait for planning to be approved to do an additional extension or garage conversion for example. What you do will very much depend on the layout of the property and the timescales needed for either option.

With commercial property, this can mean keeping the existing commercial if you don’t get planning to convert it to residential. The rental again would need to work either way and you need to be comfortable with either option. Vacant commercial buildings can be difficult, so there needs to be a good demand for the commercial unit for the bridging to work, and then let out before we move it to a term mortgage.  We have had other examples of when this scenario works; converting semi detached properties back to a single dwelling, houses to flats and licensed HMOs in Article 4 areas looking to extend to larger properties.

A favourable pre-planning application 

There are instances where a back up option just doesn’t work. This could be where the costs or rental potential just don’t work financially for the back up option, or when there isn’t a back up option! This is usually for vacant commercial buildings but there are some other examples too.

In this instance, buying yourself some time to get planning is the ideal solution. This can be done through a conditional exchange or an agreement with the vendor. Where this isn’t possible, achieving a favourable pre application can really help. It really does depend on the overall case and it’s not necessarily a guarantee but it can be enough to complete on your bridging loan. Where a precedent has been set, or there’s been a previous application that has expired then it really does help.

Take advantage of  permitted development rights

There are plenty of areas where permitted development rights exist, and the rules have relaxed considerably recently.  Knowing what you can and can’t do is so important and can give you an edge over other investors.  We can complete without the full approval, as long as we know that is falls under PD rights.

Use alternative funds

The final option is to avoid mortgage finance entirely. This is not something that will work for everyone, but when you have the cash to purchase the property and are willing to take the risk, then this can help. Once planning is granted then we can look at refurbishment finance and can take advantage of the uplift in value that planning has created. There are clearly risks involved with this, so ensure that you have carried out your due diligence, and we are happy to talk about the potential exit routes before you purchase the property.

It’s really important not to get emotionally involved… you are in for a return in investment, keeping your eye on the prize can mean saying No!!

As always, we are happy to chat through any specific deals that you have and talk about your options.

BTL first or straight in to HMOs?

This week we are looking at the pros and cons of both strategies; single let’s first or HMOs? It’s a question that comes up lots so here’s what I think!

 

Single let’s first 

 

The big advantage of this method is experience. Most lenders require you to have some rental experience before you go into HMOs or other more complicated properties such as commercial and blocks of flats. It also allows you to gain some rental experience and possibly some refurbishment experience too. You may want to do this first to feel more comfortable moving to bigger projects; to test the water and see if it’s something you enjoy doing. 

 

The main disadvantage is the money that you will end up leaving in the project in order to gain the experience. I have completed projects with clients that have enabled them to pull all their money out, but this is usually where they’ve added bedrooms within the existing floor plan or clever extensions. Usually you will end up leaving some money in, and that can then restrict how quickly you can move on to your next project. The other issue can be that you end up with a property that isn’t yielding as much as you would like and you didn’t really want a single let anyway! 

 

What about going straight to HMOs? 

 

The big pull towards HMOs are the rental yields. Of course this can apply to blocks of flats or serviced accommodation as well. This dilemma will apply to all of these properties to an extent as you need some experience for all of them.

 

What you need to decide is whether you want to pay an increase in the interest rate, to compensate for your lack of experience versus putting cash and cost into an asset which isn’t part of your long term plan.

 

In terms of interest rate for for HMOs, up to 5 bedrooms will be a slightly lesser rate than over 5 bedrooms. Both options will be higher than if you have some experience. In both instances the valuation will be a bricks and mortar figure and you will need to own your residential property. We can look at 2 year products to allow you to refinance to a more competitive product and hybrid valuation if that’s something that can be achieved. 

 

You will need to be looking for a property which doesn’t need extensive works (planning or building regulations) unless you have done something similar previously. You will require a management agent in place to look after the tenants. When you’re looking at refurbishment experience, you need to have done something similar previously, but this can include projects on your own home. 

What if you don’t have a residential mortgage? 

 

This is more tricky at the moment but there are still options. Single let’s are easier to place but there are more restrictions on affordability. For HMOs we need to think outside the box to find a solution, but it can be done! Some  clients choose to buy something cash and then refinance after they have owned it for a period of time and others use bridging to get around the experience. Looking at occupied properties can be an option too. 

 

When you don’t have the experience required, we need to balance this with something and this is usually a higher cost – whether that is using bridging or an increased interest rate on your mortgage.  This is a short term issue though, and once you have one property under your belt you have far more options.

 

We can usually find a solution somewhere though, so call with your enquiries and we can chat through the options.

