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Addiction To Credit

Yesterday we finally exchanged on a property in Bryanston Square, W1, this took a lot longer than expected to occur. The property is a beautiful property, and makes sense from many viewpoints. The service charge is low at £1,500, it is a share of freehold, and it overlooks and has access to one of the few squares in London. The price is at £1,540 per sq. ft. whilst the going rate is £2,200 per sq. ft. The blockage is how much money the deal will soak up.

This is due to the rental figure being so low in comparison to the purchase price. The rent on this property as is will be in the region of £600pw, giving a yield of 2.4% p.a. This used to be an acceptable yield in places like Mayfair and Knightsbridge and purchasers never really minded as they were generally cash rich and aiming for capital growth. Given the recent spike in property prices the rental levels just haven’t managed to keep pace with the increase in prices.

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A BTL mortgage works not from the investor’s income but the amount of rental the property attracts. Typically lenders require the rental to be 25% higher than the mortgage interest payments. So if your mortgage payment is £100pw your rental must be £125pw. Working backwards from our rental of £600pw means the mortgage payment should be no more than £480pw this equates to a mortgage of only £500,000 working on a 5% interest rate. This would mean you need to inject £800,000 plus costs into this deal, nearly £950,000 after allowing for costs and refurbishments.

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The mortgage level is only around 40% LTV! This turns on the head the normal LTV of 75%. Given the injection required this didn’t really make any sense from a cash return point of view.

This is the reason why this property took so long to get to an exchange, the backdrop of the looming election did not help. The mortgage situation was the blockage, not the property. If buying in cash was the norm this property would have gone a long time ago. Purchasing with credit has now become the norm, given our addiction to debt.  This property would suit someone who has a high income, of say £250,000 per annum. This could then be purchased as a residential property based on the income of the purchaser rather than based on the rental income. This would reduce the deposit required from around 60% to 15%, a reduction of £600,000.

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However this property is very very attractive and a rare find, even given the mortgage blockage we still decided to go for it. The property will be purchased mostly in cash if not totally and kept as a long term hold with the view of converting it into a two bedroom flat and refinancing at a later date hoping at this point to scrape some of the uplift out of the property.

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At this time the nervousness caused by the election would have subsided and the dust settled, whichever way the wind ends up blowing; giving a more supportive backdrop for the property valuation.

Another property which we exchanged upon but haven’t yet completed on is facing a similar challenge, here the property is priced at £2.85m, it’s a freehold house and is being purchased as a BTL investment. Here there are two problems, one is the purchaser and the other is the rental. The purchaser’s home is worth £600k and there are no BTL properties in the background. The lender cannot comprehend how someone has just got out of bed and decided to buy a BTL property and then gone for one which is about 5 times the price of his own home! Which in all fairness is a strange picture.

There were of course the standard questions around money laundering and source of the deposit. A good excuse for the state and the authorities to peer into the privacy and business of individuals.

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However the background of the clients hadn’t been that cold, in 2013 they had invested in a deal with us which has almost doubled in value in a couple of years. This gave them the taste and confidence into investing further and taking a bigger jump to this property. This however could not be seen on the credit reports the lenders use, as the investment was done as part of a syndicate and there were no personal guarantees given for the property.

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Once this hoop had been jumped through then there was of course the relatively poor rental figure which comes to between £1,400 – £1,600pw, this equates to a yield of 2.6%. Added to this situation the property has an additional kitchen downstairs, this seems to cause a problem for lenders as it means there could be two tenants occupying the property, meaning a more problematic property to be vacated and repossessed. I actually don’t quite understand why this would cause such an issue, but the point is it does.

Given all the above finding a lender was no easy task, we have literally had to persuade one lender who originally refused the case to go ahead and do the deal, the valuation is due to happen any time soon. This may even add another problem to the mix!

Given the above it is prudent to have a backup plan, the obvious choice being bridging, it is no surprise the bridging market is increasing massively year on year. This has been attracting new entrants to the market, which means there has been more competition in the market leading to keener pricing and more innovative products.

The Real Deal

Fulham, London, SW6

Purchase Price: £620k

  • A bright and spacious three bedroom flat
  • Long lease
  • Potential to add an additional room to the property
  • Close to the bars, shops and restaurants of New Kings Road
  • Properties in this location are being sold for around £1,050 to £1,150 per sq. ft. while this is coming in at around £764 per sq. ft.
  • We expect the end value to be around £800k
  • Very good long term buy and hold opportunity

Call us now to reserve!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Central London property prices are higher than the rest of the country, however they’re always in high demand and price drops are a rare occurrence. This means you can exit quickly.

Many clients start off in the property game by using the equity in their property.

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