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Castle Trust has launched a new Bridging Loan with streamlined requirements for brokers who want a combination of transparent pricing, fast-track service and flexible underwriting.
Available for a flat rate of 0.67%pm, Castle Trust’s new Bridging Loan can be used for first charge Buy to Let cases up to £1 million. The product has a choice of a nine or twelve month term, with an ERC period of three months.
The loan can be used for all types of refurbishment that do not require planning permission, including refurbishments that do include building regulations.
Brokers will benefit from a streamlined application process, with online submissions and quick illustrations from a dedicated team of bridging specialists who are focused on progressing cases through to completion as fast as possible.
Marcus Dussard, Director of Sales for Mortgages at Castle Trust, said: “At Castle Trust, we’ve developed a reputation for providing brokers with creative solutions for complex cases but, as the demand for short-term finance has grown, we’ve recognised that an increasing number of brokers are looking for more straightforward bridging loans for their clients, particularly on refurbishment projects, which are becoming more popular. So, we have developed a new product and service proposition that gives them just that – a quick, uncomplicated loan with simple pricing, supported by expert underwriters who understand the market. Our new Bridging Loan combines the insight and experience we have developed over the years with a new, more accessible format. It’s a combination we think will prove very popular for brokers and their clients.”
This presents a challenge for brokers. Not only do you have to help your clients to navigate the changing environment and make the right decisions for their circumstances, but you also need to choose lenders that you can be sure will remain committed to the market throughout the uncertainty and be able to fulfil on their agreements.
For those lenders in this market that are not banks, the strength of funding lines is critical and could make the difference between a straightforward completion and a very disappointed client.
So, once you find a lender that can deliver the solution your client wants, how can you have confidence the deal will complete, even if the economic conditions take a turn for the worse?
Here are three questions you should be asking every non-bank lender before you submit an application on behalf of your client:
Castle Trust Capital plc is pleased to announce the appointment of Ronnie Denholm as Managing Director of Omni Capital Retail Finance, its point of sale finance division.
Following the acquisition of Omni Capital Retail Finance in 2016, Castle Trust has restructured the operations of the business and has ambitious plans for progress.
Ronnie is an experienced financial services leader and joins the business from Barclays Bank Plc, where he held various Managing Director roles across the business, including most recently Barclays Partner Finance, one of the UK’s largest point of sale finance companies. Prior to joining Barclays, Ronnie held several senior leadership roles across the American Express group, with a strong growth record across each of the business areas he led.
Martin Bischoff, Chief Executive Officer of the Castle Trust Group said: “Opportunities to work with someone of Ronnie’s calibre are rare, so we are privileged to have him on board. As he’s demonstrated in the past, he is a very capable pair of hands to lead the business as it looks to grow. We have big ambitions for Omni Capital Retail Finance, which Ronnie is integral to helping us achieve.”
Speaking of his appointment, Ronnie said: “I am delighted to join Omni Capital Retail Finance. The company has undergone a lot of changes recently and the prospect of leading the next phase of the company’s growth is an exciting challenge. I look forward to working together with the team to consolidate the business’ position within the market and expand its operations further. “
Not all landlords are obsessed by yield. If they were, there would be very few private rental properties available in London and an oversupply of HMOs in student towns around the country. For some landlords, purchasing a desirable asset in a sought-after location is a more important factor of their investment than achieving a high yield.
For example, according to Which?, the NG1 postcode in Nottingham provides the best buy to let yields in the country, with an average yield of 11.99% and an average house price of £152,631. In Hampstead on the other hand, where the average house price is more than £1.6m, the average yield is just 4.20%. But this is still a popular area for investors because the location will always attract a good level of demand.
The trouble with investing in properties that deliver a low yield is that it can be difficult to make the interest coverage ratio (ICR) stack up on a standard buy to let mortgage.
