Landlord Tips | Searchlight

Tax Returns

It’s that time of the year when last years Tax Information expires. The normal reaction is “I don’t have to submit it until next January”.

You are correct, but last years information is now 18 months old to a lender and if you don’t have the current figures you may not get your first choice of lender for your next BTL Mortgage.

Make your accountant happy and get the information in soon if you haven’t done so already.

Remember the Tax Year Calculation and Tax Year Overview are needed by most lenders with some asking for the return itself.

What do lenders do with this information?

Tax Year Calculation (also known as SA302) – this confirms to the lender your income and tax status. It’s important as some lenders have minimum income requirements and the rental calculation is different for a high rate tax payer.

It’s also used to double check your personal property income compared to your portfolio.

Where do I get it from? Whoever does your annual tax return can access it from the software they use.

Tax Year Overview – this confirms to the lender the amount of tax due in the tax year and how much has been paid.

Where do I get it from? Your accountant or you can download it from your Self Assessment account.

Tax Return (also known as SA100) – this confirms that you are declaring the same number of properties that you own personally at the time of your finance application and will show a lender the total income for the personal portfolio.

Where do I get it from? Whoever does your annual tax return can access it from the software they use.

Product Choice

You may think it’s comparing one rate with another and that’s it, but there are so many other factors to consider when choosing a BTL mortgage. The more of these you want, the less choice you will have.

-Overall Cost. Look at all the costs including lender set up fee, interest over the term, interest on the fee if added to the loan, valuation and solicitors costs less any cashback. You will be surprised how many brokers just look at the lowest monthly payment, which may not be the best option.

-Service. Who would you rather use, a lender that takes one day to look at your application and documentation or three weeks? A great rate is not so great if you lose your purchase.

-Product Transfers, Further Advances, Repaying extra 10% per year, Free Valuations and Free Legals when you remortgage.

These are all very common when you own property personally but in the limited company market they are rare.

The ability to keep your mortgage with your existing lender can be crucial if market conditions change or to keep the remortgage costs down.

If any of these are vital then the best rate may not be the best product for you.

Talk to us to see how we can find a BTL mortgage to match your requirements.

Improving the EPC of privately rented homes

We’ve had legislation where a rental property needs an EPC of E or better and now the government has issued a consultation paper to get that to C.

This consultation seeks views on the government’s proposal to amend the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. They think the proposed amendments would significantly improve the energy performance of private rented sector homes.

Now I’ve looked at the properties I own which are terraced houses and they are E and most of the BTL mortgages I arrange for my clients are E as well.

A lot of properties are going to be affected if it becomes law for new tenancies from 2025 and all tenancies from 2028.

It looks like grants may be available and there is also the opportunity for you to tell the government what you think by going online and completing an Online Survey

When you have a break in tenancy see how you can improve the efficiency of the property and if finance is required there are plenty of remortgage products to raise capital for this.

BTL Portfolio Lending

What is BTL portfolio lending and what are the benefits? It’s not to be confused with a portfolio landlord (four or more mortgages). It’s when one lender takes multiple properties on one loan.

Very few lenders can do this and it tends to be the banks, both high street and challenger and a few specialist lenders.

The question I get asked a lot from professional landlords is when should I do this? There is no definitive answer as every portfolio is different.

If you are considering restructuring your portfolio as part of tax planning then review your finances at the same time.

Pros

– You go from a number to having a relationship with a manager who understands property.

-Greater flexibility if a property becomes empty as rental cover calculated across the portfolio.

-Can be lower costs in setting up the loan as reduced valuation fees and legal costs.

-Option for 100% on purchases if there is headroom within the security calculation.

-Low pricing if loan is for 3-5 years increasing cash flow.

-Administration easier as one account as less lenders to deal with.One direct debit for all properties and only one lender discussion at renewal time.

Cons

-Performance Covenants: eg: Minimum LTV, rental cover, net assets.

-Provision of regular information to the lender including accounts, portfolio lists.

-All rents may have to go through the same bank where the loan is and all monies in these current accounts can be used to offset the loan balance if things don’t go to plan.

