Steven, the owner of firm specialising in Pensions and Investment advice, called one afternoon for some help and advice with a mortgage problem. Steven said that he had heard through the grapevine that we were good at dealing with complex mortgage cases, but he had doubts as to whether a solution to his problem could be found.
A month earlier, he had sourced a holiday let development proposition through a local estate agency.
The development consisted of a terraced house in a popular tourist area in central Scotland. The property was run down and in need of damp treatment, a complete new kitchen and bathroom. The value in its current condition was £130,000, with about £35,000 needed for refurbishment works. Completed value after works would be in the region of £230,000
After Steven’s offer had been accepted, he had referred the case to one of his own firm’s mortgage advisers who occasionally arranged buy to let mortgages when a customer required a property as a part of an overall investment plan. The adviser had arranged, in principle, a buy to let style mortgage, which allowed for some light refurbishment works, prior to letting. The loan size was set at 70% of the initial value. This gave Steven a problem as finding the 30% deposit required was a bit of a squeeze and would make it difficult to do the refurbishment work. Steven had recently tied-up most of his capital in a different, recently purchased investment property which he had bought for cash.
This was where Steven’s problems really started. The lender instructed a panel surveyor to assess the suitability of the security and also comment on the rent achievable. The surveyor failed the project on both counts! In his opinion, the case was more than a “light refurbishment” and as such the lender could not easily realise money in the event of re-possession. In addition, in the surveyors view there was not much demand for normal long term Buy-to-Let style tenancies in that area and even if there was the rent achievable on an Assured Shorthold Tenancy (AST) would be around £400 PCM. This was far short of the amount required by the lender to support a Buy to Let loan.
A double whammy. The money spent on the survey had been wasted, but really the adviser should have known there was no way to get an off-the-shelf product to fit.
That’s where we came in. As a holiday let mortgage specialist, this sort of project is straightforward grist to the mill; we face such issues on a daily basis.
This is what we did. We arranged a loan to purchase and re-furbish the property set at 100% of the purchase price. This was based on a first charge loan secured on the development property plus a first charge secured on a recently purchased investment property. By doing it this way Steven was not required to put any deposit money in. To further ease the cash flow burden during the works, our consultant recommended that the interest be rolled into the facility. The lender that we selected felt comfortable that, overall, its exposure to risk was reduced to 45% LTV across the two properties. In addition, with the rent of the existing property being tied in to the deal to service the debt during the refurbishment, the lender was really comfortable.
The project has just completed, and Steven has decided to retain the property as a furnished holiday let. A local holiday lettings specialist had determined the rent at £14,000 over a twelve month period. The development lender has in this case, decided to retain this project on its books, as a long term loan, with a small 0.5% arrangement fee; however no further valuation or legal fees. As the completed value was confirmed as being in excess of £230K, they have agreed to release the first charge on the secondary security.