Money, mortgages & musings!
I told my mother-in-law that my house was her house, and she said, "Get the hell off my property." ~ Joan Rivers.
Should finances allow, I commonly suggest that investors obtain or keep an unencumbered property (no loan of mortgage secured on it) as quickly as possible as it’s an incredibly powerful tool to have at your disposal and here’s why.
Firstly it’s always there to fall back on; no matter how low lenders reduce LTVs you’ll nearly always be able to raise cash on it in an emergency. You never know when you may need some quick cash and if your portfolio is geared up and lenders move the goal posts you may find yourself unable to lay your hands on some urgently needed cash. This may be for the deal of a lifetime, it may be to help a friend or relative or it may be for an unexpected bill!
Secondly, having an unencumbered property enables you to strike all sorts of deals with partners and lenders. You can create the equivalent of a revolving loan or drawdown facility, you can use it as collateral for a business loan or a joint venture for example.
However the most significant reason for having an unencumbered property is it enables No Money Down financing perfectly legitimately. Let me demonstrate…
You buy a property that you intend to refurbish for 100k – you’d typically have to put in say 30k deposit plus costs of works and purchase and finance costs of say 30k. So you have to find sixty grand.
Now imagine you have a property worth 100k that’s unencumbered.
You could bridge across the two properties and get all of your purchase money and costs and make it a true and legitimate No Money Down deal.
Once the property is sold on you repay the bridging loan in full returning to an unencumbered property plus profits (hopefully!) You could remortgage the new property or even remortgage the original unencumbered property and then leave the new one unencumbered and so on. There are many factors that come into play here depending upon your strategy but hopefully you see the point.
It is true that you could remortgage the unencumbered property on a buy to let mortgage in the first place and raise the cash that way and pay a lot less interest for it but you’re also paying for it whether you use it or not. If you leave it unencumbered then you are only paying for it whenever you need it, rather than obtaining the money on a mortgage and being tempted to use it unnecessarily.
The ideal of course would be the equivalent of an offset mortgage but unfortunately these aren’t currently available for buy to let.
You also can’t do anything else with it as the lender has first charge so you have no flexibility to use it for other purposes or in an emergency. In addition you may find that you have to jump through a lot of hoops to get a buy to let mortgage but would easily qualify for the much more relaxed lending criteria associated with bridging loans. Not to mention it takes a lot longer to arrange a mortgage than it does a bridging loan.
So how do you get an unencumbered property if you don’t have one now?
The obvious way is to either save up your cash or do a couple of deals and end up with an unencumbered property but for many investors this isn’t realistic or even possible. If you already have a portfolio of properties there are a few relatively easy ways to achieve this however.
Firstly, take a look at your existing gearing levels and consider if you could remortgage a couple of properties to leave another one unencumbered. Your overall debt remains the same (albeit considering any fees payable, your existing interest rates and the new interest rates) and you now have an unencumbered property.
Another way is to pick one property and pay off the mortgage as quickly as possible.
If any of your buy to let mortgages are on a repayment basis why not change them to interest only and the selected one to repayment? Then make additional payments to whatever level you can afford. You do need to read your mortgage contract however as many mortgages have a maximum repayment in any one year, typically 10%, but just pop that money into a savings account and pay it off at the end of the product term instead.
If you have a part time job or run a small internet business for example then give that income a purpose and throw it all at this one mortgage. Much like paying off your credit cards it will start to snowball and you will soon see the mortgage come down to zero.
I once saw someone do this by creating a huge poster of a house; they drew the house out of small squares that each represented £100. As they paid off each £100 they coloured in another square! Childish? Maybe but the speed with which they paid off an entire mortgage was astonishing so who cares!
Why not allocate one of your other rents to this property and throw all the spare cashflow at it? If you’re benefiting from some of the very low base rate trackers right now you have the perfect opportunity to do this.
Another great property to do this with is a property that’s not easily mortgageable; I often speak to clients who have a part commercial part residential property on one freehold. These aren’t that easy to finance in the current market so I often suggest that instead of refinancing it they simply leave it unencumbered and use it as I’ve suggested; it will be perfectly acceptable for bridging security. I’ve talked myself out of doing loads of mortgages this way!