-Some lenders will only commit for three or five years and then you renegotiate so further valuation fees, set up fees, possible increase in rate. Others will do twenty-five.

-Lenders may require regular valuations on the portfolio which you will pay for.

-Cross default clauses. If you have a problem on one loan it affects all the others with the same lender.

-Consolidation clauses. If you sell a property they may take 100% of proceeds.

-Usually on repayment basis so lose benefit of cash flow if that’s you want.

-Ideally £1m loans + to get the best rates.

-Less brokers to assist you due to the complexity

At Searchlight we have experience in arranging these facilities and we’d be happy to talk you to about your finance requirements. Please contact us by phone or email.

BMV Property – Is it worth it?

Would you buy a new car without researching the model and having a test drive? Would you get married by just seeing a picture of your potential partner? No, you wouldn’t so why are so many looking to buy property from an email which has a headline of “25% BMV “

Now I understand that people are busy and the internet has resulted in many major purchases being conducted online. But housing shouldn’t be one – you must visit the property and the area.

BMV or Below Market Value is a term used to tempt people into buying a property which is a bargain, for a finders fee. Many of these “offers” then get emailed to property investors with a time limit to apply, before “they all go”. This puts pressure on the buyer and the normal research they should do is ignored.

The vast majority of BMV is not realistic and if it truly is, has many implications for you as a buyer. There is a danger of the transaction being reversed up to five years from purchase and the purchaser will lose money.

If the seller is accepting a lower figure due to their financial position, a lender would class this as a distressed sale and the seller vulnerable. A BTL lender will not lend as they do want to be part of this transaction.

Also if a sourcing fee has been paid the majority of BTL lenders will not agree with any form of BTL mortgage for the purchase.

When you are spending thousands of your hard-earned money to buy a property, why do it so quickly off the back off an email without doing the research?

When buying a property look at the area, visit it during the day and at night, talk to the locals, find the crime figures, the number of rental properties in the area, potential demand and talk to all the local letting agents both national and independent.

Have a look at the surrounding properties as any pubs, takeaways, commercial units will impact on the number of lenders available to you.

Always have a plan B for both tenant type and if an HMO what alternative use it can have, to minimise any future risk. Always visit the property without exception.

From our perspective as responsible property finance advisers, we will not accept any BTL application if the client has not visited the property and been inside it.

We will also not put BMV property on bridging because the costs/risks of staying on a bridge far outweigh the possibilities of getting a long-term mortgage on the perceived true value.

BTL Yield

Always look at the yield as one of the comparisons when viewing a BTL property and if its high for the area ask yourself why?

Once you start investigating you realise that the return is high because the property or location has potential issues.

Ones I’ve seen recently include next to a pub, takeaway, massage parlour, council waste depot, haulage yard, supermarket, railway line etc.

Not everybody wants to live next to these type of properties and as a result, it’s harder to sell or rent.

This reduces the number of BTL Mortgage lenders available and of the ones that are in the market, you may get a lower loan to value, reducing your return on capital and the interest rate is normally higher.

So if the yield is better than comparable properties in the area find out why.

BTL Portfolio Restructure Accountants Advice

Today I have come across one of the worst structures implemented by an accountant for a BTL landlord I have seen. The client owns properties personally and he has been told to put all the rental income through a limited company and then create a deed of trust as part of this process.

Land Registry, his tenants and lenders think he owns them personally, HMRC expect the rent to go through his personal tax return but it’s in the limited company. Finally the deed of trust shows he and the company own the properties 50-50!

As well as being in breach of his mortgage conditions, he can no longer refinance his BTL mortgage portfolio or buy any more property.

What’s worse for the client is the accountant is a family friend, so I envisage many an awkward conversation ahead.

Before you do any restructure I recommend that you talk to a Chartered Tax accountant who understands the property market and once you have options, speak directly to your lender or a broker who understands the BTL market.

You will find out how the lenders view your options and you won’t lose sleep at night because of what your accountant has done.

We know what the lenders like and don’t like, so are happy to help you with your BTL mortgage restructuring plans.

It’s not just about the rate?

