Raising capital with lower rental yields

Many landlords are starting to experience the restrictive impact on borrowing resulting from the changes in underwriting amongst PRA regulated lenders.

If your rental income is stopping you from raising the capital you want from your portfolio, there may be a solution.

Keep a great deal on your existing mortgage and still raise capital

Second charge mortgages do not require you to change your pre-existing buy-to-let finance. This means that if your existing rate is a good one, you can keep it.

No need to remortgage whether inside or outside of the ERC period

It also means that if you are inside the initial rate or “deal” period of a mortgage and you want to raise capital without ERC’s (Early Repayment Charges associated with remortgaging during the initial rate period) you can do this too.

Weigh it up, you may be surprised to see the calculations favour you

Whilst a second charge product is likely to come with a higher interest rate, you need only pay that rate on a small proportion of your borrowing and for a shorter amount of time with favourable exit costs.

Competitive  rental coverage of 115%

After the PRA’s tighter underwriting rules came into effect in January, many lenders required applicants to prove that they could cover 145% of the monthly mortgage repayment through their rental income on the property.

However, some landlords have found it difficult to meet this new requirement, and subsequently are unable to borrow the sum they require.  This second charge lender is offering much greater flexibility, with a rental coverage requirement of just 115% (cover 115% of the mortgage payment with your rental income)  in order to give you a competitive solution.

Available to individuals and companies

A second charge loan with this lender is available to those who are employed, self-employed sole traders and limited companies/partnerships as well.

When it comes to an application for a second charge loan, this lender will take into consideration your rental income and, if required, any personal income you have.

Support your application with these sources of income

If you include personal and rental income on your application, the criteria this lender uses will vary depending on your circumstances, detailed below:

Employed
Income calculations can be based on:

  • 100% of your guaranteed income (basic wages, shift allowances, car allowance etc.)

Plus,

  • Additional income e.g. overtime payments, or bonuses, will also be taken into consideration

Self Employed

  • Sole Traders – 100% of your net profit from the previous year’s figures.
  • Limited company/partnerships – The applicants share of the net profit

 Plus,

  • Any salary paid to the applicant.

NB: Individual dividends paid to themselves are not accepted.

Example: Applicant has a 50% share of the business. The net profit on the accountant certificate is £100,000, the applicant was paid a dividend of £30,000 and a salary of £7,500. The lender can use £50,000 out of the net profit (the applicants share) and the £7500 salary. The dividend will not be used as it has been drawn from the net profit.

Property locations accepted

  • England
  • Wales
  • Mainland Scotland
  • Northern Ireland (separate criteria applicable. Maximum LTV of 60%, speak with an advisor for more information)

Flexible underwriting for landlords with adverse credit issues

This lender will also take into consideration credit issues that may affect an application elsewhere, such as CCJ’s, adverse credit and low rental income, details below. 

At the point of application, you can only have one instance of one of the following adverse credit:

  • One CCJ / Default (no maximum amount). Lender will ignore if under £300 / if satisfied and under £3000 / if older than 12 months.
  • One full month’s mortgage repayment / secured loan arrear in the last 12 months. Must not have been within the last three months.
  • Unsecured loans or credit cards. Up to two missed payments
  • Mail order and mobile phones contracts. Missed payments ignored by lender

Applications just short of criteria are assessed on a case-by-case basis; discuss your circumstances with your advisor.

Non-standard properties accepted

A maximum of 75% LTV (loan-to-value) is available on non-standard properties. If the value is below £75,000, then the maximum LTV is 70%. A valuer MUST confirm the property is mortgage-able and common to the area it is situated in.

Non-standard property types include:

  • Steel-framed
  • Timber framed
  • Concrete
  • High-rise flats
  • Ex-local authority

Consolidating existing unsecured credit

Second charge loans are not just practical ways to raise capital for your portfolio; you can pay off any unsecured debt.

Therefore, if you have been using your credit card to fund renovations to your property and you are paying expensive interest rates, you could consolidate the debt with a second charge mortgage and pay a lower rate of repayment than your credit card offers. One of our clients faced exactly this scenario further details are below.

Be mindful of securing further debt against your property. Your lender may repossess your property if you do not keep up your mortgage repayments. By consolidating your debts, you may pay more over the mortgage term than you would with your existing debt.

Faster access to funds

Given the right circumstances, a second charge mortgage can be arranging more quickly than a remortgage. If you are hoping to access funds within a short timescale, make your advisor aware and they will give you an indication of what may be possible. 
Typically, second charge mortgages can complete in two weeks from start to finish.

First time landlords

New landlords starting out a career in property investment often find themselves unable to raise capital due to their lack of experience.

This lender will assess your industry and market knowledge and your external income (relevant proof would be required) and may accept your application. This means landlords who have not been up and running long, but wish to expand their portfolio, still have the same opportunity with this lender as their more experienced peers.

Available to HMO landlords too.

It is not just standard buy-to-let landlords that can benefit from this funding option. HMO’s are also eligible, but it is worth noting that a valid HMO licence will need to be provided, where one is required by the local council.

Case studies: The solutions achieved with a second charge mortgage

Summarised below are three case studies where a second charge loan has been the most beneficial and financially practical approach to capital raising for clients we have worked with.

Case study 1
The client needed to raise funds for a development project. There had been previous complexities around the titles on the properties being borrowed against, which did not fit elsewhere. Furthermore, two of the properties were on one title, which most lenders would not accept.

We presented the lender with a strong application, which was individually assessed by the lender and went ahead as a result. The client was able to raise £180,000 they required from equity across three rental properties.

Case study 2

Clients making a joint application wanted consolidate unsecured debt and make various property improvements by raising funds across three properties in their portfolio. The lender agreed a total of £87,000 in second charges, which payed off the unsecured debt and reduced the client’s monthly repayment amount by £50 per month.

Case study 3
The owner of a £2m property wanted to raise £400,000 as a deposit for another high end buy-to-let purchase. The case did not fit on the applicant’s rental income alone, so the application did not fit the criteria of other lenders in the marketplace. However, because this second-charge lender accepts personal income in combination with the rent we were able to secure the necessary funds and the purchase went ahead.

There is a range of opportunities available with a second charge mortgage, call our advisors to see if this is the solution for you.

Enquire about a second charge loan

This information should not be interpreted as financial advice. Buy to let mortgage rates are subject to change. Speak to our advisors for a mortgage illustration. Seek tax advice from a professional.

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