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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Simone Gilks (Mortgage Adviser)

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11:22 AM, 8th November 2013, About 11 years ago

Having already carried out a number of these applications I am in a position to offer some feed back from the lenders.

TMW have advised that they would only allow a 2nd charge on a BTL property when the existing 1st charge held by them is no more than 65% loan to value. If this is not the case then charge would be declined.

This does however, still fit this particular mortgage product but only if they wish to withdraw say up to 20% of the value, taking them no more than 85% Loan to Value.

It also raises the questions on how they can refuse the 2nd charge as Mark has rightly said....something I need to now look into.

Every day is a learning day!

Mark Alexander - Founder of Property118

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11:29 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Howard Reuben" at "08/11/2013 - 11:14":

I totally agree Howard, I can immediately think of two scenario's where this is applicable

SCENARIO ONE

High value property with low yield, the London market immediately springs to mind. The rental income stress test may well have significant impact on the borrowers ability to achieve a higher level of gearing.

SCENARIO TWO

Where the borrower has a very cheap lifetime tracker deal which they do not want to get out of but still have significant equity in the property and felt unable to justify gearing up prior to the release of this product.

I'd say the real beauty of this product is the effect it can have on potentially doubling up the number of properties owned at a point in time where most indicators are that we are in a rising property market. In other words120% growth in capital after taking out CT's 40% return on their 20% equity when two properties double in value as opposed not using CT's money and only taking 100% return on capital when one property doubles in value. I have assumed 60% LTV on primary debt rising to 80% LTV after adding CT's 20% equity loan.
.

Mark Alexander - Founder of Property118

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11:32 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "08/11/2013 - 11:22":

That's interesting, so if I'm reading this right you think TMW are saying they will allow a second charge for 20% of value if their LTV is 65% but they will not allow a second charge for 10% if their LTV is 75%?

I don't follow the logic in that as TMW's legal position and the overall LTV of the borrower remains unchanged in either scenario.
.

Simone Gilks (Mortgage Adviser)

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11:36 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "08/11/2013 - 11:32":

Yes, this is the case. No 2nd charge permitted if their 1st charge is more than 65% loan to value, despite how much the 2nd charge is for.

Mark Alexander - Founder of Property118

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11:57 AM, 8th November 2013, About 11 years ago

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "08/11/2013 - 11:36":

Did they offer a logical explanation for this?

There is of course a solution at least in theory, subject to it making sense to the borrowers overall financial position and attitude to risk of course. An example of this would be to borrow the full 20% from Castle Trust and use half of the money to reduce the TMW exposure from 75% to 65%.

Advantages would be raising extra capital and reducing interest costs.

Disadvantages would be doubling the potential return for Castle Trust and possibly redeeming some comparatively cheap finance..

Have you run this scenario past TMW?
.

Colin Childs

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20:17 PM, 8th November 2013, About 11 years ago

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "08/11/2013 - 11:22":

Releasing 20% enables the borrower to leverage up on equity alone. Thereby increasing the overall risk of default. Not that the lender is overly concerned for the borrower. More for the lenders own protection. Hence why there's a cautious board policy.

Mark Alexander - Founder of Property118

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9:30 AM, 9th November 2013, About 11 years ago

Reply to the comment left by "Colin Childs" at "08/11/2013 - 20:17":

I don't follow your logic Colin, please explain why you think a 20% equity loan increases the risk of default and/or the borrowers or the first mortgage lenders risk.

There are no extra payments so no risk there due to cashflow being unaffected by increasing the debt in this way. If an equity loan is used to reduce debt the cashflow position actually improves.

The first charge mortgage lenders rights to recovery of interest, capital and any costs associated with recovery remain unaffected.
.

Colin Childs

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17:53 PM, 9th November 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "09/11/2013 - 09:30":

I am assuming that the purpose of the release of equity is used to fund another acquisition. As this an area where mainstream lenders have tightened up more recently.

Howard Reuben Cert CII (MP) CeRER

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18:25 PM, 9th November 2013, About 11 years ago

Hi Colin

The lender says;

"Purpose of loan

Equity withdrawal for any legal purpose, for example:

Buy another property
Divorce settlements
School fees planning
Business investment "

Ian Ringrose

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11:06 AM, 15th November 2013, About 11 years ago

This is a product that needs lots of thinking about to understand as it rewrites the rule book.

My thinking at present....

I don’t like the unknowns with tax relief on paying double the gain on the part of the property that is mortgage to Castle Trust. I also don’t like the limited term, so forcing the property to be sold a few years before the term is up – I can’t predict how long it will take to get a tenant out, so could not leave it until the last minute to sell.

At present the rates I can get at 65% LTV for a fixed rate over at least 5 years are not that much better than I can get at 75% LTV.

However this product lets me buy lots more properties, but I must sell them within the 10 years term. So I get a lot more cash flow, but have to hope that the capital value is at least what I paid for them at the time I come to sell them, and I have less control over when I sell them.

I don’t think 10 years is long enough to control the risk of the market falling at the wrong time.

(Now if I had a 65% LTV loan at a very low rate on a property I did not expect to go up in value a lot, but was giving me a good cash flow, I would be jumping at this.)

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