One option to tackle ICR on low yielding properties is to roll up some or all of the interest. With a roll-up mortgage there are no monthly payments required as interest is rolled up to redemption and, any interest which is capitalised is not subject to a stress test, and so this can increase the client's borrowing capacity.
Rolling up all of the interest on a loan can ultimately reduce the amount an investor is able to borrow however, as the payment of rolled up interest will need to be factored into the maximum LTV.
So, for landlords with low rental yields, a blended product can be the ideal solution. This is effectively a loan that is structured so that some of the interest is serviced, but the interest on the remainder of the loan is rolled up. Because there are no monthly payments due on the rolled-up part of the loan, this element is not subject to a stress test. So, with a balance of serviced interest and rolled-up interest, it is possible to build a loan that fits the required stress test.
The roll-up element offers the opportunity for a client to maximise their loan amount and the serviced element offers a lower rate than the roll-up element. When the two are combined, the rates can be aggregated to give one set of loan terms, keeping things simple for you and your client.
So, if you have clients who choose to invest for long-term stability rather than yield, and need a flexible solution to tackle ICR, consider whether it would be appropriate for them to roll up some or all of the interest on the loan to achieve their lending objective.
As originally published in Financial Reporter.
The ongoing uncertainty around the UK’s departure from the European Union is continuing to have a dampening effect on the property market, which is bad news for developers who might be struggling to sell properties or suffering from down valuations.
The headline of the RICS December market survey was “housing market on hold for now” and the report said that the sales outlook for the next three months is the gloomiest it has been for 20 years.
RICS said that activity indicators from surveyors continued to slip in December with sales volumes dwindling and a net balance of -28% representing the poorest reading since the series was formed in 1999. However, the 12-month outlook is a little more upbeat, which suggests that some of the near-term pessimism is directly linked to Brexit and, while there is no guarantee of greater clarity any time soon, there are indications that the property market could experience an uplift, when we enter a more stable political environment.
So what options do developers have in the short-term if they have deadlines to pay off development finance but are also struggling to shift units at a desirable price?
In this situation, a development exit loan could provide the breathing space they need to transition from a development at their own pace. It’s important to allow a reasonable timeframe to market and sell the properties and, at Castle Trust, our development exit products are available on a three-year term with a two-year ERC. There is also the flexibility to sell an agreed percentage of the properties during this ERC period without penalty, giving the client a product that works on their terms.
So, don’t let your developer clients be suffocated by a stagnant property market. Consider their options with a development exit loan that can provide them with the flexibility and breathing space they need to successfully exit their current development and move onto their next project.
As originally published in Mortgage Solutions.
More than 400,000 first year students will begin university in September and 80% of those students will start looking for their accommodation by March, according to research by the consumer watchdog, Which?.
So, if your clients want to invest in student accommodation, now is the time they should be looking for the right property to ensure they are not too late to meet the demand from September’s starters.
University hotspots are lucrative for landlords, with locations in areas with a high student population like Nottingham, Liverpool, Manchester, Leeds and the North East boasting some of the UK’s highest rental yields, according to Totally Money, which puts Nottingham at the top of the list with average yields of 11.99%.
High yield doesn’t have to mean low quality and the standard of student accommodation has been shifting steadily upmarket, according to research by student housing charity Unipol and the National Union of Students. The survey found that average price of student accommodation in the UK has jumped by nearly a third in the last six years, with the average rental bill now taking up 73% of the maximum student loan, compared to 58% in 2012.
This is partly caused by an increase at the top end of the market, with studio flats now accounting for 9% of student accommodation, up from just 4% six years ago. In fact, self-catered en-suite accommodation now accounts for the lion's share of student accommodation with 58% of total rooms and only 17% of students live in traditional HMOs with shared bathrooms and kitchens.
The report says that private sector investment now provides half of all student bed spaces, up from 39% in 2012, as a growing number of landlords have identified the opportunity in the sector. Lenders have responded to meet this demand and there is now a range of flexible options to fund investment in a variety of student accommodation, from traditional HMOs to purpose built blocks.
