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 through 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 so 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 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 they 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 an 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?

 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

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.

Funding your projects when your usual lenders can’t help

I think we’ve all now recovered from the excitement of the Euros and now summer has arrived!  I hope you’ve all had a good week.  This week I am talking about funding that’s a bit more outside the box.  As you know, we can look at all sorts of scenarios, and one of our lender’s has really upped their game recently so I wanted to run through what they can help with.

Buy to lets when you don’t have enough experience for standard lenders

We often see clients come to us with a great project, and external experiences which means we are confident it will work – this is usually where they have carried out works in their day job, so not for themselves.  This doesn’t count as experience for most lenders though.  This can cover HMOs (of any size), multi-unit blocks of flats or semi commercial buildings as well as single lets.

We can now help with mortgages up to 75% LTV for these scenarios, at a really reasonable interest rate.  The products are fixed for 2, 3 or 5 years, allowing you to gain the experience you need to move on to a lower interest rate and longer term product.  Its important to balance the lender’s risk and your experience with the rate – and also remember that you aren’t spending time or capital on projects you don’t really want to do before jumping into bigger ones!

Foreign Nationals and Ex-Pats

This is another area which is tricky to fund at the moment, so this lender allows you an easy way in to the UK market.  We can raise up to 65% LTV and the minimum loan size is £50,000 so it is available for smaller properties.  Again, the loans are for 2, 3 or 5 years and the rates are reasonable so with a good yield it is an accessible way in.  you don’t need any experience, or property in the UK at all, which is often a sticking point.  Most counties are covered under this product, and it can be in a personal name as well as limited company.

Slight credit issues

This is another potential barrier to lending at the moment.  Many lenders have become more stringent with their credit rules, meaning that even a slight blip can prevent loan approval.  Having a short term solution for first time buyers and investors is lacking in the market

This lender will allow a small amount of adverse credit, which means that a past issue which has now been resolved will be disregarded.  Some examples could be a satisfied CCJ under £5000 in the last 2 years, or one missed mortgage payment in the last 3 years.

This would cover all scenarios, so buy to lets, HMOs, multi-unit blocks and semi commercial up to 75% loan to value at the same 2, 3 or 5 year terms.  This allows you to build your experience while time is passing on your credit file to allow you to move to a more mainstream lender afterwards for a slightly lower rate and longer term.

As always, give us a call if you want to run through a particular scenario then give us a call.

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!

Adding value to your property: Planning

This week we’re exploring some more ideas on how to add value to your property. I’ve chosen to talk about planning as it is something that can be used in many different ways.

Planning gain

This is one way which I think is under used, and can be such a great way to add value quickly. Especially in the current market when investors are looking for opportunities and build costs are so high it can be a great alternative to completing the works yourself – it may be just as profitable. It allows you to sell on the asset quicker than if you were completing the works too, meaning that you can move on to your next project.

Finance has to be thought about carefully in this instance, as there always needs to be a back up option which the lender will base their decision on, but as you aren’t completing the works you don’t need to worry about the refurbishment costs. This means you are borrowing less, and the GDV on various options are less important at this stage. When you are completing the works and borrowing the refurbishment costs the lender will always work back from the GDV, and if the option is funding without planning,  there may not be enough profit in the deal to make it work.

This works well for extensions, change of use, commercial to residential (where it falls outside of PD) and conversions to houses and flats.

The added advantage is that you don’t need so much experience as you are not carrying out the works yourself.

Planning to carry out the works yourself…

There always is the opportunity to carry out the works yourself of course.

With a shortage of homes, a relaxation in permitted development rights and a booming housing market, there are always opportunities in this area of the market!

What to watch out for?

  • Land with property to give you options with additional houses or extensions
  • Blocks of flats – looking for options to add units or extend
  • Development of existing dwellings – this could be to knock it down to make better use of the space, extending or splitting into multiple dwellings
  • Floor plans are key to looking at your opportunities!

What experience do you need?

Lenders are becoming more flexible with what they need, and even with ground up sites we have options if you haven’t done one before. You do need some experience with a project that requires planning but it probably isn’t as much as you think, and you can use your residential properties as experience too.

we have had some examples recently of lenders who are happy with quite a jump up from a small renovation to something much bigger.  It does mean that more due diligence will be carried out on the contractor, and a JCT contract will need to be in place but this does open up potential opportunities.

