Categories: Case study | buy to let mortgages

Our client owned a House of Multiple Occupation (HMO) property, unencumbered, and wanted to take out an HMO mortgage on it, to raise cash to invest in more properties.

We were able to secure a competitive high-street rate and raised almost a quarter of a million pounds to help them grow their portfolio.

The case

Investment route: This investment was made in personal name.

The existing portfolio: The client owned a number of other rental properties, many of which were unencumbered.

The property: The security property was originally a four bedroomed detached, freehold house. Two reception rooms had been converted into additional bedrooms, taking the property up to six bedrooms in total. The local council required the property to have an HMO license, which was in place.

The tenancy arrangement: Each of the six tenants had individual Assured Shorthold Tenancy Agreements (AST).

The borrowing requirement

The client wanted to raise 75 percent of the value of their unencumbered HMO so they could buy more property. Whilst they could have borrowed at up to 85 percent loan to value, at 75 percent more lenders and deals were available with lower interest rates.

This decision supported the clients overarching objective of achieving the most cost effective outcome over the initial rate period of the mortgage.

The challenges we overcame

Six bedroomed HMO properties just fit into high-street lender criteria, anything over this and the client would have had to work with a specialist HMO lender for their borrowing.

This is beneficial as high-street lender rates are typically lower than specialist rates – which all comes down to the risk associated with the security property.

A standard four bedroom home with converted reception rooms can easily be put back as it was and sold to a single unit family (in the extreme and unlikely circumstances a lender we need to retake possession of the property to recoup an unpaid mortgage debt) .

What’s more, whilst the client’s portfolio consisted of more than four properties, because only three were mortgaged at the conclusion of this remortgage process, the scenario didn’t class them as a portfolio landlord for the purposes of the mortgage lender. This meant there were more lender options available to them (some lenders do not accept portfolio landlords).

Our job was to find a solution for the client based on lowest overall cost of the mortgage.

The solution

Property value: £305,000

Capital raised: £228,750

Loan to value: 75%

Rate: 5.35% five year fixed

Term: 20 years

Payment basis: Interest only

Monthly mortgage payment: £1,017

Monthly rental income: £2,700

Lender arrangement fee: Nil

Gross yield (before costs): 10.62%

Annual rental income minus mortgage costs: £20,196

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