September may seem a long way in the future, but opportunity knocks now for investors in student accommodation.
As originally published in Bridging and Commercial
If there is any sector of the lending market that is used to adapting to change, it’s buy to let. As we step into the political uncertainty of 2019 it’s worth looking back over the significant changes the buy to let market has already negotiated in recent years, to give a clue to the trends we might expect over the next 12 months.
Over the last four years buy to let has experienced an unprecedented level of regulation and tax intervention. In 2015 it was announced that the Income Tax relief landlords are able to claim on residential property finance costs would be replaced by a basic rate relief tax reduction, with a phased introduction starting in 2017. Then in April 2016, HMRC added to the tax burden with the introduction of a 3% Stamp Duty Land Tax (SDLT) surcharge for purchases of rental property and second homes.
In January 2017 extra regulation was layered upon these tax changes, with the PRA introducing new underwriting standards for buy to let mortgage contracts, including stricter rules on the affordability tests to be used as part of the assessment of a buy to let mortgage application. This was followed later in the year by the second part of the PRA’s new underwriting standards with the launch of additional checks for portfolio landlords, owning four or mortgage mortgaged buy to let properties.
More recently we have seen new minimum energy efficiency standards for privately rented property, the extension of mandatory licensing for HMOs and the introduction of a minimum bedroom size for HMOs.
It’s been a significant amount to deal with over a short period but, despite some negative speculation, buy to let has survived. Some landlords have decided to step away from the market and we have seen changes to the dynamics of the sector, but the majority of investors remain committed, demand for rental property remains strong and so does buy to let.
Recent figures from UK Finance show that buy to let lending in the 12 months up to October 2018 was £35.4bn, which was actually £0.4bn more than the previous 12 months.
Remortgage activity has dominated this lending and there has been a growing proportion of limited company buy to let as landlords have looked for a tax efficient vehicle for their investment. We’ve also seen increasing demand for less standard types of property investment that can deliver higher yields, such as HMOs, holiday lets, multi-unit blocks and refurbishment projects.
So, what can we expect over the next 12 months?
For the first time in a number of years buy to let landlords can look forward to a period without intervention and so amongst the political instability, there is at least a clear outlook for property investors. The market has demonstrated its resilience and landlords have developed an appetite to take a more creative approach to their investment.
Even if the macro-economic environment dampens the property market, demand for rental property will remain strong and this combined with a proven resilience and more committed and creative investors, should help to make it an exciting 12 months for buy to let.
As originally published in Financial Reporter.
Top slicing has become a popular way for affluent buy to let landlords to invest in property where the yield does not support the rental coverage. But it’s not the only way for sophisticated investors to purchase high value buy to let property.
Blended rates offer an alternative to top slicing, allowing investors the flexibility to service a portion of their loan, whilst rolling up the interest on the rest, enabling you to structure a solution that fits the required rental coverage. Here's an example of how it works.
We recently worked with a broker to help a landlord client with a portfolio of three properties valued at £1,050,000. The client wanted to consolidate his existing borrowing into one loan, with a view to selling his portfolio in three years. He also wanted to ensure that the monthly repayments would be no more than £3,500 per month.
The problem was that the rental income alone would not support the full servicing of the loan, so the client was struggling to achieve his required loan amount without having to subsidise it from his personal income.
To provide a solution, we created a blended rate product for the client, with part of the interest serviced and the remainder of the loan on rolled-up interest.
£597,127 was offered on a serviced basis with an interest rate of 6.99%. The remaining £135,180 required was offered on a rolled-up basis at 8.59%. The two rates were combined to give an overall blended interest rate of 7.29%.
The result was that the client was able to achieve his desired loan amount and continue with his plan to sell the portfolio in the next three years, using the proceeds of sale to fund the rolled-up interest without having to use his personal income.