Which property should you pick?
Well assuming that all other factors are equal, the property that has the lowest debt with the highest value – for example which of these three properties would you pick?
A. £100,000 value £65,000 mortgage
B. £55,000 value £30,000 mortgage
C. £250,000 value £150,000 mortgage
I would suggest property A.
The loan to value is actually the highest on this property but it’s got a smaller mortgage than property C thus you can pay it off much quicker. However the value is almost double that of B even though that mortgage could be paid off quicker.
Not all investors are the same and if a client wishes to reduce their debts or not increase their gearing we can help them make the right decision on how to do this and give them the most options for the future.
I have to say these are one of my favourite products around at the moment and while many investors are bemoaning the current marketplace we find ourselves in lenders are actually launching a whole range of innovative products such as this. What is ironic is that during the boom years there weren’t many ‘creative products’ available and especially not refurbishment mortgages so we are actually quite lucky!
So how do they work? Essentially they allow you to buy and finance a property requiring works at the same rates as standard buy to let finance, complete the works and drawdown on some of the equity in a relatively short period of time. Up until these products were launched you had to wait until the property had been refurbished before using a buy to let mortgage often having to fund the property with cash or expensive bridging finance initially and then waiting at least six months before remortgaging.
The Light Refurbishment product from The Mortgage Works allows you to drawdown up to £25,000 after works subject to a maximum of 70% of the end value and rental coverage. You don’t apply for a further advance or a remortgage however; these products work by way of a retention for the cost of works and/or additional drawdown with lending based upon 70% of the purchase price and then the end value.
Purchase price £69,950
Initial loan 70% LTV £48,965
Cost of works £15,000
End value £100,000
End mortgage 70% LTV £70,000
The property is valued at the beginning for its current value/purchase price and also its end value and cost of works. A reinspection takes place once works are completed and the retention is released. A charge of £100 is made for the reinspection which is deducted from the retention.
There are numerous advantages to this product including the lower cost of finance throughout the project, no need to remortgage paying additional valuation and legal fees and most importantly of all you know upfront the exact numbers you are playing with. Do not underestimate the importance of this.
If the property is down valued then you can decide whether to proceed or not before completing on the purchase; at worse you have lost a valuation fee. Whereas if you had paid for the property cash or with bridging and completed the works then had a down valuation you would have struggled to retrieve the cash in the deal. This way you know upfront exactly what money the deal will cost you.
There are some very clever ways to use this product for example:-
You can use this product for a long term buy to sell strategy. Opt for a 12, 18 or 24 month fixed rate product to maximise cashflow and provide some security. Refurb and pull out some of your money initially then sell the property at the end of the term. While this takes longer than might have been achieved during the boom years it can create a rolling programme of releasing cash if you do this on a regular basis; say every third property deal.
The Mortgage Works will allow up to 4 sharers on a single tenancy on any of their standard mortgage products including the refurbishment product so you can also use this on a small multi let property; not only pulling out some of your costs and/or deposit but also increasing your cashflow dramatically by letting to 4 sharers.
It is also important to note a few things:-
This product should not be used for major works, conversions, extensions, etc. It is for a light refurbishment only. Remember the valuer will see the property initially and after works have been completed and will report back to the lender if the property is not as intended.
The product should be used on what I would describe as a typical ‘rental refurb’:-
- New kitchen
- New bathroom
- New flooring
- Minor works
The retention must be drawn down within 3 months of the initial loan being released so it’s important to get on with the works asap and keep an eye on your calendar. You need to get your broker to request the reinspection and your solicitor will be sent the retention funds so work on about 2-3 weeks for this to take place.
This product is NOT aimed at Below Market Value purchases per se. They are aimed at properties that are unsuitable for letting upon purchase not to simply withdraw any discount. While the lender will allow you to drawdown more than just the cost of works it is not sufficient to aim for a £25,000 drawdown based upon simply changing the carpets!
It is best to talk through your plans and the numbers with your broker before using the product to understand how it works in practice and how it applies to your particular project.
I am aware that many investors and brokers are having trouble with this product finding they cannot get the retention released or the property is downvalued initially. When the product was first launched there were some administration issues but these were ironed out pretty quickly and my clients and I have been successfully using this product since its launch so do get in touch if you’re struggling to make these products work for you.
