A mortgage market update
By Augusta Onyiuke-Eluma
Property meet-ups offer education, networking opportunities and a forum for developing new ideas which aims to solve financial, political and practical problems faced by active property investors and developers.
As a mortgage adviser/broker, these events have been a brilliant source for attracting new clients and positively impacting my investment journey. I regularly provide a ‘mortgage update’ at such events, and the next few hundred words summarise some of what I explained to those crowds of eager listeners.
The next three points are an expression of my personal experience as an adviser and focus around the kinds of business I have been attracting. The vast majority of my clients are in property full-time and professionally - but I also have built a reputation for dealing with complex residential cases. Which leads me to my first point…
1) Tricky residential cases are taking ages to get looked at
One of my findings over the last few months is an increase in the time it is taking for lenders to underwrite residential mortgages.
Nearly all my residential applications are plagued with long time scales before the lender even looks at the case. A year ago, cases would undergo initial underwrite within 3 days. At the moment, an 8 working day turnaround is not unusual, and in the week just gone, one lender informed us it would take two and a half weeks just to review the application (which precedes requesting documentation and instructing a valuation).
Now you may be thinking, why not just go to another lender? But imagine a scenario where you need a remortgage, you missed two mortgage payments in the last 36 months, where you are self-employed and for you to receive the desired level of borrowing, you must approach a lender who can only use your latest year of accounts (as opposed to the usual two year average). There's not much choice in the market and the next best lender is offering rates on average 1.5% higher. You do not have many choices so the best thing is to wait it out.
This creates a problem in purchase cases, where you may be a chain, or you had been agreed the purchase price on the understanding you can move quickly. In these instances, a range of strategies to get the mortgage approved as quickly as possible.
2) Using the equity in your home to start a portfolio
If you have built up significant equity in your home and are considering moving, you may be able to turn your residential property in to a buy-to-let.
In doing this you release some of the equity based on a rental calculations applied by every buy-to-let lender. So to clarify, the re-mortgage of your residential home into a buy-to-let is based on the rent brought into the property not the income you earn!
However, the equity you release must be largely used to buy another residential property. I say largely because you can retain some back for stamp duty (as now you will be paying the higher rate) or for some home renovations in your new place. To purchase your new residential home, you must have enough deposit to support the mortgage. Your maximum potential borrowing will be based on a multiple of your household income less any committed expenditure.
You should also get some advice about your tax position from a qualified accountant as you will now be a landlord and there have been changes to the way landlords are taxed in recent years. Also note that buy-to-let remortgage and subsequent purchase must complete simultaneously.
You must have already moved out of your property and have a valid assured shorthold tenancy agreement in place to get a standard buy-to-let mortgage.
3) Purchasing opportunities using bridging loans
I am a fan of bridging loans because I have helped clients use this means of purchasing to complete quickly on purchases that they otherwise would not have been able to do.
There is the perception on the market of bridging loans being expensive last resort products for people with adverse credit. This is not the case - and in fact several bridging lenders will only lend to people with a good credit profile provided the numbers stack up.
When would you consider using a bridging loan? If you are purchasing a property that is not suitable for mortgage purposes, when buying at auction and you need to complete quickly (usually within 28 days of exchange), when a commercial lender rejects a case at the late stages of an application and the purchaser needs to move quickly and does not want to lose the property…. These are only a few examples.
Usually the lender will charge a 2% arrangement fee and a monthly fee of typically between 0.5% and 1.2% of the amount borrowed.
How much you pay depends on whether the loan is regulated (for your home or a buy-to-let that a close family member will live in) or unregulated (for purely commercial property), who the lender is, your level of experience, and how quickly you need to move.
In certain cases, there is a real opportunity to add value to a property and then either sell it or refinance when the works are complete to a mainstream buy-to-let lender. The applicant may not have the physical cash to put down a deposit, pay stamp duty and/or pay for the works. They can consider using a second security as they have a significant proportion of equity in the property, and the lender will take a charge against the additional equity. This allows the applicant to purchase the property and potentially raise additional funds for the ancillary costs without a cash injection. This is typically known as 100% bridging.
This method of purchase is not suitable for all investors or indeed properties; and it is very important to understand the mechanics of borrowing using a bridging loan before you commit to proceeding. If your planned exit is refinance, it is important that you have a clear understanding of what the property will be worth after the works have been completed and what rent you expect to achieve. I even go as far as identifying potential lenders who will consider the exit from the loan and ensure that the clients do or will meet their specific criteria by the time they are ready to remortgage.
In summary, the mortgage market is constantly moving and changing and keeping updated on these changes will enable you to prepare and will help you to achieve the results you desire.
In turn, there are several strategies that can be employed to expand your portfolio as a buy-to-let investor. The information provided in this text should not be deemed as advice, and it is important that you consult a specialist before attempting any complex strategies or even to get a full understanding of your position before proceeding down a set course of events.