So, if you have affluent clients who want to invest in high value, low yielding buy to let property, consider a blended alternative to traditional top-slicing.
What age group do you think about when you consider Generation Rent?
Perhaps surprisingly, one of the fastest growing areas of tenant demand is amongst people over the age of 60. According to a report by the Centre for Ageing Better (CfAB), the number of over-60s renting privately has increased by 200,000 in the last four years. And the CfAB predicts that about a third of people over 60 could enter the private rental sector by 2040 as a growing number of older homeowners choose to sell up and rent in retirement.
This trend could have a significant impact on the target tenants for your landlord clients and it could present an opportunity for you. The primary factor impacting the success of a buy-to-let investment is the right property pitched to the right tenants in the right area. A shift in the demographic make-up of the tenant population could drive growth in new areas and on new types of property that have previously proven unpopular amongst buy-to-let investors.
A landlord targeting older tenants may, for example, may consider purchasing a bungalow in a rural location, which would otherwise prove an unlikely choice of investment if they were targeting young professionals.
Another element to consider is the styling and finish of the property. Older tenants may choose to sell their home to downsize but having established a level of wealth and comfort throughout their working life, they won’t want to sacrifice the quality of their accommodation. Renovating run-down properties could provide landlords with an opportunity to deliver the high standards their potential tenants are expecting and could provide you with an opportunity to finance those renovations.
The most straight-forward approach to property refurbishment is light refurbishment, which doesn’t require planning permission or building regulations and so avoids some of the risks of more speculative property development. Light refurbishment renovations commonly include new bathroom, new kitchen, redecoration, rewiring, or new windows and a newly renovated property can increase the capital and rental value.
A refurbished property could help landlords to attract this new generation of tenants, and a fresh look at the idea of Generation Rent could help you to boost your buy-to-let business.
As originally published in Bridging and Commercial.
The recent legislation changes for HMOs have triggered a wave of coverage about the higher yields that can be earned with a multiple occupancy property investment over standard buy to let. But HMOs aren’t the only choice for this type of investment and a multi-unit freehold block is another option that can deliver similar returns.
A multi-unit block differs from an HMO in that it contains separate, independent residential units, each with their own AST agreement. Each household will have its own entrance and private areas into which no one else has right of access, and there are also likely to be common parts, such as a hallway or garden, that all households have the right to use. Examples of multi-unit blocks include:
Multiple-unit flats are lucrative for investors because they provide economies of scale and so, by their nature, they tend to be larger deals. They also provide opportunity for investors to realise greater capital gains as they can increase the value of each unit by separating the title and selling them off individually.
According to the Mortgages for Business Buy to Let Mortgage Index, multi-unit blocks delivered the biggest uplift in yield this quarter compared to any other category of investment.
The average yield achieved by a multi-unit block in Q3 of this year was 8.4%, compared to 7.5% in Q2. The yields achieved by HMOs remained consistent at 8.6% in Q2 and Q3. The yield on a vanilla buy to let during this period was just 5.4%.
We recently worked with a broker to help a 61-year old self-employed director who had successfully developed two adjacent four-bedroom detached houses on a plot of land in Oxfordshire. Both properties were listed on the same title and both were tenanted. The total value of the houses was £1.73 million.
The client wanted to raise £1.07 million to clear the development loan, pay off existing debts and fund a new project. We structured a solution to meet the client's requirements, with a product that allowed him to roll up some of the interest and service the remainder.
Many lenders are able to lend on multiple units on a single title but there are often more restrictions imposed when this is the case. For example, some lenders will not lend on new build properties and some may apply a stricter rental calculation. There are also often limits on the number of units held on the single title. So, look for a lender that takes a flexible and commercial approach, reviewing each application on its own merits and delivering bespoke solutions to meet the needs of the individual customer.
As originally published in Financial Reporter.
Your Buy to Let clients will soon start to feel the financial impact of recent tax changes, as they submit their tax returns for 2017-2018 and this could trigger a conversation about how they can maximise the returns on their investment to counter the extra cost.