JV or teaming up with other investors to increase the overall experience of the team is a very good idea too. It shares the risk and the rewards

It’s always worth a conversion to see what’s needed and how it could work.

Thinking outside the box: where can your deposit come from?

In this current market, we really have a big split in the situation of our clients. On one hand we seem to have plenty with cash available to purchase property and then refinance once works are completed. On the other, however, we have so many people trying to get into the property market but struggling to find the deposit funds.

Before I get to the options, one thing that comes up often is how much money you need to prove and whether credit cards can be used.

You need to be able to show the lender where the deposit is coming from (and it needs to be in your bank account!), as well as any refurbishment costs. This will need to match your schedule of works, and a valuer needs to agree that they schedule and cost match the works needed in the property. For example, if there’s clear evidence of damp then the solution needs to be covered off in your schedule.

How can you use credit cards within this? 

I hear property mentors often speak about using credit cards to pay for refurbishments so that you can refinance and pay it back without putting your own money in but to be honest it doesn’t always work that way! Lenders will want to know that you have the funds to carry out the refurbishment – if you’re not able to finish it then they will be the ones left with it and that’s not what they want!

As with lots of things though, it does come down to experience. If you’ve done it a few times before and got off your bridge successfully then they are more likely to be more flexible with where your money is coming from and we may be able to agree it.

Here’s 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 creat 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. With residential mortgages back up to higher loan to values and lenders now using bonus and commission again this may be a good time to look at this option.

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 on 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 set up.

Company loans 

Something we are seeing more of, is where clients have a (non- property) company which is profitable and they want to use these funds to put into property. It is a tax efficient way of doing things, but ensure to check with your accountant. You may have utilised a BBL in the company too, so you will be able to use that. Most lenders will allow you to use company loans as long as they are interest bearing.

Angel investments

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, when 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!

As always, let us know if you want to run anything past us!

 

 

What is going on with the stamp duty deadline and Jackie’s update

I keep saying this – but I can’t believe it is Friday again!!

I am starting to venture out and its taking some getting used to… We had one night out for a very belated November birthday this week and I’ve needed a good few days to recover!

We are now at the stage when the last cases will get through for the higher SDLT discounts ending 30th June. 

For the £250k and under purchase prices, there are still a few months to go – but be wary, the conveyancing side is starting to bubble over. We are being asked by clients for solicitors details to take on cases when their own are simply too busy to help.

What’s the best way forward if you get a good opportunity?

I would suggest, if it’s available, going dual representative. This is where the solicitor acts for both the lender and yourself.  I wouldn’t be holding your breath for a speedy completion, but it may knock off a good few days/weeks, which could be vital.

It is also important that you make sure you have a solicitor in the bag BEFORE considering an auction timescale case.

I have recently exchanged on a Manchester property. I has all been a bit quick after a year with an option.  With the planning application taking so long, together with a change of tack due to a Housing Association now wanting the plot, things have not been straightforward.  Planning has had to be resubmitted due to the changes so its now going to take even longer!  When we were ready to proceed, the original solicitor simply couldn’t take the case for completion on the 18th June. That has caused a real headache.  Thankfully my go to solicitor (Phillip Adam) took the case after I begged him! Honestly it was a really kind deed, as I know he is as busy as anyone.

So why have I changed direction with my portfolio?

The reason for going for this property and plot was to expand my portfolio. I have had vanilla buy to lets for some considerable years and although they are lovely and safe, I wanted take a bit more risk to get the higher potential rewards.  I am selling one of my flats as the return on Manchester site is worth the cost of selling the flat.

It’s interesting that your pension pot doesn’t tend to go on the radar… until you realise that your years left to fill it suddenly get very short.  Having had a financially difficult divorce in my 40s, time was short if I wanted the option to retire at a reasonable age.  I try to keep a split between earnings, pension (very tax efficient to put money in from a company) and properties.

Enjoy your weekend and I hope you give yourself time to recover 😊

Keeping an eye on the purse – Personal Guarantees…. and associated costs

Pesky costs….

