BTL Second Charge Mortgages / No Monthly Payments

BTL Second Charge Mortgages / No Monthly Payments

21:59 PM, 30th October 2013, About 11 years ago 145

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No this is NOT a wind up, it’s 100% genuine and is important that you know how it works so that at the very least you can make an informed decision about new financing choices which until now have been unavailable to buy to let landlords.

It really is a fantastic way to improve cashflow and rental profits or increase gearing without the need to remortgage.

A very credible mortgage lender (Castle Trust) is offering second charge buy to let mortgages with no interest charges and no monthly payments based on 20% of value subject to both the first and second mortgage combined not exceeding 85% LTV on BTL deals and 80% on your own home.

You can use the money in whatever way you wish, for example:-

  1. You can use it to pay down existing mortgages
  2. You can save the money for a rainy day
  3. You can use the money to buy more property
  4. In fact, you can blow it all at the local casino if your daft enough too!

So what’s the catch?

With no monthly payments or monthly interest charged, the lender must get paid somehow. This product works with a profit share basis, in that you borrow 20% of the value of your property the lender will take 40% of any increase in value – on sale or refinance.

You will also need to obtain permission from your existing mortgage lender for a second charge to be added.

Given that your equity in the property may represent as little as 15% of the value of the property and you will receive 60% of the capital appreciation you don’t need to be Einstein to work out that it’s better to use their money than yours, especially if you use the extra money raised to purchase more properties. Remember, you will not be making any payment or incurring any interest whatsoever until you sell or refinance.

Imagine if somebody put this deal to you …. I want to buy a property, you put 20% of the money and I will put in 15% and borrow the remaining 65%. I take all the rental profit/losses and when we eventually sell the property I will get 60% of the capital appreciation and you will get 40%. Oh and by the way, I will decide when we sell, OK? You would probably say no wouldn’t you? Well if you put that deal to Castle Trust, chances are they will say yes providing you have a good credit rating. It really is that good.

Basic criteria

The loan term can be up to 30 years if the equity loan is secured against your own home, 10 years if it’s a rental property.

Your total LTV must not exceed 85% on a rental property, 80% if the loan is secured on your own home..

There are no limits on the number of properties the lender will consider lending on per borrower and their maximum loan exposure to any one client is £1 million.

The minimum advance is £10,000.

For rental properties there is no requirement to have a first mortgage.

You must be able to prove that you have been a landlord for at least six months to qualify and you also need a decent credit score.

Pros and cons?

I can see several reasons why this will be attractive to landlords and I will be using this product myself for the following reasons …

  1. Deals may not stack up on rent to ordinarily qualify for an 85% LTV mortgage but may do so on this basis
  2. It’s a relatively easy way to raise capital against the security of your existing rental portfolio or your own home
  3. Improved cashflow when compared to a conventional mortgage for a higher amount
  4. Raise money without paying off an amazing tracker or fixed rate deal arranged pre-credit crunch
  5. Avoid potentially extortionate fees associated with refinancing
  6. Increase borrowing without affecting cashflow
  7. Use of other peoples money to increase leverage and returns on capital invested
  8. Castle Trust do not legal or valuation fees to arrange finance on your own home and their arrangement fees are only 1% of the advance. Valuations on rental properties cost £195+ VAT and conveyancing costs £216. This means that total fees are likely to be significantly less than arranging a conventional remortgage.
  9. Some landlords will wish to borrow 20% LTV via Castle Trust to partially redeem their mortgage with another lender and thus benefit from improved cashflow.
  10. Some landlords will wish to utilise this product to borrow more money
  11. Some landlords will wish to mix and match, i.e. reduce existing interest bearing debt and increase overall gearing to 85% LTV

Downsides

  1. Your risk is higher than that of Castle Trust because they get paid back before you do on the basis they have second charge over the property. Therefore, if the property decreases in value then you carry the majority of the risk. However, unless you’ve come to the end of the loan term it’s up to you to decide when you sell, they have no say in it.
  2. Future remortgaging may prove more difficult
  3. No new build property, i.e. properties built in the last two years
  4. The product is only available on properties located in England and Wales (not Scotland or Northern Ireland)
  5. 40% reduction in any future capital appreciation but you do need to consider that you may well be able to use the money to make a better return elsewhere
  6. The improved cashflow, in comparison to an higher traditional mortgage, will increase taxable income. However, many will see that it’s better to pay tax on profit than to have no profit at all
  7. Early repayment charge of 5% in year one
  8. If you wish to repay the loan without selling the property then you are committed to proving Castle Trust a return equal to the greater of 2% per year for the period which the loan has run or 40% of the rise in property price
  9. You will need to contact your existing mortgage lender before progressing matters to establish whether they will allow a second charge to be taken