One way many landlords choose to increase their returns is buying a run-down property and renovating it to achieve a higher re-sale price or retaining the property and benefitting from increased rental income.
For first time investors in property refurbishment, the most straight forward approach is light refurbishment that doesn’t require planning permission or building regulations and so avoids some of the risks of more speculative property development. Light refurbishment renovations commonly include new bathroom, new kitchen, redecoration, rewiring, or new windows and a newly renovated property can increase the capital and rental value. A refurbished property can also help landlords to attract higher quality tenants and reduce long-term maintenance costs.
Often, the properties that provide the best opportunity for refurbishment, even light refurbishment, are in a condition that makes them effectively unmortgageable, and there is a growing number of lenders that offer flexible short-term lending options to fund property renovation.
A common concern amongst landlords investing in property refurbishment is whether they will be able to refinance to a longer-term solution at the end of their refurb loan. But some lenders are able to offer both the short-term finance and a longer-term solution once the renovations have been completed.
This can provide your clients with the peace of mind in knowing that they have fully prepared their finance at the outset, which can benefit experienced refurb landlords as well as first-time investors.
As originally published in Mortgage Solutions
The number of students studying at UK higher education institutions is now more than 2.3 million and this presents a significant opportunity for landlords who want to invest in HMO property.
There are a number of benefits to investing in student lets. For the right properties in the right area, there is almost guaranteed demand year after year and student lets are often arranged early – up to six months in advance – which can minimise the risk of void periods.
The average yields on HMOs are also currently higher than any other property investment. According to the Mortgages for Business Buy to Let Mortgage Index, in Q2 of this year, HMOs delivered an average yield of 8.6%, compared to a yield of just 5.5% on standard Buy to Let property, while multi-unit freehold blocks delivered an average yield of 7.5% and the average yield on semi-commercial property investments was 7.8%.
For these reasons, we often work with brokers whose clients have children who are going to university and want to invest in an HMO that can be used by their children and rented to other students to cover the costs.
This is a very practical idea, but it does carry some complications. Letting a property to a relative is considered as regulated Buy to Let and this can restrict the number of options. However, most lender definitions state that Buy to Let mortgages are considered to be regulated if at least 40% of the property is used by a family member. So, if your client were to buy an HMO in which their child was to occupy one bedroom out of, say, five on a separate tenancy agreement to the other occupants, then it would not qualify as a regulated Buy to Let contract and you would have more options.
In these circumstances, you should ensure that the rental income achieved by letting rooms to non-family members is sufficient to cover the stress test as this will provide the lender with comfort that the investment is sustainable. However, in most cases, this is unlikely to prove a problem as the yield achieved on HMOs means that there should usually be excess rental income to cover the stress test.
If you are working with clients who would like to invest in student property that will be occupied by a family member, speak to a lender that specialises in HMO investments and can help you to structure the right deal to best meet their requirements.
The uncertainty surrounding the outcome of Brexit negotiations has, temporarily at least, put the brakes on an already faltering property market and transaction activity is suffering.
The September 2018 RICS UK Residential Market Survey has shown a continued weakening in national new buyer demand, citing a mixture of affordability constraints, a lack of stock, economic uncertainty and interest rate rises.
RICS says that new buyer demand was down by 11% in September on the same month last year and, at the same time, new sales instructions have also deteriorated, leaving average stock levels on estate agents’ books close to record low levels.
The combined effect of constraint on both supply and demand has resulted in house price resilience, but with little fluidity in the market, properties are taking longer to sell. According to RICS, the time taken to complete a sale, from initial listing, has increased to approximately 19 weeks, which represents the longest duration since the measure was introduced at the beginning of last year.
For home-movers, this period can be frustrating, but for developers it can also prove very costly and any delay in selling the property and redeeming the development loan can significantly impact the profit they achieve on a scheme.