We were recently approached by a new client who had obtained a decent 5-year fix quote from another broker for their limited company BTL. There was nothing wrong with the product but after talking to the client they wanted the following:

The ability to reduce the mortgage each year by overpayments
A lender that did product transfers, as they wanted the option to keep the costs down on expiry of the rate
Their grown-up children were down as shareholders but did not want to go on the mortgage application

The product that had been quoted offered none of these features so always be aware of what you need rather than the rate.

BTL Tip – Mortgage Illustration

Take your time to go through the Mortgage Illustration which shows you everything about the product which includes all fees including arrangement, product, broker and valuation fees and also gives you details on any exit penalties or early repayments. It also explains the rate that it will go to once the initial product is finished and if there is a free valuation or legal costs.

Ignore the amount specified under legal costs as unfortunately, most lenders keep this very very low and unrealistic to reduce the Annual Percentage Rate.

When can bridging finance be used?

Standard bridging is ideal for customers looking to secure the purchase or refinance of a residential or investment property
including:

Chain break – whilst waiting for an additional property sale
Raising funds for short term requirements
Auction purchase
Capital raising for any legal purpose
Meeting tight transaction deadlines

Light refurbishment:

Light refurbishment is used where short term finance is needed for items such as:

Modernising properties
Replacing kitchens and bathrooms
Properties deemed uninhabitable/unletable by long term lenders

Heavy refurbishment:

Heavy refurbishment is where you may require short term finance for works that require building regulations or planning permission.This could help with:

Conversion and reconfiguration of residential property
Commercial to residential
Completing a development that is wind and water tight
Extension, loft conversion and basement digs

What is a small HMO to a lender?

• A HMO with C4 planning use specifically relates to smaller HMOs

• The classification of C4 originates from C3 with the added benefit of permitted development.

• Permitted development allows for a change of use from C3, up to a maximum of 6 occupants, without a full planning application as long as there is no Article 4 direction in the area.

• Valued on a “vacant possession” basis by most lenders: the property is valued in its present condition with full benefit of vacant possession. The surveyor uses comparable evidence to support the valuation figure.

• Article 4 is whereby the local authority is looking to restrict the number of HMOs and restrict permitted development in a geographical area

• This may affect the valuation in the sense that if a HMO has the benefit of planning in an area then there is a value in the scarcity of the HMO

• Valuers confirm whether a property sits within an A4D area, and if so, how much proportion of the MV is in essence ‘scarcity value’

Multi Unit BTL Mortgages

What is it?

A freehold property split into self-contained flats. Make sure it has the correct planning permission if it has been converted and building regulations. Lenders want each unit to be greater than 30sqm and to have their own utilities.

These can be as simple as a terraced house converted into two self-contained flats or a new build on one freehold title split into multiple flats.

We have a wide range of BTL and specialist lenders which can provide options for all types of multi-unit BTL mortgages.

Bridging Finance Risks

I deal with bridging finance risks on a daily basis. Like everything in life the vast majority of lenders and brokers are perfectly acceptable and do a good job but there are a few issues that not everyone is aware of.

There is a lot of paperwork and you can’t always easily compare one lender to another. You might be under pressure financially or need to complete quickly.

Always make sure you know what you are signing and pay particular attention to the points below. This list is not exhaustive but the main points to consider. If in doubt talk to a reputable broker who has experience in bridging and your own solicitor.

The term of the loan. If you can’t apply for a remortgage until you have owned a property six months then why is the loan six months or less? On average it takes 6-8 weeks to complete a remortgage so the term should be at least nine months. Is it so the lender can charge you extension fees or default interest? Or that the transaction hasn’t been explained to them fully?

Interest – Monthly or daily. Loan set up 7th October and repaid 7th December. That’s 2 months and one day or three months depending on who the lender is. At an average margin of 1% that can be a lot of money.

Retained, rolled up or serviced. The latter is straightforward in that you repay the interest each month when it falls due. Retained is when you borrow from the bridging lender the interest payments due on the loan. If you have a six-month loan then the total of these interest payments are added to the amount you wish to borrow. Rolled up is when interest is added to the loan each month and you pay interest on that amount. There is a vast difference in the total cost when looking at these alternatives.

