Buy to Let Mortgages on Low Value Properties

by Howard Reuben CeMap CeRER

14:00 PM, 26th July 2013
About 6 years ago

Buy to Let Mortgages on Low Value Properties

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Buy to Let Mortgages on Low Value Properties

I have always found one particular lender on our panel hard to consider as they’ve always represented (in my mind) the last resort lender. As 99.99% of my clients are prime, own ‘standard’ properties, have sufficient income and mortgage amounts, this lender has never really been on our radar.

However, the enquiries which I have been getting stuck on just recently have been for properties valued at less than £40k. Only one or two lenders will consider these but the hoops you have to jump through rule out the majority of those enquiries.  And of those that can be agreed, we’re still only talking about valuations of £39k or £38k anyway.

However, I had a call today from this, shall we say more “adventurous”  lender and they told me of their updated proposition.  It’s not cheap, but you have to ask .. compared to what?  I mean, if there is no other choice, then actually they are the cheapest because there is no other option.

They will lend as little as £3k, they have no minimum property value, they told me they have completed on properties of £25k value! Thereforeif any investor has such properties in mind and they don’t want to use all their cash to purchase, they can – via us of course!

The deal allows up to a possible maximum of 60%LTV, which includes the lenders fees, so only a 40% “ish” deposit is required.  And on a £35k property, that’s only £14k outlay.

This particular lender is for when all other lenders say ‘no’.  i.e. this is not a like for like comparison, and mustn’t be treated as such, but this is a deal for when there are no other options available.

For example

  • property purchases or remortgages for properties valued at less than £40,000
  • credit impaired applicants
  • non standard construction including bungalows, high rise, defective, ex-council & semi-commercial properties
  • Micro Mortgages from £10,000 – £30,000
  • Shared Ownership available up to 100%
  • many income sources accepted – employed, self-employed, DWP, pension income, companies trusts and funds

Now, don’t get me wrong, this is not a ‘cheap as chips’ range of products that you might get from a traditional BTL lender, but it is, however, a BTL deal that you can get when no-one else will lend!

For example

  • purchase price of £38,000
  • net mortgage advance £20,750
  • initial monthly mortgage payment £232.31 on a repayment basis (i/o payments only allowed on loans above £25k)
  • interest only on BTL 25 year term mortgage basis
  • interest cover at 120% of pay rate

Who does this work for?

It doesn’t have to be an ‘extreme’ example of all factors as detailed above to qualify.  For example, if you are a traditional BTL landlord who owns, or has seen an opportunity to own, a property of less than £40,000 in value (most won’t go less than £50,000 as we know), then this product allows you to buy / own unlimited properties … without having to use 100% of your own cash to buy them!

And the benefit of that?  You can buy more!

Every deal is on a case by case basis and is manually underwritten.

Useful info;

  • Properties must be let on an AST basis
  • Available in England, Scotland and Wales
  • Minimum age 18, maximum age 80
  • ERP’s during 1st 3 years at 4/3/2%, then 1% thereafter

Summary

When no other lender will say yes, there are deals available throughout England, Scotland and Wales from a long established BTL provider who likes to say yes.

If this is of interest and you would like to have a chat please leave a comment below or see my member profile – linked at the top of this article.

Regards

HowardAdventurous Buy to Let Leting



Comments

Mark Alexander

14:09 PM, 26th July 2013
About 6 years ago

Hi Howard

That is quite interesting, particularly for people buying in the North and via auctions I suspect.

A few questions if I may please. I know you say it's not cheap but how "not cheap" are we talking about?

Presumably something closer to the cost of bridging finance maybe? My guess is somewhere around 15% interest rates.

What is the interest rate?

When are the arrangement fees?

When are the charges for early repayment and within what time scales?

The reason I ask these questions is that they are important considerations for anybody who is thinking about buying a very cheap property, adding value and then refinancing onto more competitive rates say 6 months down the line with a more conventional lender.

Howard Reuben CeMap CeRER

14:28 PM, 26th July 2013
About 6 years ago

Hi Mark

Cheaper than a lot of bridging actually!

The rate is dependent on the profile of the borrower and property type, and can be as low as 0.91%pm (some bridgers are 1.5%+ of course).

ERP's are as per my article above ie 4/3/2% in 1st 3 years then 1% thereafter

arrangement fee £995 (standard as per most BTL deals)

Unless substantial refurb / value enhancement works are carried out, I can't see many 6 month refinances happening though tbh.

In my eyes, this is an option for the lower value properties to be held without having to lay out 100% cash in the first place and therefore being able to spread cash over additional properties instead.

Some people may see it as expensive, but as I say above, compared to what?

Howard

Mark Alexander

14:49 PM, 26th July 2013
About 6 years ago

Hi Howard

I've just had a very quick play to see what's available and whether such a deal could ever stack. I must admit to having surprised myself!

I found this property in Burnley which is advertised for £20,000 >>> http://www.rightmove.co.uk/property-for-sale/property-39051214.html

Similar properties within a quarter mile radius seem to be renting for around £450 pcm.