This provides an opportunity for you, as a stagnant property market leads to increased demand for development exit loans, that can benefit developers in a number of ways.
A development exit loan allows a developer to refinance their completed development at a lower rate than most development finance, while giving them more time to achieve the best sales price and even release equity from the scheme to use towards future projects.
When it comes to development exit loans, flexibility is key, particularly if your client is actively marketing their development for sale. A loan with a lower rate may ultimately prove more expensive for your client if it also comes with restrictive early repayment charges.
A stagnant property market doesn’t have to put the brakes on your business and there are always options to deliver your clients appropriate solutions, whatever the stage of the economic cycle. In the current environment, development exit loans provide a great opportunity for you to provide your clients with the flexibility they need to bridge the current uncertainty and continue to grow their portfolio.
Castle Trust announces two further management changes.
Barry Searle, the company’s current Chief Operating Officer will become the company’s new Managing Director (Mortgages). Barry has been with Castle Trust since 2014, he has been instrumental in the growth of the company, especially within the mortgage division. He held the largest underwriting mandate and had overall responsibility for operations. During Barry’s financial services career he has held senior roles at various institutions including Legal and General’s mortgage division and GMAC RFC.
Stuart Sykes will be joining the company as Operations Director from MyJar, where he has been Group Customer Operations Director for the last four years. He has previously held roles at ICICI Bank, RBS and Lloyds Banking Group.
Speaking of the appointments, Martin Bischoff, Chief Executive Officer said:
“As the company’s COO, Barry is already very familiar with both the industry and the aims of the business and was a natural choice to fill the role. He has contributed enormously to the success of the business so far and will be a pivotal part of our transition to become a bank.
“Stuart has extensive experience in the lending environment, particularly in consumer finance. We are delighted that he has chosen to join us as we move into Castle Trust’s next phase.”
Following continued success, Castle Trust has entered discussions with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to pursue a banking licence application.
This represents the next phase of growth for Castle Trust, which was originally authorised by the FSA in September 2012. Since then, Castle Trust has offered investment products alongside its mortgage range and now has approximately £750m of assets under management and £660m of bonds outstanding. In 2017, Castle Trust further expanded the offering with the acquisition of Omni Capital Retail Finance.
As a result of this growth, the company has applied for the licence to support the continued evolution of the business and enable it to further expand the product offering across both the mortgage, savings and consumer finance arms.
Speaking of the application, Sean Oldfield, Group Chief Executive said:
“We are delighted with the progress of the business to date and today marks a significant moment in the evolution of the company. Making the application for a banking licence will allow us to continue our innovative approach to both investments and mortgages as the business continues to grow.”
Castle Trust has appointed Steve Gregory to become its new Telephone Business Development Manager for the Midlands.
Steve, who was previously a Business Development Executive at Castle Trust, will work with brokers across the region to help identify appropriate solutions for their High Net Worth clients, buy to let investors and entrepreneurs in need of business funding.
In addition to this appointment, Castle Trust is further strengthening its sales team with the recruitment of new Business Development Executives.
Marcus Dussard, Sales Director at Castle Trust, said: “Steve has worked at Castle Trust for two years now and developed a strong reputation amongst brokers as someone they can call if they are struggling with a complex case. He has a great understanding of our proposition and the challenges faced by brokers, and this makes him a huge asset to have on the team. In addition to the appointment of Steve, we are further strengthening our support for brokers and recruiting for new Business Development Executives.”
Steve Gregory, Telephone BDM for the Midlands, at Castle Trust, said: “Castle Trust has a unique offering for brokers in that we can genuinely structure bespoke loans to help their clients fund a property investment or business venture. I am looking forward to the opportunity to work more closely with our intermediaries in the Midlands to help identify the best solutions for their clients.”
This was a 54% increase on 2016 and, so far, this year the number of listed properties has already exceeded 197,000, according to Airdna, a useful website that drills into the data of every Airbnb listing in the world.