My first property deal was a buy to sell refurbishment project. Like many investors I naively got some landlords insurance on the property and went about my business.
We then went on to do buy to let deals as well as buy to sell and again each time I’d simply take out a landlords insurance policy.
As our portfolio got larger I negotiated with a broker in Birmingham for a particularly good rate across our portfolio. It was at this stage I was finally informed by the broker that the insurance I had been using for my buy to sell properties was useless and a complete waste of money!
The reason for this is that landlord’s policies will nearly always only insure vacant properties for what is called ‘between lets’ and usually for a period of 30, 60 or 90 days.
This means that as long as the property is only vacant while pending letting you’re usually on full insurance cover.
However if the property is being bought to sell, is being refurbished or is on the market for sale then it is highly likely that your insurance policy is worthless.
As a result of this revelation I designed my own landlord’s policy and the broker went to the insurers for us with our requirements.
The primary requirement was that we could use the same policy for all of our properties no matter what we did with them and that we would only have to pay pro rata for periods they were long term empty. Also that we had a standard percentage rate for all properties; the way this worked is that we paid one rate for a tenanted property and another for when they were long term empty. The rate for long term empty was about 3 times as much but as it was only pro rata and we had full cover it was well worth it.
We got a couple of insurers to match our requirements and used this policy for 8 years. In fact it was so successful that the broker and insurer offered out the same policy to thousands of landlords across the UK.
However when the credit crunch and recession hit claims across the entire insurance industry went up significantly as is often the case and while the number of claims across this particular policy was lower than the industry average the insurers we used all decided to stop offering long term empty cover.
But all was not lost; we simply sourced a new insurer! The downside is we have to get a bespoke quote for each property as they won’t provide us with a standard rate but at least we have cover.
My brother in law told me only this weekend he was chatting with some friends who were landlords and they had a property in the North Midlands.
The property had been let and was indeed ‘between lets’ however it had taken longer to let than they had hoped and they had surpassed the 60 day restriction in their policy. In fact they didn’t even know there was such a restriction.
The property was broken into and every single thing possible was removed including the boiler, kitchen, bathroom, all pipes, cables, carpets, you name it!
They are looking at a bill well in excess of £25,000 and can’t claim a penny on their insurance. Had the property been set alight they could have been left with nothing and still have a mortgage to pay! The consequences of an inadequate insurance policy just don’t bear thinking about.
Now I know many landlords are doing buy to sell deals and I also know that the vast majority are using their standard buy to let policy.
So if you’re buying to sell, take a while to let your property, are refurbishing between lets or put your property on the market for sale then make sure your policy gives you the cover you require.
Metro Bank have today announced they will be looking to enter the buy to let market later this year.
This follows on announcements from Santander and Skipton and Yorkshire Building Societies.
I’m also aware of a number of new lenders in the system seeking regulation.
This is very encouraging news for the entire buy to let sector.
With prices seeming to be bottoming out many people are looking to jump on the property bandwagon once again.
My personal view is that while it’s good to buy property, and anything for that matter, cheaply and ideally at the bottom of the market, as long as you are in it for the long term you should still get attractive growth and as such there is no perfect time to buy property so don’t feel like you’re missing out and jump in with your eyes closed.
I love this proverb:-
The best time to plant a tree (buy property) was 20 years ago; the second best time is today!
However if you’re itching to get started or increase your portfolio the only money you might have access to is in your own home. As such I am often asked ’should I release equity from my home in order to invest’?
The risk averse will always say ‘definitely not’ but let’s get real here. Whether I say that or not people will still do it so let’s look at some of the issues you might want to consider instead.
For many the only money they have access to is the equity in their own home. On the plus side if this is equity over and above what you paid for the property and/or owe on it, it is effectively free money. You didn’t earn it, didn’t pay for it and thus won’t miss it when it’s gone. If you would miss it then don’t do it!
However there are a number of points to bear in mind before going down this route.
Your current income level and affordability will still determine how much you can borrow on your main residence. It doesn’t matter how much equity you have in the property if you can’t afford the repayments on your income you will probably not get access to it.
