I have an example of how the commercial market is changing. Some lenders are now taking a risked based view of using second charges over equity as security for development finance rather than only relying on pure cash being put up as collateral by investors.
Example of a recently completed case, as follows:
A builder/developer was looking to buy a property to renovate for a long term investment and once complete take out a Buy to Let mortgage based on its new and improved value (and if possible have additional funds returned too).
He was very limited in the cash deposit he had, as all his money is tied up in other properties which he lets out, however he had a good level of equity in his main residence, which has a value of £600,000 and an outstanding mortgage with the Halifax for £300,000
He found a property which needed heavy renovation including a full new and extended kitchen, and also a new bathroom. The purchase price was £150,000 in its current state and the cost of renovation was £40,000 (as he would be able to do it himself). Therefore, the total borrowing required was £190,000
He ideally wanted to borrow 100% of the purchase price and 100% of the renovation costs using both properties as security, including using the equity in his home as additional security.
Once renovated he required a quick solution in changing the bridging loan into a Buy to Let mortgage
He was able to borrow 75% of the new purchase – which gave him £112.5k on a bridging rate of 1.15% for 3 months. A very keen rate for refurbishment deals.
The short fall of £37.5k towards the purchase and the £40k needed for the renovation works was raised by adding in the additional security via a 2nd charge on the client’s main residence by the same Bridging company.
He was offered a 2nd charge bridge on his residential property up to 70% LTV (although he did not require as much as that) including his existing main residence mortgage at a cost of 1.4% per month. This meant he could raise up to up to a max £120k from this property, more than enough to raise the required 100% of the purchase together with 100% of the renovation costs.
The valuer was booked to attend the property within 72 hours. In the meantime the shopping list of requirements was quickly collated and submitted.
Working closely with a solicitor that understood the speed required for a bridging loan, the deal was completed within a few weeks enabling him to ‘do up’ his new property, increasing the value to £300k.
3 months later he was then able to change the bridging loan product to the lenders the same lenders Buy to Let product at 4.10%, releasing 75% of its new improved (and surveyor agreed) value. This released £225,000 back to the client, enough to clear the bridging loans and put some money back into his cash flow.
Summary of Deal:
- Liquid Cash available £0
- Purchase Price £150,000
- Costs £40,000
- Gross Development Value £300,000
- First Charge Bridge £112,000 at 75% LTV
- Second Charge Bridge on Main residence £77,500 at 70% LTV
- BTL on completion of works £225,000
- Liquid cash released £35,500
The set up costs not including interest were:
- 1st Charge on property of £150k = valuation £330
- 2nd Charge on residential property of £600k = valuation £540
- Legal fees = £780
- Total = £1,650
Buy to Let 3 months later:
- Property now worth £300k = valuation £360
- Legal fees = £540
- Total = £900
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