Airbnb is just one marketing platform, but it’s clear that an increasing number of investors are turning to shorter lets as a way of generating better returns.
For example, a new two-bedroom flat in Canada Water, south London, would typically be available to rent for around £1,800 a month on an assured shorthold tenancy (AST) which means that, at full occupancy, it could generate £21,600 in revenue over the course of a year.
A similar property in the same area could achieve around £150 a night by being let on a short-term basis. Assuming a 70% occupancy rate – which is the London average according to Airdna – that property could generate £38,325 over the course of the year, which is a 77% increase on the amount it could achieve on a standard AST.
It is important to note that this figure is before expenses and that the costs of running a short-term let are considerably higher than a standard buy-to-let given that the high turnover of occupants means larger cleaning, maintenance and marketing fees. But, even accounting for these, the comparable returns on a short-term let are still impressive.
With so many investors drawn to these returns, you need to ensure that your clients have the appropriate product for the way they intend to let the property, as short-term lets and standard buy-to-let are two distinct categories.
The PRA’s supervisory statement on underwriting standards in buy-to-let states that an agreement to dwell in a property for less than one month is not occupation on the basis of a rental agreement, which means that mortgages for short-term lets are not restricted by the same rules that govern buy-to-let.
Short-term lets also have different tax considerations to buy-to-let as they are treated as a trading business, although stamp duty land tax on both still carries a 3% surcharge.
And, perhaps most importantly, a standard buy-to-let mortgage will generally require that the property is let on an AST, which effectively excludes it from being used for short-term rentals through Airbnb or similar platforms. Borrowers with a standard buy-to-let mortgage who choose to rent their property on short-term lets could, therefore, be in breach of the conditions of their mortgage and, as such, committing fraud.
Needless to say, this is not a position that you want to be in with one of your clients so, with the growing popularity of short-term lets, it is worth taking the time to understand how they intend to rent the property and making sure you recommend a suitable product. Taking a long-term view to short-term lets will protect both you and your client.
This is why areas with cheaper house prices – particularly university towns – are heralded as the next buy-to-let hotspots.
But landlords don’t always focus on yield. Often an investor will want a reliable property in an area with strong and sustained demand that can provide dependable long-term growth. These properties tend to be found in more expensive areas so rarely deliver particularly attractive yields.
According to the latest buy-to-let yield map by Totally Money, Liverpool boasts the highest buy-to-let yield of 11.79%, while there are parts of London that only achieve a yield of 1.5%. Despite this huge gap in the yield that could be achieved, there are still many investors who would rather buy in those areas of London. In fact, in monetary terms, a 1.5% yield in London could still deliver more profit than a 12% yield in Liverpool.
We know there is significant demand from landlords for solutions that help them to buy low-yielding properties because of the number of lenders that have started to offer top slicing, where they use the landlord’s income to supplement the interest coverage ratio (ICR). A lot of big names have recently entered this previously niche market and it goes to show that standard ICRs are not sufficient for the requirements of many landlords.
Top slicing is one way for landlords to purchase low-yielding properties within mandatory minimum stress tests, but it is not the only option.
Another approach is to structure a loan where some of the interest is serviced, but the interest on the remainder of the loan is rolled up. Because there are no monthly payments due on the rolled-up part of the loan, this element is not subject to a stress test. So, with a balance of serviced interest and rolled-up interest, it is possible to build a loan that fits the required stress test. This is something we are able to do at Castle Trust, and here’s an example of how it works.
We worked with a broker to help their client – a portfolio landlord – to buy a desirable three-bedroom maisonette in Fulham for £1,050,000. The client wanted to borrow £755,000, but the rental value was only £2,625 per month and the yield did not support this loan amount. Based on PRA stress testing, the client would only have been able to borrow £395,000 from a traditional lender, or £458,000 if the property was purchased by a limited company. This would mean the landlord would have to evidence up to £2,400 additional monthly income.
