CASE STUDY: 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 works 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 with when you choose to refinance, and you can move to and from a bridge to carry out works 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!

More options for first time landlords!

We’ve had some criteria changes this week…

The unicorn product for first-time HMO landlords is now an option!!

There will always be some sacrifices with your first HMO as a first-time landlord. 

But now, achieving a hybrid or yield-based valuation is not one of them! 

We now have an option, with a competitive interest rate and terms.

This is really a game changer for your first project. 

As always, please give me a call and I can talk through the figures and see how it can all work.

 

Common Mortgage Mistakes: How to avoid them?

I am often asked to ‘fix’ issues that have come about from clients not using the right mortgage, and it is sometimes pretty tricky to do. So I thought I’d run through some examples of things you shouldn’t do as a property investor…

Use a Residential Mortgage for an Investment Property

This sounds like an obvious one, but you would be surprised how much it comes up!

Yes, there are some tax advantages to buying your home over an investment property – but that doesn’t mean you should do it!!

Once you have lived in a property (or your credit file looks like you have) it can be difficult to obtain a BTL mortgage on it, particularly if it’s an HMO.

So please don’t do it!!

Use a Standard Mortgage when You Intend to Refurbish or Convert the Property

This is probably the most common mistake I see made by investors.

You’re going against the terms of your loan. The lender won’t like it and may not want to work with you again.

If you are looking to refinance and you haven’t let your property out then the new lender will see this on your bank statements and it could present a problem.

Not Speaking to your Broker before Instructing Solicitors

There are many types of solicitors, each with their own specialism – and bridging/development is very different from residential mortgages!

Using the wrong solicitor can stop your mortgage from completing, so it’s really important you get the right person for the job.

Some lenders will allow you to use the same solicitors to act for them and you, saving you time and money so check if you can do this before deciding who to use.

Not Exploring all the Options before you Commit

We have had a few cases recently where the client has paid for a valuation or received an offer before realizing that the product they are looking at doesn’t work.

This may be because the rate is too high, it doesn’t release enough inquiries or the terms just don’t seem right.

It’s important to know that you are working with a broker who does that type of business and ask for examples of previous cases.

It’s expensive to swap halfway through!!

so please speak to us (or a broker who does lots of what you are looking to do) before you start.

and if it sounds not quite right, then it probably is!!

Case study: Getting around lack of planning and refurbishment funds.

Ryan came to me in August last year with a property he wanted to convert to an HMO. It easily converted to a 6 bed but had an option as a 7 bedroom with a rear extension. He didn’t have planning before the purchase, and only had funds available for the 6-bedroom option due to other commitments.

So we had to think outside the box a bit!

Stage One

The first part was simple; we arranged a bridge for the purchase of the property with the intention of converting it to a 6-bedroom HMO. Ryan had the funds for this, and it didn’t require planning so the lender was happy too. We were able to lend 75% of the purchase price and Ryan funded the refurbishment.

Stage Two

When the refurb was almost finished, planning was approved for both the rear extension and the change of use to a 7-bedroom HMO.

We used the same lender as the original bridge to refinance into another bridge to raise funds for this. This meant a reduced arrangement fee, valuation, and legal costs. It allowed the client to raise an additional £80,000 for the work (and also gave him the deposit to purchase another property!)

Stage Three

Another big advantage of this structure is that the lender could see that the client had followed the correct process. Ryan didn’t push the boundaries of what you are allowed to do on the original bridge and therefore wanted to keep him as a client.

Through the relationship we have with this bank, we were able to ensure the refinance was a smooth process with the same lender. Again this meant a reduced arrangement fee, valuation, and legal costs. We were able to lend 75% of the market value, and use a commercial valuation.

Summary of the numbers:

Purchase price £135,000

Initial refurb cost: £85,000

Valuation at the first refinance: £260,000

Additional refurb costs: £30,000

End value: £300,000.

Precise have expanded their bridge to term product!

How does it work?

  • You have one valuation carried out to give you a today figure and a GDV. 
  • You receive two mortgage offers – for the bridge and the term.
  • You have the offer for the term before you start.

For the bridge:

You can borrow 75% LTV to purchase the property

They allow a light refurbishment, including a change of use to an HMO

You have 6 months to move to the term mortgage

For the mortgage:

You can borrow 75% of the GDV figure.

The fees are reduced across both products.

There are very little legal fees to move from bridge to term and it is quick!

What are the benefits?

  • It keeps the costs down of bridging – arrangement fees, legal fees, and valuation fees are reduced
  • It offers certainty over the exit.
  • The process to move from bridge to term is quick and simple.

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

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.

 

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.

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.

Case study: Don’t be afraid of an ugly property if the yield is good

We’re here at Friday again, nearly 3 weeks through however long this lockdown is going to last! I hope you’ve had a good week, we’ve been trying to find some happiness and laughter in each day to keep us going. We’ve also got a new American president this week, which has got to be a sign of a brighter future ahead.

This week I want to talk about ugly properties… in particular ugly blocks of flats.

I was approached by a client of ours late last year with a collection of four blocks of flats (32 units in total). The unit value is low (approximately £20,000), condition of the flats weren’t great, it had outside staircases (not balcony) and was let to tenants on housing benefit. Sounds like a great buy I hear you say!! Our client was drawn to the amazing 21% gross yield and gave us the task of finding a solution.

There were a few complications:

  • Various levels of experience and income from the 4 directors
  • A shareholder who would normally be expected to be a director and couldn’t be due to other work commitments
  • A complicated lease structure in place for the blocks of flats
  • The flats are in a variety of conditions, some have recently been renovated but some do need updating throughout
  • The majority were tenanted, but not all
  • Client wanted to avoid the bridging route

We researched the area; the client was able to provide plenty of reasons why this area was a good investment in terms of future regeneration. On cases like these, it really is important to be transparent with your broker.  To get a good outcome we really need to know the case and the applicants – warts and all… as we are the ones that need to sell it to the lender.

It is really important to know your lender’s appetite; we do work hard at our lender relationships, as that allows us direct access to the people we need, rather than putting into the system and hoping for the best.

We engaged a lender who we know are ok with low value properties and whom we trust to do what they say. They were able to look at the appearance and give us a good steer that they would be able to lend (subject to valuers comments). What we weren’t sure about was what the valuation would be and what loan to value we could get to.  Our client really wanted 75%.

The clients were happy to proceed so we instructed the valuation.  Although a purchase, we emphasised the importance of the clients meeting the surveyor on site which I think is really worth it if you can. It gives them confidence in you as an investor and you can talk them through your valuation methodology.

The valuation came back with the market value as the purchase price. The vacant possession and 180 day value were much lower though. The valuation read well and agreed with the client that it was a good investment with a good yield. We then had to wait for the lender to let us know what they could do, and they came back with an offer at 75% of the market value and on a term product. Best case scenario! The clients were very pleased.

Legals are going through now and we are hoping to complete within the next month.

So, the moral of the story… let your brain make the decision and not your heart.  An investment property is not your family home and it’s all about the numbers, so you must take the emotion out of it.

I hope this inspires you to look at some properties that perhaps are outside of your comfort zone to see what yield you could achieve.