Loan To Value or Loan To Purchase Price?

Good afternoon

The mortgage lenders are still recovering from the credit crunch and in particular lenders such as Mortgage Express who, in the pre-crunch days, were doing exactly what you're asking about below. They were one of the lenders who would lend up to 85% of the value irrespective of the purchase price and provided funds based on the 'value' which was what the surveyors/valuers placed on the property at the time of application. However, subsequently many such 'professionals' have now been struck off, fined and even imprisoned for submitting false valuations, and so you can see that the resulting marketplace is now far more tightly controlled and criteria is far more stringent too.

When the real values were realised by the new borrowers / owners and when the credit crunch hit and they had void periods (no rental income) because they had no 'pain money' in the deal (ie they didn't have to put down any deposits so there was no financial detriment to them) they simply walked away and left the lenders with properties worth much less than they thought and a huge heap of trouble instead. Quite often repossessed properties are not in a fit state to quickly put on the market and sell and so not only do they lose out on interest payments but they've also had to spend monies to update/clean/refurb the properties ready for sale too. Many fingers got burned during that time.

Yes, the 'bottom line' with mortgage lenders nowadays is as you say, the mortgage will be based on either the LTV or LTPP whichever is the lower figure.

However...... there may be a solution as per my Property118 article here >http://www.property118.com/switch-to-a-buytolet/37543/ although this works best for properties that require refurbishment.

The 'pain money' issue is a crucial part of the underwriting process now. Lenders want to see that you are investing in the deal and not trying to arrange deals as they were in the pre-crunch days. This has also led to BMV deals, property clubs and property sourcers being banned from the deal by nearly all lenders now too. That's not just me saying it, it is printed in all of the lenders upfront criteria as well.

Finally, the new purchase price now becomes the new value anyway. As soon as you have bought it at the price of, say £90,000, the solicitors will register the transaction at the Land Registry and all other local properties will be affected making the area's values realigned accordingly. Ultimately, all you're doing is really paying less than the asking price (traditional to'ing and fro'ing as always) and unless refurb works are carried out and proof can be shown that the property value has truly been enhanced, the 'value' will thereafter have a starting point of what you paid for it.

If you're buying to sell (rather than BTL) and you have a new purchaser lined up more or less as soon as you complete on the purchase yourself, then either cash or bridging finance is perfect for this and you could indeed realise the full value from your motivated buyer. i.e. get the valuation report at £100,000, buy for £90k and sell for £100k(+ ?) straight away. Of course the profit works better with bigger discounts and higher value properties, but even one deal with a £5k net profit is worth a day out in my book!

Hope this helps.

Depending on whether you fit their criteria Paragon (and Mortgage Trust) will lend on the improved valuation. You will be required to meet their minimum earned income criteria and in addition you may have to show receipts for the work that has been done.

Howard has answered the question very eloquently, as always.

I just wanted to add that, if you purchased at the net price but put the gross price on the Land Registry, not only would you be defrauding the Land Registry, but, when you came to sell the property, you would pay the capital gain on the higher value, thereby defrauding HMRC of capital gains tax as you had actually made more of a capital gain than it appeared.

About two days ago I saw a newspaper story about a couple in Wales who had been jailed for mortgage fraud using the discounts as deposits, faking mortgage documents and their incomes, and various other dodgy practices where they had pulled the wool over the lender's eyes in various ways. It eventually came back to bite and they are now behind bars.

I know for a fact that lenders monitor these forums to see if people are talking about doing NMD or BMV deals using the discount as the deposit, as they don't want to lend on these deal structures .... so bear that in mind too. 🙂

Rental income is a consideration when it comes to BTL mortgages. Not merely a question of purchase price.

Reply to the comment left by "Colin Childs" at "16/01/2014 - 22:38":

I completely agree Colin.

In Consultancy meeting I often review my clients portfolio's and property deals using our Landlords Calculator. Many of my clients have large portfolio and have three strategies, investment, trade (i.e. refurb and sell) or speculation.

We look at interest break even points and ROE (Return on Equity)I to consider which properties fit into which categories. Those with the highest ROE and interest rate break even points are usually considers as keepers. Where value has been added and and the ROE is low we look at refinancing opportunities to release the equity. If this reduces the interest break-even point to a level which my client considers to be uncomfortable we discuss trading vs speculation on the equity rising at a rate beyond profits that could be obtained as a result of moving onto a better deal for investment or trading purposes.

Link to the landlords calculator used >>> http://www.property118.com/calculating-rental-yields-and-returns/
.

On the matter of lenders monitoring social media, I did some research on this subject last night and it appears to be very topical.

Please see my link below to find out more.

Reply to the comment left by "Vanessa Warwick" at "17/01/2014 - 08:18":

I applaud them. If this helps them to detect fraud their losses will reduce and they will be in a position to improve their margins. The worry is that they will become obsessed with it and not dig deep enough before making a decision. For example, if a person was considering a particular scheme he or she may start a thread about it. IIt is quite possible that as the thread progressed that the original poster would be seen to realise the consequences of the transaction they were considering. If the lender reads the entire thread they would realise that there is no cause for concern. However, if they were to only read the initial post, and make their decision based on that, they could very easily end up black-listing a perfectly legitimate borrower.
.