A radical shared appreciation mortgage product for buy to let landlords is soon to be launched.
The detailed criteria is yet to be released but we do have details of a product launched a few years ago by the same mortgage lender into the residential mortgage market. If we assume that the key features for the buy to let version will be similar, then landlords will be able to borrow 20% of the value of the property with no monthly payments or interest charges whatsoever against the security of a second charge. Up to a further 60% LTV would be able to be borrowed from a different mortgage lender which would take first charge.
In other words, you have to put down 20% deposit in cash on a purchase yourself and if you are refinancing, your total mortgage exposure (including the Shared Appreciation Mortgage), cannot be more than 80% of the value of the property.
The mortgage lender offering this product (Castle Trust) is well funded via venture capital and is a credible and trusted lender. They only operate via an exclusive panel of mortgage packagers and their network partners.
The way Castle Trust will make their money is by sharing in any capital growth when the property is sold, or in 25 years, or when the borrower reaches age 75, whichever is the sooner.
The product for residential borrowers is based on the lender taking a 40% share in the growth in the value of the property whilst the owner takes 60%. Not bad considering each party is only putting in 20% is it? In fairness though, the property owner does carry the lions share of the risk as the shared appreciation mortgage provider is secured with a second charge.
As an example, based on a property value of £100,000 the figures would work as follows:-
- Traditional mortgage £60,000
- Shared Appreciation Mortgage £20,000
- Owners equity £20,000
Now let’s assume the property is eventually sold for £200,000 – the following is what each party would get back …
- £60,000 to the traditional mortgage lender (assuming it was an interest only loan and no fees were added)
- £60,000 to the shared appreciation mortgage lender (i.e. £20,000 original capital plus 40% of £100,000 growth)
- £80,000 to the property owner being the balance.
In this example the property owner would quadruple his capital invested and only be paying interest on 75% of his total mortgage liability.
I can see several reasons why this may be attractive to landlords if the BTL product is similar to the version available to residential mortgage borrowers:-
- Deals may not stack up on rent to ordinarily qualify for an 80% LTV mortgage but may do so on this basis
- Improved cashflow due to only having to service interest on a maximum of 75% of the debt
- At 60% LTV many BTL mortgages are significantly more competitive
- Landlords will be able to increase their borrowing without affecting their cashflow
- Use of other peoples money to increase leverage and returns on capital invested
- Castle Trust will rely upon the mortgage valuation of the traditional mortgage lender. Therefore you only have to pay for one valuation.
- Castle Trust do not legal or valuation fees and their arrangement fees are only 1% of the advance. This means that total fees could be less than if you arrange a traditional mortgage for a higher Loan to Value.
- Castle Trust do not require the consent of a lender providing the first charge. Therefore, the product is technically available to any landlord with borrowings of 80% LTV
- Some landlords will wish to borrow 20% LTV via Castle Trust to partially redeem their mortgage with another lender and thus benefit from improved cashflow.
- The property owner gives away a substantial share of any capital gain
- The improved cashflow, in comparison to an higher traditional mortgage, will increase taxable income
- Remortgaging may prove difficult
- The product is only available on properties located in England and Wales (not Scotland or Northen Ireland)
Questions I can’t answer yet
- In the example above, has the property owner made a £60,000 capital gain or a £100,000 capital gain?
- Which buy to let lenders will allow a second charge to be taken over the property for a new purchase?
- Whether the BTL product will be a mirror of the residential mortgage conditions
- There are also rumours of 85% overall exposure being offered
We are expecting to receive full details within the next few weeks and funds are expected to be limited. Therefore, if this is of interest we recommend you to get in quickly.
We will be arranging introductions to brokers on our panel of specialist advisers which I have personally hand picked. The role of the adviser will be to review your portfolio and provide you with bespoke advice and quotations based upon your personal circumstances.
The fee for arranging an introduction is £200, payable to Innovative Landlord Solutions LLP (the legal owner of Property118.com) either by credit/debit card or via PayPal. You will then be contacted within 7 days of the product being launched with a view to arranging a priority appointment.
To register please complete the form below.