Try to ensure your returns from your investment property cover your additional mortgage payment as well as your investment mortgage. That way if you have a lean month financially you know you’re still covered.
You may need to take out the additional borrowing on a repayment basis depending upon the terms of your original mortgage or increased borrowing so you should try to ensure that your investment property can cover this higher sum as well.
You will need to pay for the additional borrowing irrespective of whether you are able to rent the investment property or not so ensure you can cover these additional payments even if your investment property is empty.
Ensure that your life cover and/or income protection cover is adequate to cover the additional borrowing in the event of death or not being able to work.
You should be completely upfront with your lender about the purpose of the loan – they will ask! Lenders never used to have an issue with releasing equity for the purchase of an investment property in fact some loan/mortgage application forms even list this as an option.
They are less obliging these days but that’s not to say it will be an instant decline but again will depend on your ability to keep up the repayments should your investment property be empty.
If you can get one, choose an offset mortgage as this will mean that you only pay interest on any money actually used rather than the entire amount so if it takes you several months to find the right deal you aren’t paying interest on the money with no income coming in to cover it.
If you have the opportunity to repay the money, or churn it over again, it’s less risky than tying it up indefinitely in a property however that’s not to say that buying property to sell on isn’t without some major risks of its own. But if your circumstances change you can at least repay the loan but if it’s tied up in a buy to let it could be some time before you have the ability to repay it.
Finally, you must remember that the additional borrowing is secured on your residence – read home – and not the investment property so if you do default you could lose your home. You might not be so bothered if there is just you but think very carefully if you are responsible for others such as a spouse, children or parents.
From Mortgage Strategy
The government will strengthen demand for residential property by reforming the Stamp Duty Land Tax rules applied to bulk purchases, chancellor George Osborne says in today’s Budget.
If the buyer chooses, the rate of Stamp Duty Land Tax on purchases of multiple residential properties will be determined by the mean value of the dwellings purchased, subject to a minimum rate of 1%, rather than their aggregate value as is currently the case.
England is facing a “growing housing crisis”, according to a report which estimates a shortfall of 750,000 homes by 2025.
The country needs to build more homes even if the economy continues to falter, the Institute for Public Policy Research (IPPR) concludes.
It found the biggest shortfall would be in London, the South East of England, the East, and Yorkshire and Humberside.
Only in the North West of England could supply meet demand, it said.
Thanks to Just Do Property for link to this story on Twitter.
On a repayment mortgage you will pay off the entire mortgage by the end of the term but with an interest only mortgage you will only be paying interest for the term of your mortgage and thus the loan itself is still outstanding. So if you take out an interest only mortgage for let’s say a 25 year mortgage term then at the end of that 25 year term that mortgage becomes due and payable to the lender, in full.
Now to some this may seem obvious but I have been amazed at how many people I have spoken to who believe that if they reach the end of the mortgage term and don’t pay off the loan that the mortgage will simply run on.
I’m afraid this is not the case!
In the last couple of years it’s been quite hard to opt for interest only on your residential mortgage but prior to that especially through the 80s, 90s and early 2000s many borrowers opted to go interest only for a number of reasons including:-
- Low cost endowments that promised to repay your mortgage and hopefully provide some cash on top.
- High interest rates during some periods that made repayment mortgages unaffordable.
- Rapid property price growth meaning lenders and borrowers became overly relaxed about having an interest only mortgage instead of a repayment one expecting future equity to repay the loan when selling and/or downsizing.
But things have changed and many borrowers are now encouraged to take a repayment mortgage. Unfortunately many borrowers are still on interest only mortgages and as such need to carefully plan how they will pay off their mortgage at the end of the term.
- Considering switching to a repayment mortgage as soon as possible.
- Reviewing savings, pensions, investments, endowments, investment properties etc with a financial adviser who can estimate if they will be sufficient to repay your mortgage.
- Selling your main home and downsizing.
Careful consideration must be made if your only option is downsizing and this will be the case for most.
If your home will be worth for example £250,000 and you have to repay a £200,000 mortgage that will leave you with only £50,000 to buy your new home. You will likely be too old to take out another mortgage and price growth will also affect the smaller home you’re looking to buy.
