Landlord Tips

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.

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

• 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.

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.

The Mortgage Works have created a Buy to Let Tax Change calculator

Most impacted

• Existing higher rate tax payers (40% and 45%)
• Landlords with marginal rental cover (high mortgage costs relative to rental income)
• Tax payers moving into the higher rate tax band as a result of the changes
• Landlords with strong rental cover

Lower rate tax payers remaining in the same band and unencumbered landlords are unaffected.

For advice on BTL mortgages contact us now with your requirements.

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

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

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.

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.

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 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.

If you looking to pay for property education then hours 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.
• Use Google in the US as the search engine as EU privacy laws can delete the truth.
• 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.

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.

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.

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.

• 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

1.  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.
2. 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.
3. 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.
4. 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.
5. 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.

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.

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.