This month I’m going to concentrate on a new area of finance. Without the credit crunch it might not have existed. It’s a second charge loan based on the current value of a Buy to Let Property on single/family lets only.

It can be much cheaper than a conventional mortgage but it could also be much more. There are no monthly payments and when the loan is repaid they share in the increase of the property value. Whatever the percentage loan you take you pay back twice that on any increase in the value of the property.

At the moment there is only one lender and that is Castle Trust. It’s backed by the same people behind Kent Reliance and Interbay who both understand landlords and investors.

Key Information

  • Aldermore, Mortgage Express and Paragon will not allow it
  • TMW restrict total borrowing at 60%
  • Up to 20% of the current value
  • Maximum loan to value (LTV) 85%
  • Rental Income 125% of the existing mortgage only
  • Minimum loan £10,000
  • Maximum loan £400,000
  • No minimum income
  • England & Wales only
  • No new build property within last two years
  • No HMO’s
  • No limited companies
  • No LHA tenants
  • Students only on one AST
  • Ownership minimum six months
  • Minimum 1 year term
  • Maximum 10 years
  • Maximum age 80 at the end of term

Let’s look at several examples so you can see how it works:

Equity that can’t be used

  • Current BTL worth £350k and an existing mortgage £255k (or 73% LTV) and
    not able to borrow any more money due to low rent
  • Raised £42,500 (12% LTV) to put towards the purchase of a new flat that will be let out. On completion they will repay 24% of any increase in value although enjoys 100% of the increase in the new property and the surplus rent

 Raising capital for JV

  • Current BTL Portfolio of 20 properties of varying values. Used to raise £180,000 (15% LTV) by topping up five existing BTL loans. Capital raised put into JV with a client
  • Repayment via sale of properties at 30% of any increase in value
  • They will obtain 50% of the proceeds of their new venture
  • No increase in monthly expenditure and rental income not required to cover the additional borrowing

 Low yielding property and high mortgage rate of 7%

  • Current Portfolio of 45 properties of varying values and LTVs
  • Used Buy to Let Equity Loans to re-gear seven low yielding properties that are currently on interest rates of 7%+
  • Raised £140,000 (20% LTV) to reduce each mortgage down to 65% LTV. She will then remortgage or use product transfers to reduce the interest rate being charged thereby increasing yield
  • Repayment of 40% of any increase in value

 Increasing portfolio

  • Purchasing a new HMO and deposit fell through
  • Rather than lose the property £40,000 (20% LTV) was obtained on a current BTL worth £200,000 and an existing mortgage of £130,000
  • 40% of the increase will be paid back but they will now get 100% of the increase in the new property and substantial monthly cash flow from the HMO

 Potential risks

  • The borrower must repay the loan by the end of term
  • If the borrower has not repaid the loan by the end of its term and either does not have sufficient savings or is not able to arrange another mortgage, then the borrower will need to sell his or her property, which may be repossessed if the loan is not paid when due
  • If the value of a borrower’s property rises significantly, then the loan may cost the borrower more than a traditional mortgage
  • The amount the customer will repay on the loan is not known and depends on the change in the value of the customer’s property and whether the repayment is due to a sale of the property, or other type of repayment
  • Apart from repayment on a sale of the property during the term, a Minimum Repayment Amount of 2% per annum applies on all repayments
  • An Early Repayment Charge of 5% is applicable to repayments made in the first 12 months

 Repayment

It is twice the LTV amount of the loan. So a 10% LTV loan is a 20% profit share, 15% is 30% and 20% is 40%.

The profit share is paid along with the original loan amount at either:

  • Sale of property
  • End of loan term
  • Early repayment-in part or in whole

 A typical example:

  • Loan of £22,500 (15% LTV) on top of an existing mortgage of £105,000
  • £150,000 property value
  • 5 years later the property is sold for £165,000
  • Lender will receive original loan amount of £22,500 + 30% of the profit-£15,000=£4,500 so total amount repaid =£27,000
  • Using other people’s money to grow your portfolio
  • Improved cash flow
  • No constraint on use of proceeds
  • Favourable tax treatment (capital gains account)
  • Access lower LTV mortgages by switching mortgage debt
  • No monthly payments on new loan
  • No rental stress test on new loan
  • Typically completes within 28 days
  • Alternative to bridging
  • 1% set up fee
  • Valuation £234 up to £1m property value
  • Use your own solicitor

 Benefits

What’s the next step?

This product is only available through accredited advisers so simply call or email Simon with your requirements and he will be happy to help.

Below you will find a number of ways to contact Simon.

SIMON ALLEN
Simon Allen Director
Total Business Finance (UK) Ltd
 
T: 01565 759810 | M: 07919 060063 F: 01565 337506
Email: [email protected] | Web: www.tbfinance.co.ukAddress: Booths Hall Chelford Road Knutsford Cheshire WA16 8GS