Obviously if you are 15-25 years away from having to face this situation then you will be hoping property price inflation will assist but if you are only a few short years away then it needs urgent consideration.
Property investors also need to pay careful attention to how they will repay their mortgages at the end of the term. I have met several investors who for a variety of reasons took out relatively short term mortgages and in less than 5 years will find they have to repay those mortgages.
Taking account of capital gains taxes, the current market etc they may not be able to sell at a price sufficient to cover all their costs and neither are they in a position to remortgage elsewhere due to age, income, credit profile or a lack of equity.
Even those with longer to go give little consideration to their exit strategy and the more properties you have the more consideration is needed. Imagine having 20-100 properties that all need mortgages repaying on them over a 5 year period. Now imagine if when you come to do that you are in a depressed market like we have right now?
So remember at the end of your mortgage term that mortgage has to be paid in full and the sooner you consider your exit strategy the better; don’t leave it till it’s too late.
On April 6th stamp duty on properties over £1million will rise to 5% from the current rate of 4%.
Given this decision was made well over a year ago by the previous Government it’s fair to say many people will have forgotten about it. However there are two points of note with regards to the pending increase.
Firstly, stamp duty is usually payable on exchange. However the Government have decreed that this change will take place upon completion instead. What this means is that those who believe they can simply exchange by the 6th April and sort out the completion later will find it a very costly error. On a £1.5m purchase they will be an additional £15,000 out of pocket!
Secondly, those who have rushed through a completion but find they aren’t in a position to move may allow the sellers to rent back until they can organise the move. However the buyers could find themselves in legal trouble doing this.
It’s well known in property investment circles that ‘sale and rent back’ became a regulated activity a couple of years ago meaning only a handful of regulated firms are allowed to perform a sale and rent back arrangement. However it’s fair to say that this change in the law probably passed most homeowners by.
The FSA does allow a sale and rent back where there is no commercial interest. For example imagine a relative is in financial difficulty and you can buy their house and rent it back to them. Assuming you aren’t a property investor ordinarily and do this for no financial gain then the FSA would allow this to take place. However if your aim of selling and renting back is for the benefit of saving on stamp duty then the FSA may not see this as non-commercial.
Ultimately be careful to take proper legal advice before agreeing to let someone stay on in your new property.
For more details on stamp duty and rates click here.
A final note… four fifths of £1m+ properties are in London and there has been talk that the recent buoyancy in the London market is as a result of buyers trying to beat the rise. Time will tell of course…
This post is taken from an article I was asked to write for the Sunday Mirror:-
With mortgage lenders requiring much larger deposits than before many first time buyers have shelved their plans to get onto the property ladder and with falling house prices homebuyers no longer have the equity they once had to enable them to take a step up.
Many are resigned to years and years of saving up larger deposits and while it might take the next 5 years to save up a £10,000 deposit with a few tips and tricks up your sleeve you could save two or three times that in one foul swoop!
If you apply the same tactics as a property investor and look to buy ‘below market value’ then you may not need to wait so long to buy or save up so hard.
By the way I am still a great believer in frugality and saving – just do those as well!
Here’s are my Top Ten Tips for Buying Property Like a Professional Investor:-
1. Check out the auctions.
It isn’t just junk heaps that go to auction; there are some excellent bargains to be had once again – they got too ‘hot’ for a while but they are now full of great deals. The marketplace has been flooded with inner city apartments and these now fill the auction rooms across the UK but for young first time buyers these can make the perfect place to live with transport, shops, bars and restaurants right on your doorstep.
If you’re not looking for a city pad then the ideal properties are those that haven’t been looked after but are structurally sound – a good clearout and some decorating and you wouldn’t recognise them. If you’re really brave and pick the ones that smell then you’ll get even better bargains!
You should always arrange a survey on properties before the auction and check the legal pack thoroughly; be wary of sitting tenants, restrictive covenants and especially service charges on new build apartments which can be very high.
You need to have your finances in place in advance of the auction and you will be required to pay a 10% deposit on the fall of the hammer but you could get a property at 20-50% below its market value. City centre apartments can go for as little as 25% of their original selling prices.
If you’re terrified of bidding (or swatting a fly and buying a mansion by mistake!) then you can get the auction house to bid for you or ask a friend who may have done it before.
