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More bang for your buck

10th June 2020

Recently we had a client for whom we managed to reduce his mortgage rate to about a third.  The property was a family home, and the rate was floating at about 4.6%, LTV was about about 50%; the rate came down to 1.65% and this too was fixed for 5 years.  This switch saved approx £60,000 over the 5 year period; and the process for changing products was executed with minimal hassle.

He was chuffed at the reduction to say the least.  Rates are cheap at the moment and it’s worth enquiring, and fixing on a long term basis.  The 5 year rates are certainly looking very attractive.

This is the likely choice for an investor for whom we have just completed an HMO; and have even managed to find the first tenant for, given the current environment.

The property was previously rented for £1,800 per month, as a three bedroom house.  After an expense of around £150K, the property has been extended and transformed into a high end HMO.  The first tenant has been found, a teaching assistant at a local school, paying a rental of £800pm.

If you assume this level for all 5 rooms you are looking at a rental of £4,000 per month.

In essence, what has occurred is for an expenditure/investment of £150K the return has been increased by £2,200 pm or 17.6% per annum year on year return.  This would be a good return on a single project but knowing this will be the return on an annual recurring basis is even better.

We are in the process of refinancing this investment.  On the basis of a valuation of £650K we should be able to extract £455,000 on this deal.  The property was purchased in cash.  Although some money will remain trapped in the deal, a large chunk will be extracted back out.  The trapped funds will be working hard.

The remortgage rate on the HMO will be 3.05% at 70% LTV.  Ordinarily, the rental value normally governs how much one would be able to borrow, this is due to the rental income cover.  The valuation is almost immaterial, especially in London.  Many lenders now use 145% rental cover, therefore the rental must be £1,450 when the mortgage payment is only £1,000; this is to account for the last round of tax changes around the rental income.

However, as this is an HMO we are in the fortunate position of taking the full 70% offered on the product.  This comes to only £1,156 pm.  This means the investor should get a net income of £1,844pm allowing for 25% for expenses.  This will all go into straight into his pocket, well a slice will go into the tax man’s pocket too; someone’s got to pay for all the COVID19 bailouts!

We have at least three clients wishing to replicate the above experience, on properties they already own.

It’s really a no brainer.

You need to ensure the borough you choose to do the HMO in has not signed an Article 4 directive, this means they have exempted themselves out of control of government legislation where your power to do this comes from.

As long as the council has not signed this, you have the ability to do the above without hindrance from local planning.

Suresh Vagjiani

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