As the client was an experienced landlord, we were able to structure a solution by splitting the balance and enabling the client to service interest of £365,000 and roll up the interest on £390,000. This meant the client was able to invest in a sought-after property with robust potential for capital gains even though it delivered a low rental yield.
Top slicing may be flavour of the month with many lenders, but it is not the only way to meet demand from landlords for low-yielding property. With the right lender, you can structure a deal for your client that blends serviced and rolled-up interest to enable them to invest in the property of their choice.
There was a time – just a couple of months ago – when you couldn’t open a newspaper or read a website without being bombarded with scare stories about the impact and fallout of the new data regulation. But now that implementation has been and gone, little seems to have changed, except I receive fewer emails than I used to and we have a slightly smaller marketing database at Castle Trust.
It’s a smaller database, but it’s also a stronger database. We may have lost a number of contacts, but they were the brokers who never really engaged with our marketing messages and were even less likely to engage with our business. Now, following consolidation, we can be sure that even though we are communicating with a smaller group, they are more engaged and we can concentrate more of our energy on working with these more productive brokers.
There seems to be a lot of similarities here with the buy-to-let market. The dual impact of tax changes and regulation have triggered many scare stories about an exodus of landlords from the market and research from the National Landlords Association (NLA) states that up to 380,000 landlords – nearly a fifth of the market – expect to offload properties in the next year.
But, at the moment, this anticipated exodus of landlords isn’t being translated into business volumes. According to UK Finance, there were more buy-to-let mortgages completed – and for greater value – in May this year than the same month a year ago. Conversations with some of our distributors that focus on specialist buy-to-let also indicate that they have never been busier and it seems that more landlords are taking a holistic view of their portfolios and diversifying into properties such as HMOs, multi-unit blocks and holiday lets for the first time.
So, while changes to buy-to-let may lead to some consolidation in the overall number of landlords, those that remain have the appetite to become more engaged with the market and drive more value from their investment. Like GDPR, the focus is on quality over quantity and this is good news for brokers who can add real value by advising committed landlords on a whole set of new strategies to help them to grow and diversify their portfolios.
It can be easy to take comfort in a large portfolio of buy-to-let clients and any reduction to these numbers can be daunting, but consolidation provides you with an opportunity to get closer to those clients that really matter and make sure that you are an integral part of their future plans.
The way that brokers have traditionally placed BTL cases is no longer appropriate for portfolio landlords. Whereas a BTL transaction was previously driven primarily by the rental calculation, now criteria plays a much more significant role in choosing the right solution for your clients.
Lenders have all introduced their own interpretation of the guidelines and have applied stress tests in different ways, with different documentation requirements. This means that a BTL transaction is now a much more involved process and sourcing systems are rarely equipped to provide the full picture.
Brokers who have adapted best to the changes are those who have taken a considered approach to portfolio landlord business – obtaining a portfolio document upfront that details the properties in the portfolio, mortgage and repayment information and rental income.
Taking this upfront approach also presents more imaginative opportunities for raising finance, with a loan secured across multiple properties in the portfolio. Often, for example, a client might want to borrow up to 85% LTV, which is not likely to be possible with current stress test requirements. But, by reviewing the portfolio as a whole, you could identify opportunity to raise finance elsewhere on multiple properties at lower LTVs.
According to last year’s housing white paper, more than four million households rent their home from a private landlord and UK Finance said that while only 7% of landlords own five or more properties, these larger landlords account for nearly 40% of rented dwellings.
This means that there could be 1.6 million rental properties held within portfolios that could be used as security to structure more imaginative solutions for brokers’ landlord clients, providing them with opportunity to access larger loans and greater leverage to grow their portfolios.
PRA regulations have changed the way brokers work with their portfolio landlord clients, putting greater emphasis in developing a more thorough understanding of their investment portfolio and this knowledge gives brokers a great opportunity to identify new ways of meeting their lending requirements.
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