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CASE STUDY: Lenders’ Flexibility In An Uncertain Market.

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Why flexibility with your lender is so important in an uncertain market?

 

What do I mean by FLEXIBILITY?

Most lenders will tie you into a product with early repayment charges if you leave it.

The only alternative would be a tracker rate, but they are rare and expensive. And don’t offer you much certainty with the base rate on the move currently!

So, how can you get the flexibility to refinance when you need to??

Why would I need flexibility??

With an uncertain market, would you like the option to refinance and pull some more money out at a point that suits the market rather than a fixed date?

Do you want to do some work on the property, but not yet so you don’t want to put it on a bridge yet?

Is your property tenanted so you can’t complete work until some point in the future?

How does it work?

We have a lender who will allow you to refinance with them at any point and they will waive the early repayment charges.

They will offer a new product, with a reduced arrangement fee and legal, but a new valuation (the one thing you need!)

This allows you true flexibility when you choose to refinance, and you can move to and from a bridge to carry out work at a much lower cost.

 

As an example…

A client bought a property to convert to a 6-bedroom HMO with a bridge (before they knew about us!)

They refinanced to a term mortgage with a yield-based valuation in December 2020 when the market was so uncertain and valuations weren’t the best! The value was £570,000 (in Bath)

They are currently refinancing now that valuations are more positive and we have just got the new figure of £695,000.

We lent 75% of both figures, so that’s over £90,000 released for another project!

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.

 

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.