Property Investment Advice – Interesting New Landlord Mortgage Product
An interesting new “top up” mortgage product has come to the market for landlords.
This product, the first of its kind works differently to any other mortgage product in that no monthly interest is paid.
Instead at the end of the term, typically five to ten years,the borrower pays back the capital plus a slice of the property’s capital growth over that time.
In this way some of the costs of the landlord’s total borrowings are deferred, and converted into a future, capital payment which could be made if the property is sold or refinanced. Specialist property finance firm Castle Trust, which launched the scheme in November, said it had experienced “phenomenal demand”.
Some landlords are using it to increase the income they can draw from a property to supplement pensions or meet another need for income. Others are using it to buy properties.
This could be a very useful tool for landlords who need to make improvements to their property but lack the cash flow to do so, by improving your property you will in turn get better tenants and have more successful tenancies. One can argue that a property in poor condition will attract only the lower end tenant which in turn can lead to problems.
How does it work – and what are the limits
Landlords can borrow up to 20pc of their buy-to-let property’s value over a period of up to ten years. The loan is secured against the property as a “second charge” – where it sits alongside the primary, “first charge” traditional mortgage. No interest is payable. At the end of the term, a portion of the property’s increase in value is paid – see below.
The maximum proportion of the property’s value that can be borrowed – as a combination of both the Castle Trust loan and the other mortgage – is 85pc. The loan must be for between £10,000 and a maximum of £400,000.
Other fees in the form of set-up charges also apply, coming in at around £500.
What are the charges?
Instead of charging monthly interest when the equity loan is redeemed borrowers have to pay a share in any upside in the value of their property, along with the initial loan. The proportion of the increase in value which is paid back at the end of term will be twice the proportion borrowed
Say a borrower with a property worth £200,000 took out an equity loan worth 10pc through Castle Trust. Over the period of the loan, in this case ten years, the value of the property has increased by £50,000. So the borrower repays 20pc of the gain – £10,000 – plus the original £20,000, totalling £30,000.
Can the loan be applied to any property?
No. The maximum property value that can be bought is £2m and newbuild properties are not eligible for the loan. Investors should also bear in mind that the maximum term for the loan is 10 years.
You can get a loan for 85pc of a property’s value from a single lender, so why would I want to use this top-up mortgage?
Landlord lenders apply several limits to the amounts they will lend. They restrict the proportion of the loan against the value of the property – typically to a maximum of 85pc. But they also apply a “stress test” which measures the monthly mortgage interest costs against the likely rent the property will generate. In most cases the rent is required to be 125pc of the monthly interest cost, or more. This means many low-yielding properties, such as those in expensive areas like London or other urban centres, can be bought by investors who otherwise would have to raise bigger deposits.
David Hollingworth of broker London & Country said: “The potential lies in not taking a hit on your income while at the same time being able to borrow more.”
What are the risks?
As with all secured loans, the property is at risk if the borrower does not repay according to the terms of the contract. There is also the risk that the primary lender will not agree to the addition of the Castle Trust loan. Currently Castle Trust says Britain’s biggest lender, Lloyds Banking Group, will accept the parallel top-up mortgage, as will others – but others have yet to agree.
You must enter into this type of lending with a clear understanding of the effects, at the end of the term you will share with Castle Trust a proportion of the gain in your property’s increased value. So a gain in funds now is a substitute for a gain down the line. If you need funds now then this is a very interesting option that could be a real game changer for the mortgage market.
Let me know your thoughts on this product here
If you found this article interesting you can see another finance related article here