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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Ross McColl

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15:25 PM, 6th November 2013, About 11 years ago

Hi all,

Although this initially looks quite appealing this looks to me like the mortgagee is taking out a short futures position and selling a call option against the price of property. Minimum payout of 2%, Max 40% of increase in value. Assuming you hold this for the 10 year duration the value of the property only needs to increase by 10% in order that the interest payments are effectively larger than 20% or 2% per year. If the value of the property increases by 50% then you have paid what is effectively 100% interest over the 10 year period, this is of course non-cumulative. I hope my understanding is correct.

Most of us invest in property for either steady income or increasing value of equity, in a lot of cases both.

This financial instrument only benefits the borrower if house prices stay low. In my opinion by borrowing using this method you would actually be contradicting the very reason you invested in property in the first place.

Mark Alexander - Founder of Property118

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15:49 PM, 6th November 2013, About 11 years ago

Ross, Your argument is flawed if you facitor in "time, value, money" and gearing. The equity finance could more than double your returns if the money was used to invest into an additional property as an example.

Anon

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21:51 PM, 6th November 2013, About 11 years ago

Reply to the comment left by "Ross McColl" at "06/11/2013 - 15:25":

It is an interesting point you have raised, however, Mark Alexander's retort is equally fascinating. For example, if the funds raised as a result of the extra 20% equity loan were used as a deposit to fund the purchase an identical property with identical financing the ROI on capital would be 120% of what it would otherwise have been, all things being equal, accepting of course this is all theoretical, save for the rules of the equity loan scheme. The other factor to bear in mind would be and profits/losses also being geared, hence the 120% is also a variable. That said, one would expect a savvy investor to make a return on cashflow in addition to capital. In this basis, balance of probability is a win for the investor who takes the equity loan and utilises the increased gearing to repeat his business model.

Howard Reuben Cert CII (MP) CeRER

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17:35 PM, 7th November 2013, About 11 years ago

Reply to the comment left by "Andy Boothman" at "06/11/2013 - 14:41":

Hi Andy

The answers have arrived, as follows;

"Upon redemption of the mortgage CT will speak to the applicant and ask them questions with regards to how the mortgage is being repaid.

The lender will determine if the property is being sold to a family member/friend or if it is being sold under market value for any reason. If this is the case then CT will insist on a valuation to be instructed and they will work off this figure.

If the property is being sold as a full arm’s length transaction via an estate agent and the applicant does not know the new purchaser then the agreed sale price will be used. "

Andy Boothman

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18:27 PM, 7th November 2013, About 11 years ago

Reply to the comment left by "Howard Reuben" at "07/11/2013 - 17:35":

Howard,
Thanks for digging out the answer, it sounds reasonable but you can perhaps imagine various scenario's that might arise that couldmuddy the water a little if the property is sold prior to term.

I do now feel i have enough info to compare this with other methods of raising some cash - thanks again,

Andy B

Ross McColl

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9:50 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "06/11/2013 - 15:49":

Hi Mark,

I thought there might have been something I was missing. makes much more sense now. The reinvestment opportunity of the extra equity drawn down makes this quite attractive.

Food for thought.
Thanks,
Ross

Howard Reuben Cert CII (MP) CeRER

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10:05 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Andy Boothman" at "07/11/2013 - 18:27":

You're very welcome.

As always, all info I provide on Property118.com is generic 'product information only' and is not to be construed as formal advice, which I can only provide after detailing all relevant information into my Fact Find documentation.

This product has indeed been of great interest to many of our Clients and Mark's added insight and overviews have helped to create clarity in how this product can be used effectively.

When comparing this product against others, of course the main advantage of this over anything else is that there are no monthly payments. A useful feature which no other secured loan offers (except 'retirement' equity release products of course).

Howard

Ross McColl

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10:50 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "06/11/2013 - 15:49":

I have had another rethink.

Surely you should only take into account the extra 10% increased borrowing above 75% LTV as a lot of lenders will allow you to borrow 75% LTV, not the 20% this deal offers. Implying you can borrow a maximum of an extra 10% LTV in return you give away 40% of the increase in value. Obviously you still save on the interest payments.

The example I used is as follows.
Option 1: Castle Rock 20% Second Charge
Property value currently 125k currently has 65% LTV.
Borrow 25k (raising first porperty LTV to 85%), invest in a property valued at 100k, giving 75% LTV on second property.
House Prices double. Profit = 0.6 * 125k on first property + 100k on second property
= £175k

Option 2: Draw down on existing mortgage raising LTV by 10% to 75%
Property value currently 125k.
Borrow 12.5k to buy a property for 50k, giving 75% LTV on second property.
House prices double. Profit = 125k on first property + 50k on second property - interest payments on extra 12.5k of borrowing.
=£175k profit - interest on 12.5k
This option also leaves you with a lower LTV on your first property.

Please point out any potential pit falls in my argument.

Thanks,
Ross

Mark Alexander - Founder of Property118

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11:11 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Ross McColl" at "08/11/2013 - 10:50":

Hi Ross

There are no pitfalls in your argument as presented, save perhaps for detailed analysis of returns and costs. Your assumption is that you are already at 75% LTV on your first mortgage, you could of course be borrowing less, e.g. 60% LTV. If you are not already borrowing 75% LTV the costs of remortgaging also need to be factored in, plus of course you may need to pay a higher interest rate on the entire new remortgage.

Please also see the other 11 potential plus points in my original article and the 9 potential downsides I have also quoted. Based on this number of variable factors, plus the fact that no persons finances and no two property deals will ever be identical we could probably create millions/billions of examples here and we will not be doing that. That's why we are such strong advocates of borrowers taking professional advice from a quality adviser as opposed to creating their own example scenario's and potentially missing out some key considerations and running the risk of making bad decisions. Yes it's possible to find an arrangement whereby there is no requirement to pay us £200 for an introduction to a professional adviser, however, in those circumstances the risk of making a bad decision is increased.
.

Howard Reuben Cert CII (MP) CeRER

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11:14 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Ross McColl" at "08/11/2013 - 10:50":

Hi Ross

This product really comes into it's own when the primary mortgage is not ABLE to be any higher than, say, 60-65%LTV due to the rental income stress test.

In summary, if you are unable to borrow any more than eg 65% LTV with any traditional BTL deal, then to be able to release a further 20% (w/o any monthly payments) could be the difference between securing other opportunities, or not.

So, where you can draw down, or increase a traditional BTL mortgage, then that would be an option to consider and calculate the balance against, but when you can't .....

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