Changing the rate during the application. The rate you get offered should be the rate you pay unless there are issues with the valuation or additional information comes out during the process that increases the risk to the lender. Some brokers offer headline rates to get you interested which are never available

You have a loan for eight months and repay after three. Interest has been retained so you are expecting five months back. With some lenders, you won’t – they keep it. Always ask what happens when repaid early.

Don’t be swayed by the rate. Add all the costs up to compare including valuation.

Exit fees, admin costs etc. Make sure you know everything that is being charged.

Default interest. If you are late paying then rates can stay the same go up to 48% or worse. Some lenders even backdate this!!. Always ask what their policy is if the loan is late being repaid

Reputation. Don’t be swayed by FCA or any other membership. It’s no guarantee that you will get the best terms

And the worst to last. You or your broker should start on how the bridging loan will get repaid and obtain evidence of that, an agreement in principle etc. I regularly see loans taken out that don’t have this. It is usually either a remortgage or sale. Don’t enter into a loan unless you have more than one option to repay it.

Please go we don’t want you!

We all understand why property is not flavour of the month for some lenders who have historic bad debts and we are seeing many long established landlords having their funding lines cut from certain lenders.

I have seen 40 year connections told, please repay we don’t want you any more.

It’s important you have a lender who understands property, has a good reputation and is clear and transparent about credit policy.

Thankfully there are banks that are open for business and more are coming into the sector.

Well worth a read if you own leashold property

https://www.irpm.org.uk/consumer-leasehold-guides

How do you calculate bridging interest?

I’m surprised how many just focus on the monthly rate. The way interest is charged is equally as important as it can make a big difference in how much you pay.

Firstly you should have been made aware of this before the application stage.

There are three ways for lenders to calculate interest:

Serviced

This is when you will pay a monthly amount calculated on the interest rate so no deductions are taken from the loan to cover the interest for the period. Some lenders do not offer this facility and the ones that do require proof that you can make these repayments from your income.

Retained interest

An amount which covers the total number of monthly interest payments and the setup fee is deducted from the initial loan. With some lenders, you can choose the number of months that are retained and service the rest. The retained interest is still part of the amount that you borrow so interest will also be charged on this amount by the majority of the lenders. This way at the end of the loan you will not exceed the lenders LTV.

Rolled up interest

This is a better way of calculating interest and again is aimed at borrowers who are not able to make the monthly interest payment. Interest is compounded which reduces the overall costs.

BTL products we have access to …

We have direct access to lenders that will consider:-

Limited Company applications
Single Freehold split into multi-unit
Multi Lets
HMOs of all sizes
Portfolio Finance
Student Tenants
DSS/LHA Tenants
Flats above shops, restaurants
Rental valuations on HMOs
No minimum income
Limited Company applications
Pension and Trust applications
Professional landlords

Financing a Flip

A flip is buying a property and then selling quickly, hopefully at a profit. It may be a refurbishment to increase the value or you may just be trading property. There are only two ways to finance these:

Cash, which may be from a remortgage of another property
Bridging Finance

Don’t use a mortgage to finance them as it will seriously affect your future prospects of getting a mortgage. Lenders look at your credit file to see when mortgages are taken out and repaid. If you are using BTL mortgages for this type of transaction don’t as you are using long-term money for a short-term purpose and it’s mortgage fraud.

Buy to Let Light Refurbishment Finance

Refurbishment Finance is not for everyone as there are strict criteria but it does show there can be an alternative to bridging.

For a property that requires a level of light refurbishment which doesn’t involve any structural work or change in planning then it’s a very cost-effective way of adding a property to your portfolio.

You have to be an existing landlord and you are buying the property personally to get these rates. The initial loan is based on the lower of the valuation or purchase price. The valuer also estimates a valuation and rent figure after the work has been completed and the final loan is based on these figures. The difference between the two loans is retained by the lender until the work has been satisfactory completed.

You do the work normally within three months and you need savings to also cover the mortgage payments for that period. Once the work is finished the valuer reinspects and if all OK the retention is released.

The minimum property valuation is £100,000 and as with all lenders you need to be in receipt of income that is provable.

