Unable to obtain mortgage on auction purchased ex-local authority flat?

by Readers Question

11:39 AM, 19th December 2016
About 2 years ago

Unable to obtain mortgage on auction purchased ex-local authority flat?

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Unable to obtain mortgage on auction purchased ex-local authority flat?

I’m in a bit of financing conundrum and was hoping your good selves might be able to provide some potential strategies for financing.monopoly

So the situation is, I purchased an un-modernised 2 bed split level (80sqm) flat in a council estate at auction for a bargain price in May 2016 into a LTD CO SPV. The property was located in Brixton, London (zone 2), across the road from the ever trendy market and 1 minute walk from the tube station. I attempted to obtain a mortgage within the 20 day auction completion timescale but was unsuccessful, citing that the property needed to be refurbished. So I purchased the property in cash and spent the best part of 4 months full refurbishing the property to a high specification, new kitchen, bathroom, floor, repainting throughout and the property. It’s now a gorgeous space and have secured tenants on a 12month AST for 1900 gbp PCM.

Here are the numbers:
Purchase price 275k
costs – stamp duty, auction fees, legals etc, 25k
refurbishment cost 40k
Total cost 340k

So after the refurb I went back to my broker, who forwarded it onto the original lender and responded that they would be “very interested” to look at the property again and instructed another valuation. The letting agent advised that the surveyor advised that he was “impressed” with the flat and on the report recommended it as suitable security and valuing it at 430k. So have 90k in equity and feeling good about myself after all the hard work refurbishing the flat, thinking the mortgage is a foregone conclusions. BUT the mortgage company turned around the knocked back the application, citing that it was in a council estate!

Never mind that it was a large 2 bedroom apartment, in the fastest gentrifying area in London, across the road from a lovely market and 1 minute walk from a tube station and above all let for 1900pcm. They don’t want to lend on it because it’s in council estate. I was completely shocked by this decision, that they’d be unwilling to lend on a gorgeous flat in such a desirable location, purely because it’s in an estate.

My broker advised that because I purchased it in an SPV, it’s cut down the amount of lenders I can apply for and they proceeded to forward it onto every conceivable lender in the space but all have come back and said no.

I would really like to keep this property in my portfolio due to the yield % and feel that it will continue to increase in value due to it’s excellent location.

So my question is, are there any strategies I can employ to finance this purchase at 60-70& LTV, (save bridging finance, which makes no finance sense to the exorbitant interest rates), or do I have no option but to sell it due to the amount of capital locked up in the property?

Many thanks for your responses in advance

regards

Keir



Comments

Neil Patterson

11:46 AM, 19th December 2016
About 2 years ago

Hi Keir

If we assume your mortgage broker is fully qualified, whole of market and completed a full fact find and product search using Trigold or similar then there may be no standard BTL mortgage that fits. You may be mixing too many competing unusual criterias.

If that is the case then you will need to investigate commercial finance using a specialist Commercial Finance broker (should be members of the NACFB).

This will cost a little more dependent on circumstances and risk profile, but is worth investigating.

Please see >> https://www.property118.com/commercial-mortgages-recent-examples/

Marlena Topple

12:49 PM, 19th December 2016
About 2 years ago

I own 2 ex local authority flats and have had no trouble with mortgages and remortgages. One I have owned since 1992 and have remortgaged it many times. However there are only a few lenders that will lend on ex local authority property. There are usually additional criteria such as the building must have fewer than 4 floors, and the building must be brick built. Even those lenders that do not exclude ex LA property will of course say that the decision is based on the opinion of the valuer and as we know opinions can differ from one person to another. I suggest that you look on line at this lender's criteria to see what their policy is on ex local authority. If they exclude all ex LA property you have been let down badly by your broker who did not do his/her research. If the lender does lend on ex LA property then I would ask for a more detailed reason for the decision. I use London & Country brokers and they only target lenders that will lend on ex LA property; in addition they tend to phone up the underwriter to talk about my specific property prior to the application so that time and money is not wasted on a property that is outside of their lending criteria. Current/recent lenders on my ex LA flats are Leeds, BM Solutions and Nat West. However the decision will be based on the valuation. Also as you know valuations differ wildly. I recently had a valuation for a remortgage on one of my ex LA flats for 200k which was well below market value. I approached another lender and the valuation came back at £255k. Good luck.

denis knockton

12:51 PM, 19th December 2016
About 2 years ago

Hi Keir.

My broker tells me that the lenders are normally ok with ex local as long as most of the estate is also ex local and privately owned. I would give Gary McKenna at Mortgages for Business a call. They have access to every lender you can imagine.

I also congratulate you on your wise decision to buy in Brixton at such a great price. If worse comes to worse given how much value you have added to the property, you can sell and take your profit. Best of luck.

david porter

16:27 PM, 19th December 2016
About 2 years ago

My general view is as far as possible is to keep it simple.
That being the case I would cash in my chips soonest.
It is frequently the case that the more complicated it is the more complicated it gets.
You could spend much time and money going around in circles .
Cash in your chips and get aother deal going.

AP

10:26 AM, 24th December 2016
About 2 years ago

I would just bear in mind that if you decide to sell, it may take a while. A friend owned what sounds like a very similar property in a Brixton estate (it may have even been the same one) and had several offers fall through because of mortgage problems encountered by the buyers (the valuations were all over the place, some wouldn't lend because not enough flats were privately owned etc) He ended up selling for almost 80k less than his first accepted offer. He still made a tidy profit but not as much as expected.

