We had an enquiry where the client required a remortgage on a large property in Central London, worth about £4.2M. Needless to say this is not a rental yield play. Rents tend to be abysmal in proportion to the property value in this area. It’s capital growth which is the aim when buying these types of assets.
The issue with prime London property is that you need to have the staying finances to remain in the deal, for example to weather the service charges which tend to be high; and currently you have a scenario with rising interest rates. And entering the market at the right time is crucial. If these are aligned it can be a very fruitful investment. If not, it will burn a hole.
The client wanted 70% of the value of the property. With BTL properties the lender has a criterion whereby the rental must be 125% or 145% of the monthly mortgage amount, normally dependent on whether the property is held in a personal name or a Ltd company. When imposing this criterion in prime London it puts a low ceiling on the amount one can borrow. This ceiling then becomes the over ridding factor, irrespective of how much the property is worth.
As rates have risen the ceiling has dropped lower and lower.
Some lenders have alternate angles to addressing this issue. One is called top slicing, whereby the individual’s personal income is taken into account, and if there is a large enough surplus, this is then used to bump up the rental income to justify a higher borrowing. Another example is where the product interest rate is reduced but then the arrangement fee is loaded up, some go as high as 7%.
Looking at the case from a lender’s perspective, if the property were to be repossessed the lender would recover their funds, therefore they tend not to lend above 70% especially on high value properties, which is really the bottom line and the hard reality.
In this specific scenario, the client has a successful agency business, but the profits are not withdrawn from the company. They sit in there accumulating.
The excess funds were to be used for property investment, therefore the excess money raised would be working hard for the client in the background – presumably. Given the above challenges we managed to source a lender who has the capacity to go to this level of lending and right up to 70% LTV. This taps into the equity the property has, and allows the client to be in a cash rich position, ready to exploit the current market, where the deal flow is increasing steadily.