BTL Second Charge Mortgages / No Monthly Payments

Reply to the comment left by "Howard Reuben" at "04/11/2013 - 17:24":

Howard (and Mark)

Thanks for your two replies, I hadn't realised the max they'd lend was 20% - and yes, it's a cheap way to get cash out if there's no alternative, especially if you want to hang on to a very low historic tracker rate.

£600,000 Current value
£250,000 Existing mortgage
£120,000 Castle Trust equity loan (20% of value being the maximum allowable)

Repeating Mark's illustration:
5years later, property sold at £750,000
£120,000 Castle Trust equity loan returned
£60,000 return paid to Castle = to 40% of the increase in property value (i.e. £150,000 gain X 40% = £60,000)
No early redemption penalty at all

Using Howards answer:
5years later, property sold at £600,000 i.e. no increase in value
£120,000 Castle Trust equity loan returned
£12,000 paid to Castle = to 2% of the loaned amount per year (£2,400 x 5)
No early redemption penalty at all is this correct?

Lastly, what are your thoughts on:
It begs the question of how many ways people might try to abuse the system, 1) either Castle trying to downvalue the initial valuation (to increase the later uplift) or 2) the owner selling to a ‘friend’ at a lower than market value to minimise the uplift in value (3) am I right in assuming it’s the actual sold price that would be used rather than a valuation carried out by Castles panel valuer just prior to sale?)

I have read the ealier info from Castle about how they'd arbitrate if you did not accept their initial valuation which kind of answers a bit my first point, but the 2nd point and my 3rd assumption?

Many thanks in advance for your replies

Andy B

Reply to the comment left by "Andy Boothman" at "04/11/2013 - 18:08":

I now concur with your updated version of the example you put to me.

You've hit on a very interesting point with your second and third new question. as you say, question one is answered. With regard to your second and third question we could take it a stage further, i.e. what if you were to sell a property which CT had loaned further money on to a spouse? I'm sure Castle Trust have these loopholes covered, they're a lot smarter than us, however, I'm going to pass the hot potato over to Howard now as I have no idea how they deal with these scenario's.
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Reply to the comment left by "Andy Boothman" at "04/11/2013 - 18:08":

Thanks for your potato Mark! 🙂

Quick note; Andy, in your calculation above you stated "Using Howards answer:
5years later, property sold at £600,000 i.e. no increase in value
£120,000 Castle Trust equity loan returned
£12,000 paid to Castle = to 2% of the loaned amount per year (£2,400 x 5)
No early redemption penalty at all is this correct?"

No, there is NO 2% payable if you sell the property and the value has not increased. This is the MRA waiver that I mentioned before, so the £12,000 is not payable in this instance. i.e. MRA = ERP and so MRA/ERP is therefore waived.

Re your 2nd and 3rd questions, I will 'potato' pass to our underwriters to provide a detailed answer and will update this thread asap.

Howard

Reply to the comment left by "Howard Reuben" at "04/11/2013 - 18:49":

Howard,

OK, got it (eventually!), so if the property is sold prior to end of term at zero increase in value then there is 'nothing to pay CT' in terms of 2% per annum.
2% per annum or double the % of initial value of increased value (40% in our example) is only payable at end of term or if refinanced prior to end of term.

This then makes my question 2 and assumption 3 even more of interest, look forward to seeing what the underwriters say. I'm sure there are various permutations and shenanigans that could be attempted so it's good to know upfront what their views would be.
A last point is that while CT are described by Mark as a good trustworthy firm, what's to stop them 're-interpreting' their T&C's a few years down the road if there was some stagnation or reduction in prices (a la West Brom) and their returns went against their projections. I guess there's no answer to that as even if they are currently 110% integrative they could get bought out by a bank or other less scrupulous firm next year or the next (I know it's not actually possible for a firm to be less scrupulous than a bank but you know what I mean!).

Best to both,

Andy B

Reply to the comment left by "Andy Boothman" at "04/11/2013 - 19:15":

🙂 cheesy grin LOL - I hope your last question was rhetoric. Like I need another campaign!!!
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Reply to the comment left by "Andy Boothman" at "04/11/2013 - 19:15":

Hi Andy

The answers have come back as follows;

Q) if a property is sold to a family/friend at a discounted price - what value would CT apply to the 'value' for redemption purposes?

Ans) If the property is being sold to a family member or friend then Castle Trust will insist on a valuation to be carried out and will work off the figure supplied on the report.

Q) if the vendor and also the purchaser disagree with CT's value, does CT have T&C's to stipulate the 'final answer' ?

Ans) If the applicant disagrees with the property value then the applicants can pay for a 2nd valuation to take place, however if Castle Trust then disagree with the 2nd valuation then will insist on a 3rd valuation and then an average of the 3 valuations will be used.

Hope that helps.

Howard

Reply to the comment left by "Howard Reuben" at "06/11/2013 - 13:57":

Howard,

Thanks for the repsonse,
I guess in reality, the vendor is not going to advertise the fact they re selling to a friend or family as less than market value, so the question purely becomes:

1) On sale of the property before term does CT use the sale price or automatically initiate a valuation by one of their panel of valuers?

Imagine you advise CT you've agreed a sale pre term of a property for e.g. £500k on the open market, would you not think CT would want to automatically have a ponder on the sale price to determine if it was about right? How would they ponder this, they'd send a valuer (without the possibility of a BMV sale to friend/family even entering the conversation), what if their valuer said, actually we think this'd sell for £550k as is or with a better agent, or with more time, or if the vendor waits till the next xyz house figures come out which might boost the market, or whatever reason. Either way and for whatever reason what happens when CT "work off the figure supplied on the report" by their valuer and this is higher than the vendor can genuinely get for a genuine sale on the open market - you'd then be in a situation where the vendor was forced to accept a higher CT valuation even though he'd got the best price possible in the market, This would be espeically pertinent if the vendor had to sell quicker than he'd like perhaps under duress because of financial difficulties, perhaps he had to take a lower more concrete offer over a possibly higher possibly more flaky offer that might come in next month.

I think this is a critical point because it's the exit point of the agreement when things might go wrong. I guess the critical question is what exact criteria do CT use to determine whether the pre term sale price is a fair one and at what point do they require a CT valuation? What happens if the vendior can only acheive a genuine sale on the open market at a price lower than the CT valuation?

Sorry to be Devil's Advocate but I believe these details are super important.

Best Regards,
Andy B

Reply to the comment left by "Andy Boothman" at "06/11/2013 - 14:41":

I have asked for clarification of these excellent points. Bear with! 🙂

I think as anyone can search for the actual sale prices in any particular area, rather than the prices they are advertised at it would be fairly easy to obtain a fairly accurate valuation on most homes in the UK with very little effort.

Obviously general condition will have an impact but variation will be within reasonable parameters. For example, a property in the street where we have a rental has been on the market for two years. However it is priced almost 50k more than any other identical house on the street has been sold for. Market forces generally dictate what something will actually sell for.

One point which has not been raised here is that most lenders revalue their books quite frequently based on localised house price index systems which gather data from HM Land Registry. They also have rather large fraud departments headed up, typically, by ex CID. I suspect that a redemption request based on the scenario provided would flag up an alert and discreet background checks would be made in the eventuality.

I'm not saying that's what Castle trust will do in practice, I'm just sharing an insight into the types of steps that mortgage lenders do take to detect potential fraud.
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