 

Jackie is always talking the talk – now she’s walking the walk with her first development!

Happy Friday everyone.  I hope you are all digging deep; however we think everyone is better off than us… they probably aren’t.

This week the blog is on my live case.  As most of you will know, I have been a property investor for about 20 years, but only with vanilla properties with a small refurb thrown in.  I have always wanted to do a development and with so many of our clients going that route, it was really making me envious.

Although I had savings, I don’t have enough experience in this area, so needed someone to work with.

When you chat as much as I do, it doesn’t take long to find out who’s got the appetite for this. I teamed up with someone I have known and worked with for a number of years, as well as his business partners.   After talking about what we could do, we started looking for suitable properties.  It’s important to have a team that can cover all areas; so we were able to delegate the roles of sourcing, development, finance and renting, a solid skill group.

Having not done a lot of sourcing, I really did underestimate its importance; It was time consuming enough just to look at the properties John found.  We looked at all sorts, from converting churches all the way through to large HMOs. We finally decided on an ugly property in Upminster, Essex which had plenty of development opportunities.

The property is a 4 bed house with a 1 bed annex on a good sized plot.  It was originally on the market for £750k, which was too high.  We waited and it dropped to £650k, at which point we put in a cheeky offer of £550k. It was accepted, but they would not allow an option agreement so if we were to proceed we would have to take a chance on the planning.

We intend to build 5 or 6 flats, which will be COVID friendly and eco friendly.  We will try and keep an existing wall, to avoid CIL, which again, reduces costs.

As we couldn’t get the option subject to planning, it was important to see what has happened to the immediate area.  The road has a lot of new builds, both flats and houses, so we can see that the precedent has been set.

We will be getting planning after completion, so I sourced a no ERC product, which will allow us to rent it out for the short term.  Any cash in will help towards costs.  We also insisted on a 2 week gap between exchange and completion so we could start the works required before we rent it out.  The property is a 60s house that had very elderly owners; it was really dated.

It is so important to check exactly what is needed to do to get it rented out, it needed to make financial sense, as it would all be knocked down. Just the painting of a large house is time consuming; it also needed some work to the electrics as they were definitely not tenant safe. As the owner removed all white goods, we sourced good second hand ones off Facebook market place.  They will all be PAT tested to make sure they conform.

We chose this route to avoid bridging; due to the time scales involved in applying for planning. Bridging, as we know, is an important route in a lot of cases but during COVID, this can lengthen the timescales. When you don’t know your timescales it’s worth looking at a longer term and lower cost option.  It really does depend on the property, thankfully this property is tired, but very habitable.

In the 3 months it’s taken to exchange, we have not been idle.  We have instructed the Architect and progressing the drawings and planning.

We complete on the 19th February and it’s definitely given me something away from work and lack of social diary dates to get excited about.

We have benefitted from the maximum SDLT discount, but there are still plenty of deals to be done out there.

How does an 85% LTV bridge sound?

Here we are at Friday again, although the days all seem to be merging into one! I hope you are all doing ok, for those home schooling like me we’ve got one week left before a slight break of half term which I am so excited about! The irony of children’s mental health week being in the middle of a winter lockdown is not lost on me…

This week we genuinely do have some good news though. After a bleak January and with the stamp duty relief deadline inching closer we really do need it.

Shawbrook Bank have this week re-launched their 85% loan to value bridge. There are a few caveats to this, which I will go into but this is a great sign of confidence in the market moving forward. It allows you to borrow an additional 10% on top of the 75% (net of lender fee) for refurbishment costs.

What you need to know:

  • The 10% is for refurbishment costs, so you need to be spending at least that amount on the refurb. You can spend more (and fund it yourself), but if you spend less than the additional loan will be capped at that.
  • This is for a light refurbishment, so nothing which involves planning or building regulations or any structural changes.
  • You do need some experience, one similar project is enough
  • The maximum loan is capped at 75% of the post works value, so we need to give the valuer a copy of the schedule of works and they will give us a figure to work with.

This is brilliant for so many scenarios:

  • It allows you to borrow additional funds for the refurbishment and this is be upfront rather than in arrears which we often see with typical refurbishment bridges.
  • It suits conversions to small HMOs (up to 6 bedrooms)
  • Any residential internal refurbishment which can include kitchens, bathrooms, heating systems and re arranging layouts where no structural works are required.
  • You don’t have a cap on the amount you can spend on the refurbishment, and the additional funds will go towards this.

As always, we are happy to chat through any enquiries you have. We can let you know whether we think your project is something suited to this sort or product or whether something else would work.