Laura Delow

11:11 AM, 24th December 2016
About 2 years ago

If for the moment we ignore the red herrings of you buying at auction just 7 months ago & buying it through a Ltd Co SPV, it could be a number of factors - examples:-
1) is the block/estate built of precast reinforced concrete? If it is this will be a problem as it is defined as defective under the 1985 Housing Act
2) is the estate/block a large panel system building (LPS)? If it is & the block is over a certain number of stories high it must have been strengthened to minimize the risk of progressive collapse eg East End's Ronan Point tower block collapse in the late 1960's.
3) Length of Lease remaining less than 70 years?
4) Is it deck access? This is where most of the front doors to the flats in the block are open to the elements on a walkway, which many lenders do not like especially if the block is over 4-5 stories high even if your split level flat is on the ground floor.
5) how many units in the council estate are privately owned? (the managing agent should hopefully be able to tell you). I ask cause if less than 60% of the council estate/block is privately owned then buy to let lenders aren't interested.
6) I don't know the lender you approached but do you know what exposure this lender has to the estate/block already? (most lenders limit their exposure to eg 20% - some even 10% - of the number of units, plus if this lender is part of a larger group, their % limit exposure will include all banks/lenders within the group)
7) as already commented on by Marlena, how many floors are in the block? and is there a lift?
8) is there any commercial retail outlets next door/adjacent, especially chicken type takeaway outlets as lenders don't like these?
9) is rental demand & resale value strong in this estate?
10) is rental demand strong in the area or is there an over-saturation of units to let?
If this were me, I'd call Colleys (part of the Lloyd/Halifax banking group) & get their opinion. The local guy for Brixton is Nick Carline on 07702 681276. Don't mention you own it already. Just say you personally (don't mention SPV) are considering buying a newly refurbished flat/maisonette in SW2/Brixton at £430K as a buy to let purchase on which you've researched the market rent to be £1900 pm (give him he post code & number of beds etc) but before you put in an offer & apply for a mortgage to Birmingham Midshires (BMids are part of the Halifax Group that Colleys are owned by), could he give you an opinion as to whether Colleys would recommend it as suitable security for BMids to lend on. If he say not, ask why. This should give you your answer.
Subject to Colleys & your answers above will eliminate certain buy to let lenders after which you then need to filter this further to lenders that will lend:-
- on a property that was bought for cash & within less than 1 year of ownership, the owner wants to capital raise which many lenders won't entertain until atleast 1 year of ownership
- on a property owned by a Ltd Co SPV
- on a property to capital raise the required amount vs lenders rental calculations that have seriously tightened up these last few weeks to a minimum of 145% at a notional interest rate of 5.5% (but Kent Reliance for example still do 125% of 5.5% or 125% of the pay rate + 1.55% if higher for Ltd Co purchases/remortgages, subject to their other underwriting criteria of course).
If unstuck at the end of all of the above, then as advised by Neil you need to consider capital raising via a good commercial broker. However as you may have already found, the amount you can raise through commercial investment property finance is often severely restricted by much tighter rental affordability criteria and often assumes a capital & interest profile even if paying interest only.
To sell will only be any good if the answers to above won't also prohibit a purchaser from raising mortgage finance whether as an end user or private investor. Otherwise you need a cash buyer.
I'm sure there's bits in my haste I've also missed out that need to be thrown in the melting pot but the above will hopefully be of some help. Good luck.

John Constant

14:40 PM, 24th December 2016
About 2 years ago

Keir,
quite often the devil is in the detail. I would hazard a guess that it is not just the Council Estate location here but you must also factor in the combination of the Ltd Co nature of the purchase too, which will severely limit your options.

I often have clients presenting situations, which are easily solve-able, but when you start digging a little further the proverbial can of worms starts to unfold. Quite often there are circumstances that the average man in the street wouldn't consider a problem, but lenders, with the benefit of hindsight, can come up with somewhat strange criteria points. However, when you see the situation from the lender's point of view, you can understand why that have said what they have said.

I have no doubt that your property now is in tip top condition, but to a lender it is still an Ex-LA flat and they have their criteria points, which are not up for discussion. The trick, obviously is to find the lender who ticks all of the right boxes. To do this, you should consult a specialised BTL broker. Could I suggest that you contact HD Consultants by clicking on my member profile? We have worked closely with Property 118 for some years now. There are a number of lenders who will accept the Ltd Co/Ex-LA flat scenario. I would like to know a little more about your circumstances before making a recommendation though.

H B

10:29 AM, 26th December 2016
About 2 years ago

I think that you need to lower your LTV to roughly 50% to 60% or so. Lenders are much more concerned about pricy ex-LA properties. Some may have an outright cap on how much they are prepared to lend against such properties.

As of next week the new PRA regulations will come in and you will basically need rent that will cover 145% of your mortgage at a stress of 5.5%.

At your current rent, that comes to a mortgage of £286k and a maximum LTV of 65%.

John Constant

12:16 PM, 26th December 2016
About 2 years ago

HB, the 145% figure is not set in stone. Some lenders have made this assumption but I am sure that some lenders will be pitching somewhere south of that figure, so there is still room for further borrowing, if required..

H B

12:47 PM, 26th December 2016
About 2 years ago

Reply to the comment left by "John Constant" at "26/12/2016 - 12:16":

There are going to be few that do, especially for a niche product such as a big loan on an ex council flat.

From what I have seen they are either moving to something around 145% (like Nationwide and Coventry) or 125% after tax (like BM has announced). That is the top 3 lenders accounting for nearly half the market.

I admit to not knowing what every lender has announced ,but those offering deals at lower coverage ratios are likely to be more expensive with reduced capacity to lend.

I may well be won't, but I think that a sub-60% LTV loan will be the best bet here.

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