We have no idea how long this funding will be available for so if this is of interest we recommend you to get in quickly. BTL Further Advances No Monthly Payments

We will be arranging introductions to brokers on a panel of specialist advisers which I have personally hand picked. The role of the adviser will be to review your portfolio and provide you with bespoke advice and quotations based upon your personal circumstances.

We are also considering the demand for free of charge introductions to a non-advised mortgage packager service. However, unless you consider yourself to be a sophisticated investor and in need of no advice and associated protection we strongly recommend you to obtain professional advice from our carefully selected panel of advisers.

Obviously we want to make some money out of this too so we are charging a fee of for introductions to our panel of professional advisers. By charging for the introductions we, and the advisers we are referring to, recognise that only serious enquirers will progress matters. This is a good way to ensure that our advisers are not bogged down answering questions from time wasters and also provides a very a good reason for our recommended advisers to prioritise our referrals.

Our fee for arranging an introduction to a professional adviser, who will visit you to provide face to face advice if that is required, is £200, payable to Innovative Landlord Solutions LLP (the legal owner of Property118.com) either by credit/debit card or via PayPal. You will then be contacted within 7 days.

Professional Adviser Introduction Request Form

  • Fees are non-refundable


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Mark Alexander - Founder of Property118

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18:39 PM, 5th December 2013, About 11 years ago

Reply to the comment left by "Robert Taylor" at "05/12/2013 - 10:48":

Sorry to take so long to get back to your Robert. I'm sure my recommended conveyancer would be happy to do the work for that price, probably less. Please see >>> http://www.property118.com/excellent-conveyancing-job/33879/

Another alternative you could consider is using a different solicitor in the same firm the lender is using. If they are set up in the right way it shouldn't be too difficult for them to overcome and conflicts of interest. This might even be a cheaper option for you.

I suggest you try both but I wouldn't offer £350 straight away if I were you as they may well do the work for less. It's really not rocket science!
.

Simone Gilks (Mortgage Adviser)

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20:34 PM, 11th December 2013, About 11 years ago

31% of Independent financial advisers invest in residential property other than their home. Castle Trust research 2012

Housing has the highest risk adjusted returns of the major asset classes.

Over the last 30 years, housing has delivered average returns of circa 6%pa – 3%pa above inflation. halifax house price index & RPI data (1983-2013)

If i had a way of buying a couple hundred thousand single family homes [in the US]… & A way of managing them, i would load up on them. warren buffett on cnbc tv, 27.2.2012

So now we know why Castle Trust took an idea of lending us money for a share in the future values of our properties - they know that property is still considered the best investment.

This is why I have taken a great deal of time to understand how this product can help invest for the future when in fact they receive some of the share ......is it worth it!

Well given at the present time you can withdraw funds from your BTL property and then use the funds to invest in another, to me presents itself as interesting, but if they could help you invest in more properties than you first thought....well that's just down silly?.

So how can they do that? - it wont be long before Castle Trust presents us with more products to sell or advise on one of which will certainly be the BTL Mortgage Partnership which I know to be out soon.

The Partnership Mortgage will be secured via a second charge on the property during the purchase. There are no monthly repayments – the loan is repaid at redemption plus a share of the increase in the property’s value during the life of the loan.

To you this means that not only can you borrow up to 20% as an equitable loan from your current BTL property but you can then use this to fund 5% of the deposit on each new Buy To Let property, the other 20% will be by way of the Partnership Mortgage with the remaining being funded by the 1st Charge Lender.

So you first thought you could only buy 1 or 2, but now you will have the option of funding far more allowing more room for capital growth and property diversification.

SPREAD YOUR BET

Now I am not here to simplify things too much but its good you get to know that there are always ways in which to fund property acquisitions, you just need to speak to the right person.

Please read my profile - Bringing Alternative Lending to the Investor!

Simone Gilks

Mark Alexander - Founder of Property118

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9:39 AM, 12th December 2013, About 11 years ago

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "11/12/2013 - 20:34":

Hi Simone

I am a bit confused by the maths.