Remember to do your research and set your upper limit and no matter how tempting do not go over it.
2. Buy a repossession.
The auction rooms will include a variety of sales including repossessions but there are also a lot of repossessions going through the estate agents – mainly the nationals like Halifax and Countrywide (though they advertise under individual brands locally).
It might not fill you with joy acquiring a property from someone who has been repossessed but someone will buy it so it may as well be you. And if it helps think of it this way; the quicker the property is sold the less debt the former owner is incurring.
3. Be flexible.
If you restrict yourself to a certain house type or a very specific suburb then you may have to pay top price or even over the odds. The more flexible you are the more of a bargain you will get.
For example the next suburb along may not be so trendy or prestigious right now but they are usually heading that way as buyers hunt for bargains and push prices up. This is what happened to now uber-trendy places like Notting Hill.
4. Make loads and loads of offers.
I can’t stress this enough and this is the primary tactic of the property investor. They know exactly what a property is worth to them, will view anything that fits their general criteria and offer on everything they see.
5. Be cheeky!
As a home buyer I would aim to offer at least 20% below asking price in the current market. The worse that can happen is they say no.
Imagine if they say yes and plenty do.
Don’t be put off by estate agents trying to talk you up or sellers who tell you to clear off!
All par for the course, just move onto the next.
6. Be prepared.
Make sure you have your finances already in place and no chain. If you have to sell your current property then do that first then go looking for your next place.
And make sure you see a good mortgage broker who has access to the entire mortgage market to get your finances sorted before you make an offer.
Many estate agents won’t even put forward an offer until you have confirmed you have finances in place anyway.
If you haven’t tried to obtain a mortgage in the last 3 years you will find the marketplace very different so make sure you check your credit file well before you’re likely to need it – see this post for more help on this.
7. Try the developers.
A lot of developers are struggling to sell at the moment due to a lack of finance and banks shying away from new build properties. You will be amazed at the discounts they are willing to give if you stick at it.
I am aware of a development recently being sold for 70% below a RICS valuation!
Ok that’s a whole development but it’s not unusual to get 15-35% discounts on new builds plus you can often get extras thrown in like carpets and curtains, appliances, stamp duty, legal fees, etc.
And don’t just think of the big boys like Barratt’s etc there are lots of smaller developers too – typically infill plots with 1-5 houses/flats. Cashflow is the lifeblood of the small developers business and in difficult times they will often be willing to cut their losses to move off a site and onto the next.
8. Be persistent.
Keep making offers; don’t get drawn into increasing your offer and do keep going back to restate your offer.
Make sure you are on developers and estate agents mailing lists and keep track of properties you’re interested in; if you see the price move downwards then be quick to make an offer as the seller is clearly motivated to reduce the price.
People’s circumstances change all of the time so when someone doesn’t need to sell desperately one week that can all change with a new job offer the next.
I told a friend of mine to do this recently despite the agent telling her the property had sold. I told her to keep calling weekly and if not daily which she did. The agent got really fed up but one day said ‘I’ve just had a call from the solicitor and it’s fallen through’. She said she’d step in but at £20,000 less than the original offer – they accepted!
9. Don’t wait for the bottom.
If anyone could predict the bottom of the market they would be millionaires or have a crystal ball. The general view is we only know we’ve reached the bottom once we are on the way back up.
Do your numbers, decide on a strategy and start making offers.
If you get a good discount off the purchase price then if prices fall or rise you’ll still be quid’s in and on the property ladder.
10. Don’t fall in love with a property until after you move in!
I know it’s hard but if you use the techniques above to acquire the best possible place at the best possible price and save yourself a packet you can make it fit you later and fall in love with it then.
This is where investors will win out to home buyers as we don’t care if the garden is overlooked or the bathroom needs replacing but if you do you’ll have to pay the extra £10,000 for the privilege!
Keys (UK) Limited is an Appointed Representative of TenetLime Limited which is authorised and regulated by the Financial Conduct Authority. Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it. Think carefully before securing other debts against your home. Not all forms of bridging finance, secured loans, buy to let and commercial mortgages are regulated by the Financial Conduct Authority. The information contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
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