Last week, we received a telephone enquiry from someone who had found us on “Google”, searching for a “Buy to Let Mortgage Specialist”. Well, that’s us!
He was quickly put through to one of our specialist buy to let mortgage brokers, who knew what questions to ask. For the purpose of this case study, we will call this client Jim. Jim said that around two years ago he had completed the purchase of a new build flat, which he had committed to buy around 18 months earlier. It is not unusual for the builder to insist on exchange of contracts, even before a property is built.
At the time of exchange, the housing market was still rising and the economy booming. During the following 18 months the lending market and economy went into freefall, and we had many banking failures like “Northern Rock”. The Buy to Let mortgage lending market also retracted from 100 plus lenders to about only 6. Those that remained made major changes to their underwriting criteria. Jim found himself with two major problems. The first problem was that the flat that Jim had contracted to purchase at £465K had now been valued by an estate agent at only £400K when it was completed. The second problem was that Jim had expected to borrow 85% of the purchase price when he exchanged, but now the biggest loan he could get would be 75%, and thus he would have to find extra deposit.
Jim said that the developer was insisting that he complete at the contract price, as they always do. He went on to tell us that this new block had 42 storeys. This in itself gave rise to an extra set of problems. Those Buy to Let lenders still left in the market were very wary of high rise itself, but the combination with new build left Jim very little choice, other than to accept whatever interest rate was offered. Time was also of the essence because the few lenders either in the market or prepared to lend on new build apartments all imposed a maximum number of apartments within the block that they would lend on. All the mortgage lenders were very concerned on over exposure on this particular development.
The other problem which Jim had to face was that due to the issues explained above they reduced their maximum advance down from 75% to only 65%. Well, this was nearly the end for Jim. He had put down a 10% deposit at exchange. This was £46,500 and he had expected to find only another £23,250. Now he had to find a whopping £116, 250 to take the total deposit to 35%.
If Jim could not complete, the builder was perfectly within his rights to take back the property, sell it to someone else for whatever amount they could and to force legally Jim to make up the balance between what Jim had agreed to pay and what the builder eventually got. As we explained to him, when he had first exchanged contracts, 85% loans were the norm for a Buy to Let mortgage at that time. Jim said that it had been tough to find the 15% deposit, but finding 35% had nearly ruined him. He had been forced to re-mortgage his main residence and to use loans on credit cards, but eventually he had managed to complete the purchase.
Jim said that two years had now passed and the mortgage product was up for renewal; he needed to re-mortgage to 75% LTV. Jim did have some good news for us; the apartment had increased in value and was now worth £540K. His current loan was £302,250, however he also needed another £116,250 to cover the expensive short term debt that he had amassed in order to come up with the extra deposit.
Jim then said “Erm, I’ll be honest with you. At this point, we know what is coming. I have tried my normal mortgage broker, but he has gone very quiet”.
We asked Jim what the broker had done, and it was quickly evident that the case had been placed with a Buy to Let lender that did not allow debt consolidation. Jim at this point jumped in and said that the broker had told him that he would put down home improvements as the reason for capital raising and that would work OK. We made it clear that telling lies to mortgage lenders is not on and tends to cause more problems than it solves and, more importantly, its fraud! His broker dug a bit of a hole by suggesting Home Improvements, in a nearly new flat, 10 storeys up; bit difficult to build an extension!
We went on to explain that lenders will see your credit file, with all of the unsecured debt, at the time of application, so £100K plus on the credit cards was an obvious debt consolidation case; they simply put two and two together. Jim quickly realised that the broker was actually embarrassed that the deceit had failed and was avoiding calling him.
We said that we appreciated Jim’s candour and this was the starting point for getting his buy to let re-mortgage back on track.
Jim was told there were a few issues to consider in determining the correct lender to approach.
Firstly, there was the building, which is 42 storeys in height; many lenders will not take this type of security, notwithstanding the quality of the building or the fact that Jim’s flat is only on the 10th floor. Secondly, there was the purpose of the capital raising to consider carefully, most lenders won’t allow debt consolidation. Thirdly, the current tenants’ tenancy agreement was not up for renewal for another five months and had been established on a special deal at below market rent. A lender needed to be found that would calculate the loan using market rent, as assessed by the valuer, rather than the actual rent. A lender that uses the latter calculation would reduce the loan, and, therefore, the capital raising needed to reduce Jim’s card debt to £13,500.
We checked with the buy to let lenders that were in the market for this type of building, and asked for an opinion as to the acceptability of security. They referred us to their panel surveyor for acceptance or not of the building and, if acceptable, an idea on market rent.
Although this was a more challenging case in the current climate we managed to get the maximum permissible loan, which in this case was 75% of £540K, being £405,000. (Note that in certain circumstances 80% loans are available but several aspects of this case made this impossible). Jim was able to pay off the vast majority of the short term debt that he had amassed in completing on the original purchase by consolidating it into the new Buy to Let mortgage. He had only £13,500 left on his credit cards and was much relieved.
The loan has now completed and Jim is very pleased with the difference that the capital raising has made to his monthly cash flow. He has already recommended us to another one of the original group of flat purchasers within the same building.
Please call us on 0800 316 5756 to discuss your buy to let mortgage
The Financial Conduct Authority does not regulate some aspects of buy to let mortgages