Hi everyone, honestly having a regular blog slot is seriously speeding up the end of lockdown, they come round so quickly!…

Looking at cases recently, I thought I would do a bit of a rant/chat about Personal Guarantees and associated costs that need to be considered when thinking about the overall cost of your mortgage.

Personal Guarantees (PGs)

As most of you will know, these are required 99% of the time for Ltd company applications.  Lenders insist on them as most limited company paid up capital is so small, it offers a guarantee to the lender from you personally in case anything goes horribly wrong. In the early days of limited company lending a couple of banks were caught out in court, meaning that it became the norm.

Most investors accept that this is just part of the process and just sign and proceed, as do I. It is worth thinking about though as not all lenders have the same rules. If you do have paid up share capital then that can be negotiator to reducing the amount on the PG.

What we have seen more of recently, is more of the ‘vanilla specialist’ lenders offering funding for HMOs, MUFB and so on. With  lower rates than the more specialist lenders, it can look very attractive to go with them.  Having gone through the process recently for 4 of my properties I can tell you it’s not necessarily the route of least resistance.

It is important to look at what PGs with these lenders actually mean…

Most will want 100% guarantee of the borrowing plus any lender fees. That is jointly and severely between all applicants. What that means is they can come to any or all of the applicants for the full loan (no more than the loan), that may be from one person if they are easier to get hold of or have more assets than the others.

On top of that they will want Independent Legal Advice (ILA) when signing the PG – even though you are in the responsible position of being a Company Director.  This means that you need to pay to receive advice on signing the guarantee with a separate solicitor to the one acting for your limited company. With these lenders, waiving the advice is not possible, even though most of us are of sound mind and under 70 years of age.  Aside the fact I don’t agree with this belts and braces approach, that is how it is.  ILA is a cost consideration, as the minimum price is usually around £400 per person.

I have always tried to challenge the necessity, depending on the applicant but I have only been moderately successful!

Not all lenders want 100% of the loan guaranteed, some will go down to 25% (jointly and severally between all borrowers).  This can be an important factor when making a choice between lenders and should be properly considered.  Rate is not the only factor for choosing a lender as we often discuss.

The more specialist lenders do not require ILA for those in sound mind and under the age of 70.

This is particularly important to consider on smaller properties, these additional costs really make a difference to your return on investment.  Make sure you get as close a breakdown from your solicitor and get as good an idea of total costs for the comparison. We will outline these costs to you when we are looking at options so that you can consider the full cost of the mortgage – as you know we are big on transparency to enable you to make an informed decision.

Holiday let’s: we can now use actual holiday let rental!

Here we are at our Friday blog day again. I hope you’ve had a productive week!

As things start to open up we are starting to see more mortgage products appear in the market too. In the residential market this is most noticeable with the new 95% LTV products – a sign that confidence in is improving! And in the buy to let market we are seeing more options for holiday let’s. This year, with all the uncertainty around foreign travel, I think we will see an increase in demand for UK holidays. It will be interesting to see how that plays in the next few years – will we see more people falling in love with UK holidays and see their benefits?

This week I want to tell you about a new holiday let product we have available. For a while now we’ve not had great options for holiday let’s, but as things start to reopen and the chances of foreign holidays continue to look bleak lenders are spotting an opportunity.

Until now we have been able to lend up to 75% of the purchase price or current value  based on the 12 month AST rental figure. 

What this meant was the lender would only leverage it against a standard AST income, rather than the actual holiday figure, which may be higher.  Although you could use the property for holiday rental.

This can often work, but certain locations and property types don, and we’ve struggled with options for that until now.

A lender who used to be happy with holiday let’s (pre Covid) has now re-entered the market. There are some restrictions, the biggest being that the maximum loan to value is 70%; the rates, though, are lower in most scenarios to the options we previously had, so you may decide that 70% works.

The lender requires you to have a minimum income (between all applicants) and some previous experience. This can be with buy to let’s, it doesn’t mean you need to own a holiday let.

The big benefit is the income calculation. We are able to use 30 weeks income, at an average of the low, medium and high season rates. This can give a much higher maximum loan. 

Their minimum loan is £50,000, so covers all areas of England; the term can be from 2-30 years with interest only options available for the term. Rates start at 3.84% for a 2 year product at 70%.

As always, if you have any questions or scenarios you want to run through then please give us a call!

Enjoy your long weekend everyone.