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If your mortgage is with any of the following lenders you may be in a position to increase your gearing to 85% LTV ……….. and best of all, WITHOUT refinancing!
There may be a few more lenders I’ve missed. Sadly Mortgage Express are definitely on the list and the following need a lot of convincing 🙁
The reason 85% lending is possible with first list of lenders above is because they will ALL consider allowing second charges, which enables landlords to consider taking on Equity Finance to release cash to fund deposits on additional purchases.
Equity Finance providers are very happy to lend on a second charge basis – this is known as joint venture funding. In other words, their finance sits above your first mortgage and their security also ranks second to that of your existing mortgage lender. Therefore, you could look at Equity Finance as a second mortgage on your property, the first mortgage remains in place. This is particularly good news if you have a good tracker rate mortgage with any of these lenders, which you don’t want to disturb.
Unlike traditional mortgage lending, Equity Finance doesn’t attract monthly payments of interest or capital. Instead, the lender takes a share of capital appreciation after 10 years, or when the property is sold or refinanced (whichever is sooner). The equity finance provider does not take any share of rental profits, you keep 100% of any profits or losses you make.
The minimum amount of equity finance is £10,000 per property and the combined LTV across the mortgage and the equity finance must not exceed 85% of the current value of the property.
Returns for the Equity Finance Provider
Given that the Equity Finance provider isn’t taking any monthly payments there has to be a way for them to profit from the deal. This is quite simple, their return is a minimum of 2.5% of the amount borrowed for each year the loan remains outstanding, or a percentage of the capital appreciation on the property after making their loan (whichever is greater). If you borrow 10% of the value of the property, their return is 20% of the capital appreciation. If you borrow 15% they take 30% of the capital appreciation and so on.
As an example, let’s assume you currently own a property worth £100,000 and that you currently have a mortgage of £65,000 secured against it. The equity finance provider will lend up to a further £20,000 which is 20% of the current value (85% LTV in total).
Now let’s assume you sell or refinance that property after 5 years and it is worth £140,000 at that point. The capital appreciation would be £40,000 so the equity finance provider (based on the example above) would get 40% of that, which amounts to £16,000, plus of course the £20,000 they loaned to you in the first place. During that 5 years you would have made no payment to the equity finance provider whatsoever. The extra £20,000 released could have been used as a deposit to purchase another property which could also have produced rental profits and capital appreciation – Oh HAPPY DAYS 😀
Just to clear up one further point, if the property falls in value (or stagnates) the equity financier charges only 2.5% per annum for their loan. That’s only paid when the property is sold or refinanced. Now that’s very cheap money compared to traditional mortgage funding!
You may be wondering why I underlined the word consider at the beginning on this article. This is because it is not a given that your mortgage lender will allow a second charge. For example, The Mortgage Works will need to be convinced that your existing LTV is below 65%. If this is the case due to your property having appreciated in value, then TMW will want to see a new valuation report to confirm that. Other lenders may want to be clear that you understand the transaction that you are entering into. This might be due to you having say 15 years on your mortgage with them, but the equity financier wanting their return in 10 years time, either from the sale or refinance of your property. Your existing lender might not want relish the idea of you refinancing in 10 years time as that will impact on their profits. Accordingly they may make you jump through a few hoops to convince them to agree to a second charge. They cannot withhold consent unreasonably though, unless of course they are now entirely Government controlled, as per Mortgage Express. For this reason we have created a spreadsheet which makes it very easy for you to justify any decisions regarding equity finance to yourself, and to your existing lender if necessary.
Consider the benefits
If you are currently at 65% LTV, using Equity Finance could enable you to double up the number of properties you own and make profits from. If you do that you would retain 60% of any capital growth, which multiplied over twice as many deals provides 20% more than just one deal. On top on that you can also double up any rental profits, and you keep ALL of that profit 😀
If you would like to learn more about joint venture finance, and to obtain our spreadsheet so that you can analyse the viability of equity finance for yourself, please complete the form below. A fee of £200 is payable which covers an introduction to and initial advice from our recommended brokers, and also a copy the spreadsheet referred to above.
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— Mark Alexander (@iAmALandlord) October 16, 2014
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