If you need to complete quickly, the value is lower or you need help with the refurbishment costs then bridging finance may be the answer.

Bridging Loans

What can Bridging Loans be used for?

Bridging loans are used for a number of reasons. These range from conventional bridging, where a homeowner wishes to purchase a new home but hasn’t sold their current property, to auction finance, refurbishment and conversion.

What Can Go Wrong?

It’s a short time loan and not suitable for long-term finance. Make sure the term of the loan gives you enough time to repay it and don’t get fooled by lower rates for shorter-term loans.

Where’s the Exit?

You need to understand how the bridging loan will get repaid before you take it out. The more exit routes the better. You may lose the property if you don’t repay on time.

When can lenders repossess?

Read the loan agreement and get legal advice. Reasons include not paying the interest, repaying on the due date, or you breach a condition such as carrying out an unauthorised conversion.

We have arranged loans recently for:

• Conversion of office into a flat under permitted development
• Conversion of a mid terrace into 4 flats
• Conversion of 2 flats back into one house
• Refurbishment of a property with no kitchen or bathroom
• Loft and side extension to convert into a student HMO

Remortgage a BTL within 6 months of purchase

These are the most common reasons we see for remortgaging within 6 months with our lenders that do this – Repay bridging finance, raise funds for another project or get a lower rate.

Financing a part Completed Development

Already started a project and run out of time or money?

Talk to us as we have lenders who will do this for the right developer and project.

Finance for Commercial to Residential Conversions

Have you found a property with permitted development that needs funding?

Call Searchlight as we can arrange competitive finance for you.

Build to Let Finance

You may want to develop a property to keep and rent out. We can fund the build and the long-term mortgage.

You have to wait 6 months to remortgage your BTL. True or False?

I keep hearing about the 6-month rule – technically it’s not a rule as lenders view it very differently. Some enforce it almost to the minute whilst others are more comfortable.I keep hearing about the 6-month rule – technically it’s not a rule as lenders view it very differently. Some enforce it almost to the minute whilst others are more comfortable.

It’s not just your ownership but the sellers as well so always ask how long they have owned it.
There are several competitive BTL lenders who will accept an application within 6 months. Reasons to remortgage early include:

• Repay a more expensive short-term/bridging loan
• Release your cash earlier to buy your next property
• Improve your interest rate
• Obtain a mortgage on the increased value if you have refurbished it

Contact Searchlight now to see how we can help.

BTL Mortgages for Unusual Properties

Unusual properties that some lenders are happy with :

• Japanese Knotweed- restrictions relaxed

• Wimpey No Fines (If constructed post-1964 and not a bungalow or a flat)

• Laing Easiform (if constructed post-1966 and not a bungalow or a flat)

• Ex-local authority houses

• New Build flats

• Properties next door to one you already own

• Flats on one title

All are subject to valuer’s opinion.

All products are aimed at UK business BTL landlords and subject to underwriting. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.

One of our Buy to Let Lenders

• No limit on number of properties owned

• No limit on background mortgage amounts

• No minimum income for existing landlords

• Existing landlords don’t need to be owner-occupiers• Loans up to 80% LTV

• Maximum age 85 for repayment

• Professional Landlords and Developers welcome

• Property Income accepted

All products are aimed at UK business BTL landlords and subject to underwriting. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.

Bridge to Let

What is it?

It’s two products with the same lender. The first part is a short term/bridging loan to enable you to purchase the property and refurbish it. Once complete the second part allows you to take out a long-term mortgage against the increased value and rent.

Example

• Purchase Price £200,000 – initial loan £150,000
• Cost of works £30,000
• After works value £300,000 – BTL mortgage of £225,000 at 75% LTV
• Term to complete works 2 months
• After works rental £15,000 pa

Process

Purchase property with a loan of 70% -75% of current value
Complete the work with your own funds
Apply for the BTL mortgage 2 weeks before work is completed
BTL mortgage agreed subject to updated valuation
Valuation carried out and confirms £300,000 value
New mortgage agreed at 75% – 80% of increased value

All products are aimed at UK business BTL landlords and subject to underwriting. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.