Are your suggesting that only a 5% deposit will be required when Castle Trust launch their Partnership Mortgage for BTL purchases?

That would require them to increase their overall exposure limits to 95% assmung the first mortgage lender offered 75% and they provided the top up 20%. As we know, their current over all exposure limit is 85% so I can't help wondering whether something has been overlooked here.
.

Woking Investor

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20:57 PM, 6th February 2014, About 11 years ago

Many thanks for this great article as I am considering taking one or more of these out. I was just working through some examples to try and minimise my tax bill, and it occurs to me that this might help answer the question you pose. Although the castle trust repayment will typically occur at the end of the loan, this may not cooincide with sale of the property (i.e. no capital gain yet). Also, after year 1 there are no redemption fees, so again, one might choose to pay down the loan in chunks. That feels a lot more like a traditional loan. In this scenario the capital gain up to that point in time sets the calculation for the amount due to Castle Trust and in that sense is interest. Payments OVER that amount are in effect paying the principal and would therefore not be allowable for income tax. But payments that are less than or equal to that owed up to that point due to capital gain to Castle Trust (remember it's not ACTUAL capital gain simply repayment of a loan index linked to Capital Gain), should presumably be allowable as income tax expense. If this is true, then landlords could choose to utilise their income to pay down their equity loans in years where it is advantageous for them to do so for tax purposes. i.e. very flexible 🙂

Given that you can repay some or all of the loan at any point, but that you may not dispose of the asset itself for decades, it would seem odd to treat the loan as relating to capital gain, even though it is pegged to capital gain, would it not?

Mark Alexander - Founder of Property118

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21:58 PM, 6th February 2014, About 11 years ago

Reply to the comment left by "Woking Investor" at "06/02/2014 - 20:57":

It's getting a bit late at night for my brain to fully comprehand what you have said but my initial thought, on first read, is that you have a very good point and it seems far more logical for the returns made my Castle Trust to be treated as interest as opposed to capital gains.

I will return to this again when I'm slighted less brain fried.
.

Colin Childs

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22:23 PM, 6th February 2014, About 11 years ago

Reply to the comment left by "Woking Investor" at "06/02/2014 - 20:57":

In capital terms the break even point on the product works out at around a 3.5% compound increase in house prices a year.

Woking Investor

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22:33 PM, 6th February 2014, About 11 years ago

Reply to the comment left by "Mark Alexander" at "06/02/2014 - 21:58":

Hehe. It hurt my brain to think about it in the first place! 🙂 Whilst I stand by my earlier comment, there may be a slight floor in my comments on the detail.

If I have a house worth £100,000 and raise 20% of the value as a BTL equity mortgage = £20K.

Over the next 2 years the house goes up in value by 10%, so the growth is £10K. According to Castle Trust's rules, they own 40% of this growth - £4K. So I could choose to repay the whole lot at this point by paying off £24K.

However, what if I just chose to pay £4K off now. Does that £4K 'count' as all interest from HMRC's point of view or is it more like a traditional loan when in reality, the 4K of growth is just a proportion of the amount I now owe to Castle trust (4/24=16.7%) and therefore if I pay £4K off then does only 16.7% of it 'count' as interest. If it's all of it then I can claim £4K off my tax bill. If it's a proportion of the total, then it's £4K * 16.7% = £667 which is obviously still nice, but not quite so attractive. 🙂

Ian Ringrose

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23:11 PM, 6th February 2014, About 11 years ago

If any of the loan is repaid will there not be the cost of getting at least one valuation?

Colin Childs

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23:23 PM, 6th February 2014, About 11 years ago

I believe maximum loan term is 10 years. So careful cash flow planning is required.

Share appreciation isn't a new concept.

Mark Alexander - Founder of Property118

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8:07 AM, 7th February 2014, About 11 years ago

Reply to the comment left by "Woking Investor" at "06/02/2014 - 22:33":

I've given this some further thought and what I think you would probably have to do is to refinance the loan back onto a new 10 year arrangement to crystallise the returns. The point that Ian Ringrose then made comes into play with regards to valuation fees and of course you would need to add arrangement fees and legal fees to that. There may be instances where this makes sense, especially if there has been no or low capital appreciation for a few years and you only end up paying 2% for the money. If there has been growth at a higher level than 2% per annum compound it would take a fair bit of number crunching to determine whether it made sense to do this though.

Thoughts?
.

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