Now I've done no due diligence whatsoever other what I am sharing here but this is how the financials would stack up on the deal having run them though our Landlords Calculator.

Property value £20000

Monthly rent £450

Gross rental yield 27%

Mortgage £12000 (including lenders fee of £995)

LTV 60%.

Deposit required £8,000 plus £995 lenders fee plus legal, valuation and broker fees, say another £2,000 tops.

Interest rate 11.83%

Mortgage interest £118.3 per month

I have estimated that circa 30% of rental income will be required to fund the costs of; advertising/letting, management, Gas checks, maintenance, ground rents, service charges and void periods This equates to a monthly averaged cost of £140.

Therefore, Cashflow based on the current interest rate is £196.7 per month

Based on these figures (not including fees) the return on equity is 29.51% on cashflow alone. This is projected net annual cashflow expressed as a percentage of the equity in the property. This calculation is also referred to as; return on cash, cash on cash return, return on capital employed/invested, ROC and ROCI. Over the long term you may also wish to factor capital appreciation into the equation.

This deal breaks even when interest rates hit 31.5%.

CONCLUSION

As daft as it might sound, it does actually makes sense to borrow, even at these high rates, in some circumstances!

For the record, I have no relationship whatsoever this the featured property or it's owner and I picked it pretty much at random, knowing only that Burnley was a very cheap area to buy properties.

Frances Jones

2:59 AM, 28th July 2013
About 6 years ago

This is something I've been looking at for some time to invest in Northern properties so it looks like good news.

Mark,I'm just about to start searching for my first property as a B2L, and you mention due diligence a lot. I want to make sure that I do this comprehensively so can I find out further details of how you conduct your?

This site is great btw, thanks for your hard work. 🙂

Mark Alexander

10:00 AM, 28th July 2013
About 6 years ago

Reply to the comment left by "Frances Jones" at "28/07/2013 - 02:59":

Hi Frances

I don't usually provide one to one consultancy as the Property118 forum is a hobby for me, funded by donations from members and sponsors. My mission is to facilitate the sharing of best practice for landlords and letting agents across the widest possible audience.

If you have any questions, please search for related article using the search function (top right) and if post your question on that thread. If there isn't a related thread then please post a new article, see the second of 4 boxes just below our main navigation tabs.

The reason I work this way is that my answers to a question for one person posted on this forum can prove to be of benefit to hundreds if not thousands of people who subsequently find it.

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You do not have to be a landlord to support our goal of sharing best practice amongst landlords and letting agents 🙂
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Neil Patterson

14:25 PM, 29th July 2013
About 6 years ago

I am actually quite surprised this is now an option finally.

Many years ago the excuse for not lending below £25,001 was that the loan then fell under the consumer credit act and would be subject to different regulations to a normal mortgage. Then when this was no longer the reason £25,000 was sort of adopted by the industry as a whole including commercial as a minimum figure so they stood any chance of making a profit.

If you consider that the paperwork and admin costs are nearly the same for a 10k loan or a 100k loan I am actually quite amazed even at that interest rate that it is worth the lenders while.

It is certainly an option which has not been available ever since I can remember.

Mark Alexander

14:44 PM, 29th July 2013
About 6 years ago

Reply to the comment left by "Neil Patterson" at "29/07/2013 - 14:25":

Hi Neil, it's actually a similar interest rate to personal loans and secured loans if you want to look at it that way. Good luck to this lender I say 🙂
.

Sacha Martin

18:58 PM, 29th July 2013
About 6 years ago

What nobody seems to want to say is that these borrowers are being turned down elsewhere for a reason. Granted there is the low property value issue up North and so anyone willing to loan at lower values is a good thing but when the borrower is struggling to find someone to lend to them based on personal circumstances there is usually a good reason for it. I would suggest being responsible and only suggesting these to the 'right' applicants as otherwise there could be unsightly repercussions for them.

Howard Reuben CeMap CeRER

19:25 PM, 29th July 2013
About 6 years ago

I totally agree with Sacha and `responsible lending` is fundamental in todays Treating Customers Fairly world.

The legacy of the credit crunch has however unfortunately left - what many people would today consider to be 'good' and acceptable - borrowers with a 'history' that gives many lenders the get out clause they need to hold onto their money.

Should all borrowers always be liable for being a victim of the past?

So, an excellent point Sacha and one which further highlights my usually made point that 'face to face' whole of market advice is essential.

Sacha Martin

19:30 PM, 29th July 2013
About 6 years ago

No I agree with your response, it is difficult to find anyone not suffering in some way the repercussions of the credit crunch but yes I think each individual circumstance should be assessed for its suitability because hey, we got in this mess from irresponsible lending in the first place and I really don't want a repeat performance in five to ten years because we all got a bit too keen in recovery. Prudent and risk averse is still a good place to be in general when it comes to financing, we aren't out of the woods yet I fear!

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