Comnercial Finance – Does your broker do this?

Overview of proposal
Collation of lender responses including comparison of indicative interest rates and fees
Completion of application to chosen lender(s)
Negotiation with lenders on terms and conditions of loan along with costs
Liaising with lender and their legal advisers, valuer and you to ensure that completion of the transaction is as stress-free as possible
Ongoing advice if required during the duration of the loan

We have direct access to all the banks and specialist lenders. By direct I mean that we do not go through another broker which saves you time and money as not all lenders deal directly with the public or broker market.

We can see their service standards, discuss and influence policy, know the lenders and underwriters to avoid. All this will benefit you and your application.

BTL Mortgages for Professional Landlords

One of our BTL lenders for professional landlords:

Up to 80% LTV
Standard and specialist buy-to-let products for all types of landlord (including limited companies)
Single residential units, HMOs and multi freeholds
Choice of competitive fixed and variable rates
No portfolio limits
Maximum age 85 at end of mortgage term (79 at start of the term)
No minimum income required for experienced landlords
Capital raising to 80% LTV, to fund portfolio expansion
New build and ex-public sector houses accepted

These products are unregulated BTL mortgages and are subject to you and the property meeting their criteria. Please contact us to discuss your requirements.

BTL Mortgage Rental Calculations

When calculating how much you can get on a BTL mortgage rental calculations can be quite complex. One lender has eight different calculations depending on property type, loan term, rate chosen and tax status.

Working out how much you can get is a bit more complicated. But we do this many times a day so know which lenders to choose and the ones to avoid.

Don’t waste hours of your time, contact us to see how we can help you with your next Buy to Let Mortgage.

Bridging Finance-How does it get repaid?

I’m surprised at how many enquiries I get from clients who taken out bridging finance through another broker who has not got a firm exit in place.

If you don’t have the funds to repay it there are only two ways it can be repaid, either the sale of the property or a remortgage.

With the remortgage, before you take out the bridge you need to ensure that both you and the property meet as many lenders criteria as possible. If you have only one lender to choose from, then in 6 months they not be lending in that market or at that LTV. That’s dangerous and can cause you a lot of problems.

If you are late repaying the loan most lenders increase the monthly interest rate which will quickly wipe out any equity you have in the property.

So focus on the exit before you take the bridge.

New BTL Rental Calculations-Podcast

Thanks to Rob Dix for putting this podcast together in which we explain the new Rental Calculation Process and the forthcoming changes.

New 2017 mortgage rules: everything you need to know

10 Reasons to use Searchlight Finance

Support and inform you from initial enquiry through to completion and beyond.
Education service on market in general and 16 years experience of being a landlord.
Take the time to gain a detailed knowledge of your circumstances and aspirations
Provide impartial, expert and external scrutiny of mortgage products.
Identify when your circumstances do not meet the criteria of specific lenders.
Identify the most likely lender in unusual situations, thus avoiding the need for multiple credit checks.
Expert guidance in complex scenarios.
We understand the urgency of some transactions and “Go the extra mile” to meet deadlines.
We work for you and not the lender.
Explain the features and benefits of different options and lenders.

AST Template

Did you know the government have a recommended tenancy agreement for landlords to use which is updated in line with legislation? Find it here

Proof of Income for professional landlords

HMRC are no longer issuing the SA302 (otherwise known as the Tax Calculation) or the Tax Year Overview by fax as they don’t class them to be secure.

HMRC will continue to provide copies of the SA302 by post . Sone lenders still insist on this document whilst others accept the version that is usually accessible from your own HMRC online account.

SPV-What does it mean?

An SPV is short for (Special Purpose Vehicle). It’s jargon for a company set up specifically for one purpose. In this case to own property. Most lenders prefer this type of company as there is no baggage from the day to day trading activities if the company carried out a business or service.

We then have the SIC code. That’s a 5 digit code that every company has depending on its activity. The ones that are acceptable to lenders for property investment are:

• 68100 Buying and selling of own real estate
• 68201 Renting and operating of Housing Association real estate
• 68209 Other letting and operating of own or leased real estate
• 68320 Management of real estate on a fee or contract basis

The SIC code is advised to Companies House on the incorporation of the company or can be amended on your annual return. If the return is not due it can be brought forward or resubmitted.

