The Bigger Picture

A client has approached us with the idea of remortgaging his residential property in order to purchase another on a BTL basis.  He also has about £100K in the bank, not doing very much.   

This wasn’t a particularly difficult feat; a straight forward refinance on the residential and mortgage on the BTL.  

Both would be on a five year fixed to weather the coming turbulence in the economy.  This is the first ever BTL he is doing.   

It is likely after about a year his confidence in the BTL model will have grown, and he may wish to repeat the process again.  However, his options would be limited due to the 5 year fixed rate he would be on; not completely closed off as he could raise funds on a further advance but he would be limited to the existing lender.   

A neater way to set this up which would enable him to borrow funds later on, if he so wished, would be to arrange an overdraft on his residential property, that being the cheapest rate.  This rate can be fixed now for 5 years, hence shielding him from future rate rises, conversely of course if the rate was to drop he would not get the benefit of the reduction.  This is the ‘premium’ you pay for the security.   

There is a small increase in the rate between the fixed product and the one which gives the overdraft facility.  However, when you look at the broader benefit this is a price well worth paying.   

It would allow the investor not only to purchase another BTL property but to buy one in auction, where there is a time limit for completion.  Or if a property has not sold with an agent a few times, due to say the mortgage collapsing, it gives him the ability to swoop in and pick up a deal, at a discount to the original price of course.   

A property purchased in the right location, could very easily go up by £100K, well outweighing the premium paid for the overdraft.   

This could be done in a manner which would mitigate the variables in the transaction.  What we would recommend is a two bedroom flat in a location which has been on our radar and has not failed to perform.  Since we have been purchasing in the area rents have gone up from £900pm to £1,400pm and we believe there is still a lot of mileage in this location.  A two bedroom flat would cost about £285K.  It would be a flat we would recommend because it does away with maintenance aspect outside of the immediate property.  The block we tend to purchase in has a very reasonable service charge which includes the building insurance.   

The potential tenant would have to go through referencing, which would enable an insurance policy to be taken out which would cover the landlord for any void in the rent and also the cost of eviction.  This set up would take away most of the variables, leaving only the capital growth to benefit from, which is the goal of any investment.  Property investment too comes with its own risks and challenges but at this level they can be mitigated with some planning and foresight.   

Suresh Vagjiani
Suresh Vagjiani
Articles: 819