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Reversing The Tide

26th November 2019

We are in the process of refinancing an HMO purchased by a client several years ago.  The property is in a premier location in Notting Hill; it is freehold.  The idea was simply to purchase and resell in a short space of time.  However, the market has not been favourable, therefore it was better to hold and work the asset.  It is currently a 6 bedroom HMO and has the potential for another duplex room, as well as a mansard extension.  This means there will be 8 rooms in total.  The property has had many issues, partly due to its poor external fabric.  This has damaged the inside of the property during bad weather and has impacted the rental income.

However, there is a tendency to focus on the negatives of a property and lose sight of the bigger picture.  There are always negatives to focus on, for example if for a period the tenant doesn’t pay rent or there are some high maintenance costs.  Despite this one must not lose focus.  Primarily, money on a property is made on the value of the property going up.  And this is driven only by one thing, location.

I have no doubt, when the market bounces back this property will start to rise, and in time yield good fruit for the investor.

The issue we have is to handle the time period between now and then.  If this gap is plugged in a safe manner there is great potential for this investment.

Accordingly, we have identified a mortgage product which is at a rate of 1.98% fixed for 5 years.  The arrangement fee is only £1,700.  Many lenders, especially in the HMO professional sector, like to charge a percentage typically 1.5% or even 2%.  When the value of the loan is high like this one, the fee becomes hard to bear.  In this situation a £1.2M mortgage would attract a fee of £18K to £24K.  So, £1,700 is only a fraction.  In addition to this the rate of 1.98% is market leading, furthermore you have the security of a fixed rate.

Annually on an interest only basis this would only come to £23,760 per annum.  If we can use the refinance funds to purchase a commercial property with a solid covenant at say 6% this would leave our client with an income of £36K per annum.  Thereby easing the situation.  What would be even better besides having an income would be if the property also has a development angle. This would then enable the majority of the loan to be repaid when the investment fructifies.

A mortgage offer is usually valid for 3 months, and in some case might even be valid for 6 months.  I have seen people draw this down and leave the money sitting in the bank.  This is a bad move, the offer should be drawn down only when there is a deal to be executed, so you’re not paying money from your own pocket for interest whilst your money is doing nothing for you.

During these 3 months a deal should be closed.  Mortgage offers can usually be extended too.

We are currently looking at a commercial deal which has a strong ten year covenant, which also has the potential of residential development.  This would wrap around this mortgage product very well.

Suresh Vagjiani

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