The company does not need any history. The application to the lender can go in as soon as the company is set up.

Please bear in mind that most lenders will require all directors to go on the application and personally guarantee the loan.

We have access to all the lenders that provide Limited Company BTL mortgages so please contact us if you have an enquiry.

Joint Venture Finance

JV Finance is two or more people getting together on a project with skills and finance pooled. Quite often there is no bank or lender involved. If there is a lender then all parties who are putting in the money need to be disclosed to the lender. Other points to consider include:

Speaking to your accountant to ensure it’s the most tax efficient structure for you and the project.
Get the JV agreement prepared by a solicitor and make sure they review it to ensure your interests are protected.
Do due diligence on your JV partners.
Once the project is completed how will you get your money out and will finance be required.

Bridging Finance – The importance of the exit.

When going into bridging always work backwards. How will it get repaid? If you only have one or two lenders then be very careful as those lenders may change their criteria and you may not be able to remortgage to repay the bridging loan. The implications if you are not able to refinance, are higher rates and possibly repossession.

The longer the period between getting the bridge and it’s repayment the greater the risk. Any experienced broker should be able to tell you what options you have before you take out the bridging loan.

Financing a flip

Cash, which maybe from a remortgage of another property.
Bridging Finance.

Don’t use a mortgage to finance them. A mortgage is long term finance and using long term money for a short term purpose can seriously affect your future prospects of getting finance.

Lenders look at your credit file to see when mortgages are taken out and repaid. If they identify that you are using mortgages for the wrong purpose they will refuse to lend to you.

If you are applying for a BTL mortgage for this type of transaction don’t as it’s mortgage fraud. We have a large panel of lenders who can provide bridging finance for this type of purchase.

Choosing a property mentor or education company – Do your homework

If you looking to pay for property education then time in front of a computer could potentially save you thousands.

Education- we never stop learning but with any subject sometimes we want a head start. So you want to learn about flipping, development finance, HMOs etc. Where do you go? Firstly don’t part with any money until you have done extensive research. This includes:

Search the company name and anybody associated to it on the internet. It may come up on a property forum or at worse a police report.
Do a company search. There are various options and you can get reports for a cost of £10 or use a free service from Companies House.
Go to a taster session and compare providers.
Make sure you can get finance before committing.
Be clear on what you will be getting and what you have to do.

Even if your research is clear it doesn’t mean you are totally protected. Remember if it sounds too good to be true it probably is.

Tax Returns and BTL Mortgages

HMRC give you from the start of the tax year April 6th until the 31st January of the following year to complete and submit your tax return. However lenders need an updated return after the 5th October so instead of having almost 10 months to complete it you have 6 months.

If the return hasn’t been done then you may not get the lender of your choice and the cost of your mortgage may be higher. Doing it early will also make your accountant happier.

Bridging Finance Risks

I deal with bridging finance risks on a daily basis. A lot of landlords don’t like bridging, others do and the purpose of this post is not to sell the concept but to make people aware of some of the pitfalls when signing an agreement.

Like everything in life the vast majority of lenders and brokers are perfectly acceptable and do a good job but there are a few issues that not everyone is aware of. We’ve all seen the recent problems with West Bromwich and Bank of Ireland and that’s all down to terms and conditions and how they are looked at.

Bridging is similar. There is a lot of paperwork, you can’t always easily compare one lender to another and you might be under pressure financially or by time to complete quickly.

• Term of loan. If you can’t apply for a remortgage until you have owned a property six months then why is the loan six months or less? On average it takes two months to complete so the term should be at least nine months. Is it so the lender can charge you extension fees or default interest, or that the transaction hasn’t been explained to them fully?

• Redemption Lenders or as I call them library lenders. They wait for a loan to be repaid (book brought back) and then lend it out again quickly. The lender only has a small amount of funds and issues offers on the expectation they will have money at completion. You have exchanged contracts and your lender doesn’t have the money to complete.

