Your questions answered

12 June 2018

Q&A – June Edition: Remortgaging Cash Purchases

You asked and AALTO answered. This time, we’re looking into two different queries pondering the remortgage of cash buys.

 

Q1: “How soon could a remortgage be applied for/obtained after buying with cash?”

Craig asked:

I would be grateful for advice as to the feasibility of the following model.

I am thinking about a strategy of buying residential property in cash (circa £150k) with the idea of refinancing with mortgage (ideally 75% LTV) quickly to recycle cash into the next project.

I am sure that there is strong argument for instead spending the £150k cash on 4 x 25% deposits, but I am wondering if this model might work well for our personal circumstances because we could top up the 25% left in the property (£37.5K) plus generate cash for next costs/stamp duty from another business in reasonable time. Plus applying for mortgage with tenant in situ and rent shown must help? It might be worth it if cash buyer status afforded BMV opportunities?

 AALTO responded:

This is a fairly common question, and unfortunately the answer is not ideal for what you are considering. There are alternatives but, as ever, the cost might be prohibitive!

Firstly, almost all BTL lenders have a 6 month rule preventing you from remortgaging within 6 months.Some will allow it, but only for the exact price you paid for the property in the first place. I can explain the reasons if you wish, but for the sake of brevity I’ll leave that aside.

Most people who consider buying one property for cash do so because it’s generally unmortgageable in the first place. This significantly reduces the demand, and often means you get a good deal. Properties that need extensive renovation or modernisation are ideal, particularly those without heating, electrics, kitchen or bathroom, which would instantly rule out a mortgage even if the rest of the property was in good condition. If you are happy to wait 6 months this might be a viable strategy and the purchase, renovation and sale prices should be relatively easy to identify. You could flip the property within the 6 months to release  some quick cash, but bear in mind surveyors will know the initial purchase price and it’s always advised to take and retain lots of evidence (invoices, and before and after photos) to show any surveyor when they appraise the property for sale or remortgage.

Another option might be a bridge, or development finance. There are some interesting options if you have good equity in another property you can use. Some lenders offer a bridge-to-let type arrangement where you can start the bridge, and the day after the valuation has been done for the bridge, you start a remortgage application using the same valuation (which will include a current and a developed figure), but lend against the developed figure, they will allow you to switch that over to a longer term BTL mortgage well within the 6 months. Alternatively you could bridge against the completed property until the 6 months is up but that’s going to incur some significant fees for the sake of 3 months and most clients from experience don’t think it’s worth it.

The other way to do this, if you have money to play with, is buy two properties, 3 months apart, with a bridge. Develop one and get it let out over 3 months, and repeat with the next over 3 months, by which time the first one can be remortgaged and capital withdrawn to take onto the next project until you no longer need the bridge, but you would have have cut your turnaround times for getting more cash from 6 to 3 months.

Do be wary of the new rental calculations, which, if you want to release equity, may limit the maximum loans, and get some tax advice now, as the way your properties will be taxed will have changed  significantly as of April.

Q2: Gary has found that a combination of criteria has left him with few options, and wants to understand the way forward. 

Gary Asked:

I’ve recently started investing heavily in BTL as part of my retirement plan. I happened to get to completion late last year on two flats in Glasgow. One was a normal purchase, the other via auction.

Although I’d done a fair bit of research in pulling together my business plan, I was still caught off guard when it came to finance. As it happens I was able to complete both as cash purchases, but not without a fair dose of what you’d refer to as “squeaky bum time”.

I’m now looking to mortgage these cash buys (to release cash and gear the investments), but it’s taking longer than I’d hoped for, for a number of reasons. Some of these were know about to some extent, but worth sharing in case:

  1. Others are about to fall into the same pitfalls.
  2. Someone can wave a magic wand and point me in the right direction.

So, the lending criteria that have impacted my ability to mortgage these properties thus far:

  1. Scotland – I know property law is different north of the border, but didn’t realise how much of the market this would rule out.
  2. Ex Local Authority – I don’t think that this has been a major factor in my case (and it only applies to one of the flats).
  3. Minimum property/loan value – In my case £40K and £53K purchase price. More of a problem for the 1st one. Both are being refurbished and this should push both into a better position.
  4. Ltd Company – The market is changing quickly due to tax changes, but it is still a limiting factor on product selection.
  5. Ltd Company (who owns it) – My SPV Ltd company is actually owned by a holding company (which is 100% owned by myself/wife) and we’re the sole directors of both companies. This has ruled out at least one lender because the SPV isn’t owned by people.
  6. Converting cash buy to mortgaged – Some lenders apparently treat this as a “remortgage”, which means that you need to have owned it for 6 months before taking out the mortgage. Really?

So what actions am I considering moving forward (none of which I’d like to do):

  1. Scotland vs England/Wales – I’ve got both personal and business reasons for Glasgow. I grew up in the area and I know it better than any other city of similar yield. But I’ve started to consider other cities south of the border. Diversity is good anyway, right?
  2. Ex LA – I’ll bear it in mind, but I wouldn’t rule out a property just on this basis.
  3. Minimum value – I’ve started looking at higher value properties closer to Glasgow city centre. The yield is slightly lower, but growth is probably better and probably the tenants too.
  4. Ltd company – looking to separate the SPV from the holding company. This would be a shame (and an expense), but unless the lenders move to accept what is a very simple setup – I don’t see I have any choice.
  5. Cash buys – Will continue to look for lenders that are more lenient here, but will probably just adjust cash flow projections to allow for the lag in mortgaging. 

AALTO responded:

To be honest Graham, it sounds like you’ve learned all the lessons you need from this!

BTL is so criteria driven that layering one issue atop another drastically reduces the options, introduce a third or fourth factor and it’s easy to see your choices drop to one or no lenders, which is a bad situation.

  1. Lenders often want to know you have some background in the place you are investing so bear this in mind. Scotland is limiting, but not to the degree the rest of the points are.
  1. These are a nightmare, because it’s very much dependant on owner occupation rates, which are very hard to establish before you send out a surveyor. Balcony/deck access, and flats over 4/5 stories are particularly troublesome. If it feels like somewhere a family might want as a first time buyer that’s positive. If you think it’s likely to attract only lower income private renters or local authority tenants then you want to be wary.
  1. Definitely look at places over £75k if you are buying in a limited company.
  1. As discussed in previous threads, holding companies are complex because there’s little transparency. Apart from a few lenders, most Ltd lenders are new and not keep to get into complex structures that might hide all manner of risk.
  1. Precise do a great Bridge to Let product that allows you to get the benefit of a potentially unmortgageable property, and allow you to refinance within 6 months for the properties improved value. This comes without the risks associated in a standard bridge and remortgage. If you have the cash, and want to refurb, unfortunately you will have to wait the 6 months. This rule is an answer to the back to back transactions that obscured the real values of property and exacerbated the lenders exposure in the last recession. Some lenders might consider a remortgage within 6 months and factor in the uplift in value, but in my experience this is very dependent on the surveyor and I’ve seen more fail than succeed, as such I’m reluctant to recommend it.

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