Interest

Monthly or daily. Loan set up 7th October and repaid 7th December. That’s 2 months and one day or three months depending on who the lender is. At an average margin of 1.25% that can be a lot of money.
Retained, rolled up or serviced. The latter is straightforward in that you repay the interest each month when it falls due. Retained is when you borrow from the bridging lender the interest payments due on the loan. If you have a six month loan then the total of these interest payments are added to the amount you wish to borrow. Rolled up is when interest is added to the loan each month and you pay interest on that amount. There is a vast difference in the total cost when looking at these alternatives.
Changing the rate during the application. The rate you get offered should be the rate you pay unless there are issues with the valuation or additional information comes out during the process that increases the risk to the lender. Some brokers offer headline rates to get you which were never available.
You have a loan for eight months and repay after three. Interest has been retained so your are expecting five months back. With some lenders you won’t-they keep it. Always ask what happens when repaid early.
Don’t be swayed by the rate. Add all the costs up to compare including valuation.

• Exit fees, admin costs etc. Make sure you know everything that is being charged.

• Default interest. If you are late paying then rates can stay the same go up to 48% or worse. Some lenders even back date this!! Always ask what their policy is if the loan is late being repaid.

• Reputation. Don’t be swayed by FCA or any other membership. It’s no guarantee that you will get the best terms.

• And the worst to last. You or your broker should start on how the bridging loan will get repaid and obtain evidence of that, an agreement in principle etc. I regularly see loans taken out that don’t have this. It is usually either a remortgage or sale. Don’t enter into a loan unless you have more than one option to repay it.

As a side issue I’ve recently spoken to a new client who was fleeced £10,000 in fees by a so called commercial broker. If you get asked to pay large application fees or a for a valuation then be careful.

Certainly with a valuation fee you should only do this once you have completed an application and had terms from a lender. Any fees up to this stage should be nominal.

Read the small print of your loan agreement

Getting the business finance you need can be stressful enough and when agreed the automatic reaction is one of relief and lets get it done as quickly as possible. If you have just approached your own bank then you may be in for a surprise later down the line.

To most people a 15 year loan is a long term agreement. Providing the payments are made and there is no action of default it’s there until it’s repaid. Well think again.

We are seeing more and more existing loan agreements being used by the banks to increase interest rates, withdraw facilities, bounce items on separate accounts and arrange new valuations. Some of these reasons are valid due to changes in financial circumstances for their customers but others are not. Three clauses to watch out for;

On demand clause- Common in overdrafts where the bank’s security fluctuates. But are also in some loan agreements. This gives the bank the right to request repayment whenever they want. This clause is not used by all the banks so you need to look at alternative funders as it weakens your position;
Revaluation clause- Some banks are using this now as valuations have dropped to increase rates, enforce reductions or manage the loan away. Due to your circumstances this may not be possible. Some banks are more pragmatic than others when faced with this situation;
Cross Default- If you miss a payment on a loan and you have others with the same bank then all of them can be renegotiated. Ensure that if you do miss a payment that you pay it quickly other this clause may be enforced.

If appropriate notice is given this gives the bank customer time to look for alternatives. To bank managers please take note on this point. It makes a difficult situation for both parties much easier.

Please take independent legal advice on any loan agreement and talk to an independent broker as they will know how the different banks behave.

Please go we don’t want you

We all understand why property is not flavour of the month for a lot of lenders with bad debts, questions over values and a lack of demand for new build due to restrictions in mortgage lending, but we are seeing many long established landlords having their funding lines cut.

The number of new clients we have seen over the last quarter who have been told to go by their banks is at an all time high. I have seen 40 year connections told, please repay we don’t want you any more. If you have long term funding agreed you will be all right as long as you don’t go into default.

The problem is with loans that are on an interest only basis with repayment due this year. With one bank you have to be able to prove serviceability at a rate of 11% and that’s after they’ve deducted 30% off your rent!

It’s important you have a manger who understands property, has a good reputation within the bank and is clear and transparent about credit policy. The more notice you have the better it will be.

Thankfully there are banks that are still open for business, more are coming back into the sector at £1m+ and more are planning a return.